Are You Making the Big Mistakes Without Knowing It?
Procuring insurance is different from procurement in any other industry due to the unique relationship between client, insurance broker and insurer. Industry practices such as “reserving” can block you from getting the best price for your insurance, and if you’re a CFO a lack of knowledge about how the insurance industry really works can leave you exposed on the compliance front.
Unlike the home loan market where borrowers have a choice to go to a broker or directly to a bank, the insurance industry forces even the largest of businesses to insure via a broker. No doubt your organisation already has an insurance broker but before you renew your insurance you need to understand the true nature of the relationship between you, the broker and the insurer.
Who Does Your Insurance Broker Work For?
Mostly insurance brokers are acting as agents for the insurer rather than you. So how confident can you be that you’re truly getting the best price and coverage? To extend the home buying analogy a bit further, it’s a bit like trusting that the real estate agent acting for the vendor is getting you the best purchase price on your new home. Not likely!
So going back to your insurance broker at renewal time is no guarantee that you’ll get the best price and coverage. Especially as the broker is most likely receiving commissions, volume bonuses on the premium, or profit sharing with your insurers, which means there is a financial incentive for them to have for you on higher rather than lower premiums.
Price Tendering Is a Big Mistake
Your response to this might be to run a price tender but this is a big mistake. Why? Let’s talk about “reserving”.
The insurance industry has a unique process called “Reserving”, which allows your incumbent broker to reserve to them all the insurers on your current program and any insurers who may compete with those insurers to provide better covers at a more competitive premiums. The reserved insurers are therefore “blocked” to every other broker who may wish to participate in your procurement process. Consequently, the results of your price tender process will be poor, offering approximately 10% saving at best.
Tender for Brokers Rather Than Insurers
The only way to prevent the practice of reserving is to have a process to review and appoint the broker, who is willing to support you with their buying power, and not the insurer directly.
The process we manage for clients includes undertaking comprehensive benchmarking and inviting a panel of brokers of your choosing including your incumbent broker to tender under strict guidelines.
The guidelines include brokers being prohibited from making any market (insurer) contact in relation to your insurance program during the tender process. Covers and costings initially obtained from the tender process are “indicative”, based on the current state of the global insurance market.
After a review process, a broker is selected based on the indicatives to submit actual insurance quotations. More often than not, the incumbent broker is selected but true competition will help them sharpen the pencil. If managed correctly your chosen broker will achieve savings higher than indicated via the tender process.
Why Your Broker’s Complaints Should Put a Smile on Your Face
Now when you raise this process with your existing broker you can imagine they won’t be keen. But the more noise they make about it, the more confident you can be that you will receive better cover at a reduced annual cost. A broker who is doing a good job should have no difficulty in restating their capability, knowing that this is a basic governance requirement for all organisations and which all brokers undertake approximately every three years for their larger clients.
Ensure Your Insurance is Fit-For-Purpose
The second critical factor to achieve better insurance cover at the most economical cost is ensuring your program is fit-for-purpose. Simply put, you need a process to ensure you’re not over or under insured and that there are no unknown gaps in your cover
This process starts with an often ignored or poorly understood task of “Insurable Risk Profiling”. This involves identifying your insurable risks from your Enterprise Risk Management Framework (Risk Registers) and establishing a core insurable risk register.
Without this, how do you and your broker know what insurances you need to purchase in order to transfer those risks to the insurer that you cannot mitigate or manage yourself? If you have not identified the core insurable risks you wish to transfer, you do not know whether your insurance program is fit-for–purpose. You also need to determine your loss limits and not just purchase “off- the-shelf limits”
Consequently, you do not know whether you are over insured and wasting risk capital or under insured and may be facing unexpected financial losses. Neither of these a CFO wants to be responsible for.
The Preferred Procurement Process
In summary, procuring insurance requires a different process to procurement in other industries. The standard price tender should be avoided at all costs, and it is critical to avoid the blocking of markets by the prevalent practice of reserving.
Knowing the risks that you wish to transfer (insure) via your insurance program is critical to achieving best value and more importantly, ensuring that there are no gaps in cover. Determining and validating your loss limits is critical part of the procuring insurance process.
You need a process to review and appoint the broker not the insurer directly. At Comprara we guide our clients through this process. which should start approximately six months before insurance renewal. To ensure that you have the best covers available at the most economical cost, it should include:
- Establishing an insurable risk profile
- Benchmarking your existing cover and cost against industry data
- Obtaining Indicative cover and costs from a panel of brokers including your existing broker
- Appointing a broker to provide actual insurance quotations after indicative premiums, broker fees/commissions and services have been reviewed.
