The changes to corporate disclosure as a result of the Sarbanes Oxley Act and the investigations conducted by New York District Attorney Elliot Spitzer have had a far-reaching effect, not only on corporate disclosure and inducements to conduct business, but on the way companies manage the procurement of insurance services. Add to this FSA regulations which require companies to record both the process by which a decision is made as well as the outcome of that decision, and you get a flavour of the hoops that need to be jumped through when you select an insurance broker or any other product supplier.
These changes are largely to the good. They have increased the rigor of the selection process and have given insurance brokers and companies a more challenging, but rewarding, process for selecting the most appropriate supplier.
At the start of any procurement programme it is vital to be as informative as possible about your requirements. The best briefs clearly define the company's requirements and the response they expect from the broker. Bear in mind that appointing a broker is effectively an outsourcing arrangement, so the more information you can provide about your goals and objectives together with a clear explanation of the tasks you expect the broker to fulfil, the better the response you will receive from prospective providers.
Your briefing should include information about your risk management approach and risk financing strategy. It should also detail how much of the claims handling and risk management work will be handled in-house, as well as giving an accurate analysis of your full claims history. It is important that there is a balance between what the client needs to learn from the broker and what it tells the broker, in order to ensure that the response is accurate and correctly priced.
The selection process is often called a beauty parade for good reason.
It is an opportunity to understand how the broker's team will help you improve your own performance and will work with you as part of a team.
To be really effective however, the beauty parade has to go beyond slick presentation and must be used to understand exactly how well you will be able to work with your chosen broker. This means it should include a process for the broker to show that it can fulfil your objectives, perhaps by providing existing client references, or by completing a number of tests designed to demonstrate its approach to a specific task.
An effective alternative to a traditional beauty parade is to experience the prospective broker's service by employing them to work on one aspect of your insurance programme or risk management. This will give you a real understanding of the broker's approach, and will enable you to assess the cultural fit in a real life situation. The client can assess a potential broker while receiving input that has a real value, and the broker can demonstrate its capabilities in a real environment.
Pricing is an important issue in any proposal, but price is not everything.
Obtaining a good premium from an underwriter is a complex process that involves preparing the client to present the business in the best light, ensuring that 'soft issues' help your cause, and meeting a mixture of underwriter leaders and followers to achieve the best price. It is worth noting that the indicative terms included in most proposals may not always paint an accurate picture.
Claims handling is an area which often does not receive the attention it deserves. Insurance premiums receive a much higher level of scrutiny than the claims handling record of the underwriter. When you invite the broker to the pitch why not ask them to include a presentation from the claims team, with case studies of how claims have been managed quickly and efficiently?
Also, question the broker on the willingness of the underwriters they have selected to pay claims. If you make claims regularly, you need to know if they pay on time, or whether their first reaction is to appoint lawyers to reduce their financial commitments. Some underwriters can take up to six months to settle claims, and you need to be aware of this timescale to establish the cost to the business of such a time lag.
Insurance underwriters may also not be able to make their own decision on paying a claim. Increasingly, reinsurers are calling the shots, and there may well be some cultural differences over paying if the reinsurance underwriters are European or US based.
Another important issue you should question the broker about is the reserving policies of the underwriters it has selected. Some adopt a very conservative stance on reserving, particularly when it comes to casualty and employer's liability claims. Remember that the unsettled elements of a claim directly affect ongoing premiums.
In some cases a client's main priority is to examine the underwriters' Fitch or Standard & Poor's credit ratings. Of course this is important, but it only gives you a part of the picture.
It is important to see insurance and risk together and view the cost of service delivered. The requirement is a holistic one and cannot be viewed in isolation - the objective is to save costs when a problem emerges.
Evaluating the proposal requires clearly-defined criteria which should be indicated to the brokers taking part in the process. Each member of the client team should attend all the presentations and score off the same evaluation sheet. Whoever makes the final decision should be a member of the evaluation team, not someone waiting in an office to rubber stamp a decision.
Reviewing your insurance provision is a complex task which cannot be completed effectively without providing exhaustive information about your own business and getting a high level of detail from the broker and its chosen underwriters. The new regulatory environment has provided a more level playing field for the procurement process and provides a rigorous method for selecting the most appropriate insurance provider.
- Stewart McCulloch is chief executive, Alexander Forbes International Risk Services, Tel: (0)20 7933 2246, E-mail: mccullochs@aforbes.co.uk
