Background

At Strategic Insurance & Risk Solutions (SIRS) we have very strong views about how a professional insurance broking tender should be constructed and managed.

However, in our tenth year as Australia ’s leading independent insurance and risk advisers, we are confronting a trend towards tenders which are based primarily on costs. In this newsletter we discuss the current tender options and we seek feedback from our readers on the optimum insurance broking tender model.

The Tender Models

There appear to be four models currently being marketed to prospective clients:

1. The Success Fees Model

This model is reliant upon the advisers saving clients’ money. Often this model is accompanied by a push to save money on a range of other bottom line costs such as stationery, advertising, communications, fleet etc.

Of those that we have seen, where insurance broking tenders are constructed there has been no need for insurance knowledge or expertise.

There is also an intentional ploy of creating suspicion over broker earnings on the back of the “Spitzer Enquiry”. This is now old news and has actually worked to the advantage of clients as brokers have never before been so transparent over their earnings.

The tender is clearly all about costs and has little to do with knowledge and the optimum service model.

Here are some questions we raise with this model:

• Is the adviser conflicted? If the only way they can earn fees is to cut prices then they can be placed in the position of recommending an inferior advisory model from the best tenderer purely as a consequence of their fee being higher than others etc.
• What about continuity? If the success fee is based on the lowest prices, the value of continuity with the broker and insurers will be ignored. This is poor advice.
• If good advice shows that you are underinsured, will the adviser pay attention to this? On many occasions we have advised clients to increase their insured values to match policy conditions such as replacement and extra costs of reinstatement. Building costs have risen dramatically over the past ten years and insurance policies need to reflect this. A chronic case of underinsurance occurs with business interruption insurance. If the adviser working on this model (assuming they had the expertise) recommended increases in values, it is likely that the premiums would increase and thus there will be no success fee. What wins out; success fee or professional advice?

Conclusion

No insurance or risk expertise is required for this model. “You get what you pay for!”

2. The Fee based Price Driven Model

The only real difference between this model and the Success Fee model is that the adviser charges agreed fees to achieve an outcome.

However, the approach is again driven by costs rather than by expertise.

To some CFO’s this may seem to be a good model. However, there is little emphasis on quality and brokers are not encouraged to put their intellectual property on the table as they enter into the tender knowing that price is in fact the only driver (despite attempts to dress it up differently). This often leaves the General Counsel or Company Secretary tearing their hair out as there has been a complete lack of attention to the value of knowledge.

Beware of any adviser that starts off by saying that you are paying too much. How do they know and if they don’t have the necessary expertise to review your program will there be any quality control?

The other feature of this model is the practice of providing all current policies, premiums and invoices to the tenderers.

The holding broker is immediately disadvantaged and any intellectual property they have developed with the client is passed over to the tenderers who may not have the same level of expertise.

Having neutralised the intellectual property and by revealing pricing, what is left?? Yes, clearly only price. And by some chance does this suit the adviser as they could really only judge the tender on this basis?

Conclusion

No insurance or risk expertise is required for this model. The value add of the existing broker is blatantly disregarded and this is not an objective test of the tendering brokers on negotiating skills as they are handed the current costs on a plate.

Your adviser is a price hawker and adds no value to the quality of your insurance program.

3. The Prescriptive Model

The adviser works on a fee for services basis rather than a success fee.

This model is based on prescribing everything required in a tender:

• Premiums
• Fees
• All forms of service
• Input on all current policies

All intellectual property of the current broker is freely handed out to the tenderers. So, they know how the current policies have been structured and all prices.

All the tenderers have to do is to improve on the current contracts (rather than demonstrate their skills in creating their own contracts), reduce the premiums and price the cost of the prescribed services.

The adviser does not require detailed insurance knowledge or experience which is particularly crucial with larger corporations, government bodies or professional firms.

Conclusion

This inevitably leads to a price war on premiums and fees.

As everything is prescribed, the tender does not genuinely encourage innovation or a display of valuable knowledge for a client’s industry.

4. The Knowledge and Value Adding Model

The adviser works on a fee for services basis.

The drivers are:

• Knowledge of your business which is demonstrated by solutions to your risk exposures
• Service provided by individuals with the requisite skills to act as adviser to you
• Value adding services such as Workers Compensation, Risk Financing and Benchmarking all put to you as fully reasoned value adds for your particular business needs
• Fee for Service fully reasoned and quantified so that you can see what value the services will provide
• Cost of the insurance program. Often done by way of indications based on the detailed risk specification developed by the adviser. This enables the adviser to assist the client in determining if the broker has negotiation skills and a real understanding of the marketplace

Under this model the following are never provided to the tenderers:

• Policies – as they reduce the differentiation between brokers on product knowledge and knowledge of your particular risks. We also consider this unfair to the broker that created the policies. It is surely up to the tendering brokers to demonstrate that they bring real skills to the table
• Premiums – this prevents the client from determining if the tendering broker really understands the insurance market. We have been involved in tenders where pricing has been so low that it is clearly unsustainable and a clear demonstration that the broker does not have a handle on the market or to the other extreme
• Broker Fees – these are confidential between the current broker and client. We never tell the current broker that they have to cut their fees so that we can earn ours at no cost to the client.

Under this model the following is always provided:

1. Detailed risk profile
2. Analysed Claims Experience
3. Summary of key policy limits and deductibles
4. Minimum security ratings for proposed insurers
5. Key evaluation factors
6. Summary of issues which must be responded to in the tender

Conclusion

The adviser must have:

• excellent insurance and risk skills to formulate this model
• a real understanding of the insurance market
• the ability to assess the skills of the broker
• the ability to assist clients to confirm appropriate value adding services offered
• the capacity and commercial acumen to ensure that the fee for services is realistic to ensure that the services will be delivered. Too often the fee proposed is too cheap as the broker is simply trying to “buy the business” which can only lead to their personnel becoming disincentivated with a consequent failing of service and advice

The model gives real credit to:

• Knowledge that is valuable to the client
• Ability to structure an insurance program without the unfair advantage of the current broker’s policies
• Negotiating skills
• Value adding services
• Cost
• Realistic and well thought out fee proposals

Cost is important. However, if cost is the only driver then the wrong broker can end up with your business!

In our ninth year we have refined our approach and are strong advocates for the knowledge and value adding model.

Our observation of the other models is that the adviser only has to be a good auctioneer which inevitably leads to the cheapest deal being the winner.

A Client expects an adviser to act like one! Providing advice requires expertise and not just price and intellectual property hawking.

Questions you should ask your Adviser

• Do you have any conflicts of interest with the tendering brokers?
• Do you have an AFS License?
• What level of PI insurance do you carry?
• What experience do you have in providing technical and strategic advice to clients on insurance and risk issues? This will almost always require and underwriting or insurance broking background which involved the active provision of advice on insurance contracts.
• What value do you place on knowledge and value adding services and what skills do you have to advise us in these areas?
• What information should be provided to tenderers and why?

COLIN SMITH
Managing Director