A thought experiment…Imagine two parties are negotiating a sophisticated contract. One party negotiates hundreds of such contracts every day and has substantial market knowledge regarding costs and optional terms available. The other party has little or no prior experience. Finally, imagine that an intermediary is helping to memorialize the terms of that negotiation and the intermediary receives a percentage of the money paid by the inexperienced party.
That, in a nutshell, is the situation many Middle Market companies face when purchasing property/casualty insurance. Insurance is a complicated contractual asset. Insurance companies have substantial knowledge regarding coverages and costs. On the other hand, Middle Market companies typically have a CFO or owner who knows little about insurance and has little time to learn about it. In the middle is an insurance agent whose professional success is dictated by the amount of premium he or she is able to place. No wonder that it is the Middle Market consumer usually left holding the short end of the stick.
My colleagues from Risk International’s Outsourced Risk Management group have recently penned articles discussing insurance agent conflicts of interest and the best approaches to finding good insurance professionals. That advice which was intended for large corporations holds true within the Middle Market insurance world as well. As noted recently by Randall Davis, the commercial marketplace for insurance has inherent conflicts granting excessive power to the suppliers of coverage rather than the consumers. Agents work on behalf of the insurance companies and are compensated by how much premium they place with a particular insurer. Though insurance brokers may have some independence beyond that enjoyed by agents, insurance company financial kickbacks and broker culture incentivize large books of premium.
But these structural problems are further exacerbated by market realities especially present in the Middle Market world. Remember that an agent or broker acts essentially as an intermediary that allows the consumer to access the insurance market. While the underwriter can and does raise coverage concerns and will push for terms and pricing favorable to the insurance company, the Middle Market client often doesn’t know where to begin asking questions. Under these circumstances, even a good agent who is dedicated to his or her client will find it extremely difficult to obtain the very best coverages at the very best price. As you might imagine, these structural imbalances become even more pronounced with mediocre or bad agents.
For instance, a client recently came to us because they needed to place property coverage and non-owned and hired car auto coverage. Upon review of the property quote, we realized that the agent had failed to effectively advise the client regarding the appropriate limits it needed for business income and extra expense coverage. Similarly, the agent had failed to obtain the non-owned hired car auto coverage as part of the general liability policy as is customary. As a result of both failures, the agent was limited to very few markets and the quotes obtained were exorbitant. Our knowledgeable oversight allowed us to push for appropriate limits and coverage with a new agent at a cost 66% lower than what was originally quoted. Such examples are not uncommon.
The ever-present knowledge asymmetry in Middle Market insurance transactions dictate that the insurance customer is going to come out on the short end nine times out of ten. To truly level the playing field, Middle Market companies need the guidance of a knowledgeable consultant who is unbiased and free from the insurance industry’s conflicting interests and incentives.