Many CFOs, treasurers, and risk managers are misinformed about what brokers are capable of accomplishing. I’ve heard this very quote: “The [insurance] market is the market—the cost of insurance will be the same no matter who we hire.” Using this incorrect attitude, they hire brokers based only on service, relationship and the cost of brokerage services.
To explain how the right broker can make a difference, I will first recall The Parable of the Real Estate Agent.
A few years back our family decided to move across town. We had found a nice house in an attractive school district, but step one was to sell our current home. We asked some friends about agents and soon had a meeting with an experienced realtor. She told us the recent comparable sales in our neighborhood guided her recommendation to list our house for $249,000. While this was more than we had paid for the house, I was unconvinced.
You see, I am what some might call a cul-de-sac snob. Every house I have owned since house #2 has been on a dead-end cul-de-sac. I like the quiet, and I like the oversized back yards. This house we were selling was no different; even better, it backed up to wooded property owned by the park service. In my mind there was no way my house should be valued identically to all the other non-cul-de-sac houses in the neighborhood. So I found another broker who agreed that, while it might take a little more work to find another cul-de-sac snob, we would find one willing to pay a higher price. She got the job and we eventually sold the house for $289,000.
Let’s translate this parable to the world of insurance:
With insurance, your broker is trying to find you the best coverage at the best price, right? Well, maybe wrong. Like my first realtor, some brokers avoid doing the extra work involved in making an exceptional deal. Instead they guide you to a price which will be readily achieved in the market, which will afford them the luxury of earning their fee or commission without a lot of struggle.
Think about my realtor who earned the commission. At the time, realtor commissions were 6 percent of the transaction, so the difference between the listing prices resulted in commissions of either $15,000 or $17,000. So what was only a $2,000 difference to them was a $38,000 difference to me.
To a realtor, the extra work hardly seems worth it, especially if they don’t believe in the targeted outcome. I tried to convince the first broker to list at a higher price, but she honestly thought that $249,000 was the right number. Even if I had twisted her arm into listing it for $289,000, I don’t think she would have convincingly and passionately brokered that price to the shoppers. But the second broker believed in the number, and sometimes the price is set by the broker.
Back to insurance:
Say you are the treasurer of a company and have been charged with reducing your total cost of risk (TCOR). You believe you simply need to get your current broker team to try for a lower number. That might get you a little, but won’t get you a lot. They don’t believe in the targeted outcome. You do some research and find a new broker who already believes in your target price for insurance. In my experience, 99 times out of 100 they will get it done for the target price or better.
A while back we had a new client with a very large and expensive director’s and officer’s insurance program. They were weeks away from renewal and were staring a 20 percent increase in the face. They asked for help.
We didn’t have time to talk to new brokers, we only had time to use our techniques of restructuring, competition, and aligning compensation to improve the program. We ended up with a 15 percent decrease at renewal. Of course the client was happy with the result of our involvement; but we advised them, “just watch—let us run our full process and then you’ll see some real improvement.”
Over the next year we interviewed five different brokers and asked them to consider how they would approach our client’s D&O placement and what it would cost. Some estimated costs very close to the current price, some estimated higher than current, and a couple were lower—dramatically lower. We had another round of meetings and presentations with these two finalists and ultimately hired the broker who was supremely confident that they could place the D&O tower for a price that was nearly half of the figure the client was looking at when we were first engaged. During the renewal process, they beat their own target.
How did they do this? They found the markets who liked the look and feel of the client’s risks. In a way, the client had a cul-de-sac risk profile, and just needed to find the insurance companies who appreciated it. The broker went in to the negotiations with a figure they believed in, the underwriters saw the logic, felt the broker’s confidence, and bought. There is no set price for insurance—it is negotiated every time. I will explore the negotiation process further in a future article.
For now, just remember: the right broker makes a huge difference.