After nearly 50 years, it is time to get rid of the tie dyed shirts and join the 21st Century.
No, I’m not referring to 1968 and the Summer of Love; rather, business owners who continue to use an antiquated process for bidding their insurance – the marketplace selection process. After nearly 50 years, it is time to get rid of the tie-dyed shirts and join the 21st Century.
Many companies continue to obtain property and liability renewal quotes using the market selection process, without understanding how outdated and ineffective this method can be. The marketplace selection process was first used in the mid 1960’s, whereby multiple brokers were assigned specific insurance companies to obtain property and casualty renewal quotes. At that time, there were 75,000 independent insurance agencies across the country. There was little difference between them, except in one important area — the carriers they represented. You may recall some of these names, The Continental, The Home, The Aetna, Kemper, USF&G, The Royal, Legion and Reliance. These relationships were memorialized by plaques proudly displaying the insurers’ logo, which hung in the lobby, adorned the walls and shown prominently in conference rooms. These symbols recognized milestone anniversaries, and it was not uncommon for these relationships to exist for decades, many spanning well into the second generation of agency owners.
Over time, the top agencies used their unique ability to access specific carriers as the main point of their value proposition. After all, from that point forward, most competing agencies looked the same.
In an effort to control a process that often involved over 30 competing national, multi-line carriers and up to six brokers, the marketplace selection process was born. While cumbersome and inefficient, it allowed buyers to bring some sense into the process that was necessary to obtain desired results. By assigning markets to specific brokers, the buyer could ensure access to the large scope of alternatives available, thus keeping the playing field level. In most cases, you still needed a scorecard.
A PARADIGM SHIFT
Flash forward nearly five decades: The bulk of the major national carriers that existed when the process was developed, along with the companies mentioned above, are no longer around. They either went out of business or merged with other companies. Today, the marketplace does not offer a large selection of alternatives. Only seven multi-line national insurance companies are in existence. Further, the remaining major carriers have contracts with most agencies, which now number half of what existed in the 1960’s. Insurer contracts are no longer a differentiator among brokers.
During the last decade, systemic changes have caused our industry to evolve. As insurers consolidated, buyers became astute in the difference between price and cost, while recognizing the need for more services that reduce claims, mitigate costs, increase productivity and generate more profit. Forward-thinking insurance brokers adopted a new approach, offering value added services. In the process, they became cost reduction resources. These value added services are typically not related to an agency’s contracts with carriers, but uniquely individual to the agency. The primary objective of a broker is to offer services that help businesses achieve their goals.
Because of these factors, savvy business owners and executives understand that obtaining insurance coverage goes beyond choosing the most competitive program, it also involves engaging multiple brokers. The best results come from a strategic risk management approach, which reduces the Total Cost of Risk and positions the business as an attractive risk. This is accomplished by identifying an operation’s exposures, developing a strategy to manage that risk and mitigating claims through an effective loss prevention and control program. The broker selection process relies on developing a partnership with a qualified broker, whose services are aligned with the needs of your company. The selected broker then represents you in the marketplace to negotiate the best terms and conditions.
THE IMPORTANCE OF BROKER SELECTION NOW
The insurance market is transitioning into a new cycle of increasing rates. Fewer insurers are willing to provide coverage and underwriting is more disciplined. Previously, numerous insurers were willing to quote with year-over-year rate reductions, now only one or two may be interested. This is especially true for organizations experiencing increased workers’ compensation claim activity, deteriorating results and high experience modifications. These conditions require different strategies and tactics to maximize results. At this particular point in time and in the foreseeable future, proper broker selection is crucial to obtaining the best outcome.
SCM has long been at the forefront of the shift from market selection to broker selection. What separates us from other brokers are the measurable results our clients achieve from the programs and services we offer. Based on the numerous pricing transitions we have experienced, the following tips may offer some insight on how to best manage your broker selection process:
- Select your broker based on its experience and proven ability to meet your needs or solve a specific situation.
- Make your choice far enough in advance of the renewal, so the broker has ample time to understand your operation, perform the necessary analysis and evaluation and establish the program design with enough time to go to market.
- Consider a broker that not only meets your needs today, but is also positioned to support you in the future.
- Establish a process to periodically review and measure the progress and results of both parties to ensure accountability.
- Unless special circumstances dictate, do not obtain renewal quotes too frequently. Bidding the program more frequently than every three to four years makes underwriters wary about writing your business.
- Avoid getting alternative quotes unless you are willing to change insurers.
SCM has a suite of services focused on helping businesses manage their property, liability, workers’ compensation and employee benefits insurance. Our goal is to help clients improve risk management, reduce costs and increase profit.
For details about any of the above items, contact:
Stephen Paulin, CIC
Senior Vice President