Cutting insurance costs is an attractive proposition when times are tough – just make sure you know how to go about it
Insurance overheads are significant for any business. The structure and quality of the insurance programme may also not be very high on the agenda of the busy manager. It makes sense to review the arrangements, but care should be taken to ensure that the effort involved is effective and works in the long-term interests of the company. Insurance may be low on the priority list but when an incident occurs, the quality of the arrangements made now will come under the spotlight.
A tender process is called for and here is some useful insight and guidance. Insurance and the workings of the market are not as straightforward as people sometimes believe it to be:
Set proper objectives for what you want to achieve from the process. Is it a cut in the premiums by X%, a fundamental review of the cover, a more personal or local service or perhaps a combination of all these things? Are you looking just to benchmark your current provider, or are you prepared to commit to a move to the most impressive performer in the tender? Establishing the objectives and communicating them clearly to the parties involved will mean that you should achieve what you are after and you will not alienate insurers or brokers who you may need in the future.
Choosing who to involve. You have no doubt been inundated with calls from insurance salespeople, but it makes sense to choose brokers that you have researched and know will make a useful contribution to the exercise.
There are essentially four models of insurance broker and the different types are well recognised within the industry but perhaps not so easy to distinguish from the outside. In general terms, you could categorise brokers as:
1) Nationals – a slightly misleading handle as such organisations are mostly international. They are used extensively by major international corporations although some have facilities for managing SMEs and mid-corporate business
2) Consolidators—although the sale of small insurance brokers to larger competitors is not new, the SME and mid-corporate insurance broking market experienced an unprecedented consolidation into a handful of fast-growing companies some years ago. These organisations are able to generate economies from the purchase of small brokers by centralising service provision and can often negotiate greater commissions
3) Independent insurance brokers—the Nationals and Consolidators are independent in the sense that they have agencies with various insurers but they may opt to work with a limited number for specific insurance product types. Brokers in the Independent category are likely to be privately owned firms and hold agencies with many insurers
4) Tied Agents– by definition are not independent and will work with one or a small panel of insurers. These may be very small insurance practices or where insurance is not the main activity of their business.
It does not follow that any of the above models is automatically cheaper or better than the others and the decision of which type of intermediary to involve should be made once the objectives of the tendering exercise are established. It is generally recommended that buyers do not involve too many brokers as insurers will often provide the same terms to every broker approached and, in theory at least, if insurers see presentations from too many different sources, they are unlikely to prioritise that enquiry.
Do think to ask your trusted suppliers and customers who they value in insurance broking. It makes sense to take a personal recommendation.
Three other factors should be taken into account in choosing who to involve and may well be worth asking of potential suitors. Firstly – who owns the broker? It may be owned by an insurance company – this is fine as long as you are made aware and have assurances about their ability to act independently of their owners in providing their broking services.
Secondly, how many insurers do they effectively represent for each class of insurance? Some larger brokers have arrangements to place certain classes of insurance business or customer with a single insurer in return for increased commissions. Whilst this is not a problem if you are benefiting from any volume discounts, you may wish to benchmark the premium and cover you are offered.
Secondly, what is the calibre of the individual representative? Designations for individual advisers such as ACII, FCII or Chartered status are useful indicators of knowledge. You will at least know that anyone holding such qualifications has studied insurance law and practice and is likely to be experienced.
Be prepared to give the bidders your time. The more time you spend with a good broker or risk expert the more thoroughly they can research your needs. Allow them access to others in your organisation that can help them build a profile, such as HR or production managers. If done in a structured way, the commitment of time will be worthwhile. You may even want to prepare a tender document, giving detailed notes on your operations, buildings, fire protections, security, health and safety and other information critical to the underwriting process.
Look beyond the premium summary page of the bidder’s reports when drawing your conclusions. It may be that the cheapest quote is the best. However, the broker may have simply relied on the existing policy schedule as being the perfect insurance programme for your business and it is important to compare deductibles and policy conditions. But a quality broker should also have an insight into the risks faced by your business and a substantive review will highlight areas that may not have been previously considered. What is the point, for example, of insuring your laptops, when insuring the legal costs to defend your business against a breach of your intellectual property rights has been missed? One outcome would be a major nuisance but the other could spell the end of the company. It is all too easy to rely on traditional models of insurance cover, but in truth, risk is not so tidy. Not all brokers talk to their clients about the political risks of currency transactions or the impounding of assets overseas or loss of income caused by the breakdown of essential machinery. Has your broker worked through the calculations required to formulate your insurable gross profit estimate – be assured that a stab at the correct figure will seem a rash approach when a major disaster strikes and the Loss Adjuster wants to know how the maths was done.
If you already have a very good quality broker, don’t forget to recommend them to your business contacts. Such activity favours quality brokers rather than just those with the most impressive marketing budgets and will promote best practice to everyone’s benefit.
John Goodson ACII is a Chartered Insurance Broker and Director of Insurance Services (Surrey) Ltd, which is authorised and regulated by the Financial Conduct Authority. John has been assisting SMEs and Corporates on insurance matters for over 30 years. For advice, call John on 01483 532921 or email firstname.lastname@example.org
Content copyright John Goodson ACII 2018