What we have learned over 13 years of buying insurance broker services on behalf of our clients.

Introduction

Risk Advisory Services (RAS) provides independent risk analysis and insurance program design management services to help businesses make risk-based insurance decisions rather than being insurance product driven, with our role in the insurance supply chain as follows:

Finding, and then managing, the right insurance broker for corporate insurance buyers in Australia is increasingly challenging.  Global and local insurance brokers continue to be acquired, often creating significant changes in servicing personnel and standards. Below are some of the major changes to the Australian broking landscape in the past 6 years:

In addition, rate increases and coverage reductions are being sought by insurers on numerous classes of insurance and certain industry sectors.

RAS Insight Sources

On behalf of our clients, RAS is the largest buyer of corporate insurance broking services in Australia, having acted for many top 500 public and private companies and conducted more than 700 insurance tenders and reviews for corporate enterprises over 13 years. RAS is an independent consulting firm enabling complete objectivity in analysing the buying of insurance broking services. Our team has deep risk and insurance industry expertise including senior leadership experience.

The insights in this article are derived primarily from RAS having undertaken the following insurance broker buying related services in its 13 years of operation:

Types of Insurance Broking Services Procured

Very High Rate of Under- or Over-Insurance in Australia

Insurable risk profiling and risk tolerance assessments are rarely undertaken by brokers before establishing or renewing an insurance program. Even when they are done there are very few brokers who do this well. While insurance deductible options and basic policy limit calculations are often provided by brokers, there is rarely an analysis of what level of risk a business can afford to retain and what scenarios underpin the policy limit decisions. With many brokers being paid commission on the premium, if the insured retains more risk or has a lower policy limit the broker is paid less, so this conflict of interest can often affect how brokers present deductible options and policy limits.

In recent insurable risk profiling, tolerance and appetite assessments completed by RAS, significant cost savings have been generated through varying combinations of insurances being cancelled (such as cyber insurance) and deductibles increased and policy limits reduced after taking into account an organisation’s capacity to retain risk and develop worst-case scenarios. When considering financial risk tolerance, factors that need to be analysed are:

  • Current free cashflow
  • Access to current debt
  • Access to future debt
  • Dividend policy
  • Capital raising (current owners)
  • Capital raising (dilution)
  • Asset sales

 

In addition, the lack of structured risk profiling has resulted in the selection of insurance policy limits with no scenarios to support those limits for a large number of Australian businesses. Policy limits should be set based on a worst-case scenario for each insurance policy, and this scenario should be agreed by the Board of Directors. It is common for directors to spend a significant amount of time on the Directors & Officers Liability (D&O) policy limit but very little time on all the other insurance policy limits.

Best practice is for the Board to approve the risk tolerance and risk appetite decisions developed by the executives to support their insurance policy deductible decisions and also the scenarios they have developed to support their insurance policy limit decisions. This is essential for all businesses, but especially those that spend more than $250,000 per annum on insurance, as meaningful premium savings can often be achieved at this level.

Significant Service Variances Between Brokers

To assist businesses in the buying of insurance broking services, RAS has developed a scoring system that assesses insurance broking proposals. An example of the output of the scoring system is set out below. There is a significant difference between the best insurance brokers and the worst insurance brokers in Australia who provide services to businesses.

There is a big variance in the structured training and professional development offered within broking firms. When we assess the People and Team component of a broker’s service offering, we consider the degree of structured training offered within that broking firm and also the industry and client experience of the proposed service team.

It is common for many businesses to buy insurance broking services based on a personal relationship with a broker. “He/she seems switched on and is very personable” is something RAS often hears about why an insurance broker has been chosen. Strong personal relationships are often formed between the buyer of the services and the broker. The experience RAS has had when this happens is that the business is often paying much more than they should for both the premium and the broker’s fees and commission.

Significant Cost Variances Between Brokers

Most revenue earned by Australian insurance brokers is paid to them by insurers in the form of commission. Many commission arrangements are not disclosed to the buyer of the insurance broking services. when commission is removed from the transaction and replaced by a fixed fee with an agreed scope of services, the business buying the services will almost certain pay less. Sometimes this reduction can be a significant amount.

Removing commission from the transaction gives both the buyer and the seller of the services a more solid base to understand the value the broker is providing. The historical tying of insurance as a commission-based product creates a challenge for brokers in explaining their true value proposition to buyers, and makes it hard for the business to understand the true value the broker delivers.

RAS has a working relationship with the largest providers of corporate insurance broking services in Australia and has been invited to present at many of their internal leadership forums, to provide insights on how they can improve. When facilitating a tender for insurance broking services RAS has a very structured process that most Australian insurance brokers respect and understand. A summary of who has won the insurance broking tenders RAS has facilitated is shown below.

Inadequate Renewal Planning Increases Costs

Having a good plan for an insurance renewal is critical in the current environment. The renewal plan should be set at least 3 months before the renewal for any business that is paying more than $250,000 in insurance premium.

Common mistakes in the pre-renewal planning process are:
  • Inadequate risk information being obtained by brokers
    Results in a last-minute panic of data collection and the insurer increasing their prices as a result.
  • Not approaching key insurers interested in the risks
    Lack of competitive tension between insurers results in higher premiums.
  • Lack of rigor in determining the correct declared values and limits
    Poor processes in determining the correct values presented for renewal undermines the insurer’s confidence in the risk resulting in a cost increase.
  • Not knowing the risk tolerance for deductible setting purposes
    If the insured has not been engaged properly about their risk tolerance then they may be missing out on a significant premium reduction by entering the market with the wrong deductible.
  • Not being up to date with changes during the year
    If a material change has occurred at the business, such as an acquisition, and the broker doesn’t know about it, the details are provided at the last-minute and the insurer can increase their prices as a result.

 

Common mistakes in the post-renewal period are:
  • Poor invoicing and associated documentation
    This can include long delays in providing invoices and incorrectly calculated taxes and charges resulting in surprise costs.
  • Delays in insurance policy documentation being provided
    Cover summaries provided by brokers should never be relied upon – the insured must insist on formal documentation on insurer letterhead.
  • Lack of an Insurance Manual to provide a consolidated view of insurance policies purchased
    The manual should also include key broker and insurer contacts, and how to make a claim under each policy.
  • Lack of an appropriate service agreement and KPIs with the broker
    RAS has a standard service agreement which is accepted by all major brokers and promotes professional service standards and transparency.
  • Lack of adherence to an annual broker servicing plan
    Broker servicing plans should not be “set and forget” but need to be regularly monitored and updated.
  • Lack of agreed claims protocols and claims project management discipline
    Claims are time-critical and all protocols should be agreed and understood before a claim occurs.