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Winter Journal

Volume 31, Issue 4

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Buying insurance is a bad investment!

With the exception of insurance which is mandated by law, such as workers' compensation, the only insurance you should purchase is insurance that you must have to maintain the financial integrity of your company. What you need to purchase will vary tremendously from company to company. Buy only what you need to buy and purchase it at the best possible price.

Unless you have professional risk management staff, determining what you need to buy can be an extremely difficult task. Options available to you are the hiring of a Risk and Insurance Management Consultant or using your Insurance Broker to identify what you need. The next question and the focus of this article is, How do you select the best insurance broker to represent your company? In the corporate insurance arena one of the most difficult tasks for a Chief Financial Officer or Risk Manager is the selection of the best Insurance Broker to represent the interests of your company. When disaster strikes your company your insurance may be the only thing between you and unemployment. The broker you use must be able to understand your business, its strengths and weaknesses. They must then develop information on your company and put it into a format in such a way that your company and its risks are presented in their best light. They must then present this information to underwriters so that you are obtaining the best possible price for the insurance you purchase. The commercial insurance brokerage business is an extremely competitive environment where clients are actively sought. Each broker is different, with different strengths and weaknesses. Selecting the best one for your company is no easy task. It should not be done over a lunch or be based on hiring your brother-in-law (unless he is the best). Corporate politics can also become an integral part of deciding who is the best broker for your company. Hiring a service provider because you perceive that you will gain some internal political advantage does not serve the interests of your company.

In selecting a broker many firms simply go to several brokers and send them to the insurance market on the same piece of business and hire the broker who comes back with the lowest price. This broker selection technique is likely to save you some money in the first year, long term, however, it will cost you much more than you may save initially. A Vice President of a large brokerage house in San Francisco, participating in my process, recently said, 'This is a very refreshing process. Most companies want us to get quotes to compete for business and all that does is confuse the insurance companies and hurt the clients'.

The corporate insurance community is a very small place. Usually there are only a handful of insurance companies which write a particular type of insurance for a specific industry. It is probable that brokers looking to place a piece of business on a particular risk, will all go to the same insurance companies. When several brokers approach an underwriter with the same piece of business these insurance companies then know that you are shopping your insurance program. Unless the underwriter has a particular interest in your account or feels strongly that they can obtain your business they will not spend any time developing a meaningful price competitive quote, if they quote at all. The brokers are then left with the option of reducing their commissions in the hope that they will be the lowest and get the business. If they succeed and get your business they are left with very little income and will not be able to provide you with very much support. Next year your premiums are likely to go up because the broker will add back the lost commissions.

The brokerage business is a service business. Do not select a service provider on the price of an insurance policy, select them on the basis of the services you need and their ability to provide them on a timely professional basis.

It is my belief that your insurance program should be developed with a long term focus. It is more cost effective over the long term to identify insurance underwriters who understand your business and develop relationships with them which over time will pay financial dividends to you. I have developed a broker selection procedure which I have used internationally for many years. The basis of the concept is to determine which broker (s) are the best to represent my client and to make this determination in the most objective fair method possible. This process allows you to select the best broker for you without disturbing your insurance companies. The process is conducted by inviting several brokers to participate, having them submit a written conceptual proposal followed by oral interviews, all rated using a unique quantifiable rating sheet developed specifically for your needs.

You will need to devote some time and attention to this process. If you do not put some thought and effort into selecting your broker you are likely to get questionable results. Six months before your insurance policies are scheduled to renew is not too soon to begin. There are several steps which you will need to follow to make this a smooth process for you and the brokers involved.


Written Corporate Policy/Procedure

This document is your internal authorization to proceed with the selection process in the format we are recommending. It should contain at least:

  • Statement of your objective
  • Outline of the steps to follow

Time line
Develop a time line which will allow you to select your broker approximately 60 days before your insurance policies are scheduled for renewal. This should allow the new (or existing) broker to become familiar with your program and conduct the marketing activities required to obtain the best pricing for your insurance.

Information Package
This selection process forbids any broker to approach any insurance market in relationship to your insurance program. It is focused exclusively on the broker becoming familiar with your existing insurance program, your business and developing methodologies and recommendations for structuring an insurance program which best fits your needs. They are then required to demonstrate to you (again, without getting quotes) how they will implement a program and provide the necessary services you require.

In order for a broker to prepare this type of analysis they will need a substantial amount of information. This is provided by you in the form of an information package. This package should contain as much information on your company as possible. Include data on your corporate structure, marketing material, financial data such as, P&L and Balance Sheet, Samples of Company internal newsletters, safety and loss prevention programs, sample contracts. Include all of your existing insurance policies (blanking out all rating and premium information), five year loss histories for each insurance policy, Real and personal property inventory, Employee head count by division and state or country. The more information you can include which gives the broker a picture of your company and operating philosophy the better the proposals you receive will be.

Letter of Invitation
You should identify five to six brokers who are interested in working with your company. Send each of them a letter inviting them to participate in this process. The letter of invitation should include some of the key dates in the process such as, Date information will be available/distributed, Dates for Question and Answer meetings, Date Written Proposals are due, Dates for Oral presentations and Date the Broker Selection will be made. In addition, attached to this letter should be document which gives the brokers the rules and instructions on how to proceed.

Instructions to Brokers
This document should be clear and concise and should include at least:

  • Statement on what you are doing and why.
  • Statement that no insurance markets are to be contacted for any reason during this process.
  • Specifics on what you would like to see in the written proposals.
  • Specific direction on the one hour question and answer meeting. Be clear that no other questions will be answered other than during this session.
  • Define oral presentation. Must consist of service team. You do not want to see their high paid salesmen who will not be around to service your account or solve your problems.
  • Discuss the rating sheet philosophy and how the presentations will be quantifiably rated.
  • Specify one person who the brokers can interface with to ask procedural questions and coordinate schedules.

The best method I have found to minimize the effects of politics and personalities on the broker selection process is to keep the process as fair and equitable to each of the participants as is possible. Once the written and oral presentations are complete you are still faced with the dilemma of determining which of the brokers is best for you.

I have developed a quantitative rating sheet which, when fairly completed, provides an objective numerical rating for each of the brokers participating in the process. The rating sheet begins by identifying the ten or so most important items you need from a broker. This list may include such things as; claim assistance, loss prevention services, knowledge of your business, etc. Of this list of ten (or more) items each item is given a weighting.

Each Item is then rated on a scale of 1 to 10 with ten being the highest. That rating is then multiplied by the weighting and the line items are totaled.

This method allows for quantifiable ratings of each of the brokers with the highest points being allocated to your most important areas.


While one person can conduct this process and review the written and oral presentations and score each of the brokers I recommend that you establish a team to hold the oral interviews and conduct the ratings.

Insurance overlaps all areas of a company's operations. While one area or division may be responsible for the administration of the insurance program, changes to the brokers and insurance program is likely to affect other areas within your company. I would recommend that you identify three to six interested areas or persons in your company and ask them to participate in this process. This will allow you to involve them in the selection which gives you their buy in to the selection, if changes are made, and it gives you a wider spectrum in the rating process.


While this may seem like a complicated and time consuming effort, I can assure you that taking care to have the best representatives out in the insurance market place will save you a lot of money. It will also save you a lot of sleepless nights when something goes wrong. This process can be used to select any number of other service providers, lawyers, consultants, accounts, etc. The basic premise behind this process is that it ensures the selection of the most efficient broker or other service provider for your company and pays dividends to you.


Lawrence P. Cox, A.R.M. is President of Cox Insurance Services, Inc. of Tracy, California, a Risk and Insurance Management Consulting Firm. http://www.coxinsurance.com