Broker Review

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Broker Management

Many large corporations have an imperative from the procurement team that requires a review and tender for all external sourced services in specific time scales. Ideally, the CEO should mandate no more than once every three to five years for insurance services. Unfortunately, in some companies, there is a poorly formed understanding of the trust that builds up in long term insurance relationships. This results in more frequent broker tenders, sometimes even annually which seems excessive, bureaucratic,  and counter productive.  

The “dash for cash” in annual broker tenders risks destroying much of the value that can come from longer term relationships. However, when the tender review is implemented in a systematic manner over a more sensible timescale, it is a good opportunity to refresh relationships. If the CEO is dissatisfied with the brokers’ performance, this is an effective way to deliver a wakeup call whilst complying with internal procurement guidelines. After that, it’s up to the incumbent to lose it.

The One Year Plan

Reviewing, tendering, endorsing or replacing a broker takes about a year to do properly for a fairly large multinational business. Many businesses prefer to use one broker for all their business. For others, a dual or multi broking solution keeps a little tension and healthy competition in play as well as the ability to sense test ideas from one team with another on a regular basis. But there are also risks and challenges with this approach.

A key point here is that the broker review doesn’t automatically mean the selection of a new broker. In fact, retaining the incumbent is often more desirable. The existing broker will have a good understanding of the business, and likely a wide network, both within the corporation and throughout the insurance supply chain. Stability and longevity in insurance relationships often means the machine works more smoothly. Confidence is built up over time, and trust grows. It’s important to reinforce a basic truism in insurance, there is no product, only trust.

At the same time it’s important that complacency doesn’t set in. The broker review is the chance for the incumbent to show they are still alive to the latest products and market developments.

Quarter One

In the initial phase, the opportunity should be taken to look at the broad areas of coverage and engage with the key stakeholders internally. The risk manager can then build up an overall picture of which teams are fully engaged and mostly happy. Which business units are unhappy and why. How can the risk management process help to draw out unexplored difficulties?

This should ideally be a broad based approach wrapping in all geographical and business areas if possible. Insurance works best with big pools. There are a few caveats to this, but generally speaking, the more risk that can be bundled together, the more benefits (purchasing power) will accrue to the insured. Some business units or geographies may stand alone for historical or regulatory reasons. If feasible, the risk manager should help with consolidation either formally or informally. The risk manager doesn’t have to own the risk to be able to make a difference.

In many Asian companies, employee benefits have traditionally been managed by the human resource department. The front end of these solutions will always be critical for employee relations or perhaps from a union management perspective, and risk managers rarely have the skills to get involved in these aspects. But the back end funding and support aspects are no different from other risk transfer solutions. The professional risk manager has the best skill sets to manage these. If the internal politics can be overcome, combining the two programs under one umbrella  can give improved leverage, buying power and cohesion across the group.

Quarter Two

The second stage is to get the tender documentation together, and keep all the internal stakeholders properly engaged. This phase can be quite tricky for organizations that haven’t been through the process for a long time. Engaging internal customers is one matter. But most large organizations have a procurement or purchasing department who will want to drive the proces themselves. The chances of regular procurement teams having a knowledgeable insurance specialist are vanishingly small. The process of broker tender and review is fairly unusual compared to much of the rest of traditional procurement practice. Time needs to be taken to engage properly with the procurement team and ensure they understand why this is not like buying paper clips.

If the CEO wants a sophisticated risk management solution, instead of behaving like an SME,  it’s necessary to make the switch during the broker appointment from commissions to a fee engagement. The first issue for procurement (and perhaps the CFO too) is that there now seems to be an ‘extra’ vendor in the insurance space that wasn’t around previously. The transition and the logic behind the change also has to be addressed internally.

Once this issue is overcome the tender documents need to be designed, sometimes from scratch. The normal performance measurement criteria for purchasing teams are out of the window. Usually the risk manager will have to come up with their own criteria for evaluating performance. These should relate to the key aspects of the brokers role: Design, Placement Structure and Claims Management. It’s critical to ensure that the performance measures are distinct from those that determine the performance of the insurers themselves. It can also be a challenge to be objective. Measures that tackle response times and the like are fairly straight forward to write. But those that measure the overall performance on, for example strategic thinking, require more care to be objective.

The client should resist the temptation to add in subjective bonus measures. These can be readily assessed and applied in the early years in the relationship. But later on  it can be hard to articulate why the current year is slightly better or slightly worse than the one before. It is a good idea to ask the tenderers to populate their own measures of performance. Asking how they believe they should be rewarded can produce some interesting results.

One of the most critical aspects of the tender is to lock in transparency. Through the commission and contingency commission process, the company is quite likely to have been paying somewhere between 20% and 40% to the broker and the rest to the markets. In some extreme cases, perhaps more. Whatever the fee finally agreed upon there need to be a very strong clause around this area in the contract that should cover two aspects closely.

Firstly there should be a clear statement that the broker does not ask for or receive any additional payments, fees, incentives, commissions, contingent commissions or payments of any kind from underwriters, their agents, markets or any other persons associated with the insurance of the company with first providing the full details including quantum, percentages and all other details to the insured for approval beforehand.

Secondly, there needs to be a clear statement around what happens if the CEO has reason to believe the first clause is breached. It is usually counterproductive to terminate the broker appointment immediately as this will disadvantage the company. There is always an element of run off to manage when changing brokers and this can be very problematic if there is a sudden change. However, there can be structured wording that enables the corporation to move to a re- tender process early and leaves the departing broker financially accountable for the transfer of  all outstanding matters associated with claims and programmes onto the incoming team.

The corporation costs of this process or a reasonable portion thereof should also be carried by the broker who breached the contract. Any fees or payments received that were not identified to the client can be repaid to the markets that were made to provide them. This provides an additional incentive to markets to keep the ultimate client informed of peculiar or unusual arrangements in their regular meetings.

In the next article we will get down to the details of how to prepare and issue a broker RFP. I’ll be adding a draft document to my Substack account https://tunstallasc.substack.com/ for subscribers to download for free in the next issue. So sign up now for free for access.

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