Let me start by saying I do not receive many Christmas cards from the brokerage community. Why you ask? The answer is simple. We’ve successfully exploited the inefficiencies of the insurance industry by creating a competitive negotiation process, leveraging several brokers and insurers competing for the client’s business based on our manuscript coverage specifications. Advocating solely on our client's behalf without financial incentives from the insurance industry, our clients obtain significant enhancements in coverage with average first year savings between 20-40%. That’s a fairly large number in many cases and certainly a number that's important to the client! This we've successfully done without leveraging technology and all that digital innovation offers, although I do firmly believe that there is strong opportunity to leverage emerging technologies to create a common, competitive and transparent marketplace that is driven by the client with streamlined participation from all appropriate parties in the distribution process.
Now, as independent consultants, many brokers get upset by our process as we’re a perpetual “pebble in their shoe” from day one and it is up to them to prove that they deserve the business and it is appropriately priced upon renewal. At the end of the day, it’s all about the client and we are broker agnostic. Now don’t get me wrong, some of my best friends are insurance brokers and I’ve witnessed many insurance brokers do phenomenal work and negotiating, but the insurance industry has unfortunately created a distribution model that is nothing but one inherent conflict of interest. This isn’t a bash on the brokerage community, but rather an evaluation of the industry’s distribution model. How can the client obtain the most comprehensive coverage at the market’s most competitive pricing when their broker wears three hats? They represent themselves, the insurance company and the client.
As a simple question to ask yourself:
How can someone truly advocate and negotiate solely on my behalf if they have financial incentives and contractual relationships that potentially conflict with my best interests and influence their decisions?
Let’s break down this simple question and identify some of these the industry inefficiencies that we have successfully exploited without the ever-growing “InsureTech” or Emerging Technology that is now disrupting the industry:
For one, if you are making 10% commission on a policy, are you going to be more inclined to sell the $80K policy or the $100k policy (assuming no differences in coverage)? This question is purely subjective and different from one person to the next, but it’s certainly something to consider when evaluating industry dynamics and whether you as the client might be overpaying and underinsured.
Next, let’s evaluate the contractual relationships and issues therein. Consider a smaller, regional brokerage. They may have 3 to 4 carriers that they primarily write business with on a direct basis. If Travelers is their primary carrier and who they place the bulk of their premium with, I hate to say it, but that relationship means just as much, if not more, to them than many of their clients. The truth of the matter is that if they upset Travelers, perhaps by moving the risk to another one of their carriers or pushing too hard against them in a claims negotiation, then they are in a position that they never want to be in. A position where Travelers is angry and unwilling to make needed concessions if pushed too hard. They need to keep Travelers happy and maintain their leverage with them in order to win new business and keep existing business, not to mention the contingency commissions received for writing a certain amount of business with them. This is why insurance has become a transactional process and you typically hear from your broker 60 days before renewal and continue to renew your insurance with the same carriers, pending you are not running a competitive process yourself or received a cancellation notice from the current carrier(s). It's also important to remember that this is your advisor. As your advisor, the scope of their expertise should expand beyond just the placement of insurance and include continuous engagement throughout the year on items such as the Insurance & Indemnity language in your lease/supplier/vendor/etc.. contracts, Letter of Credit and Collateral Agreements/Negotiations, Claims Analysis and Negotiations, etc…
Lastly, many brokers are generalists. Particularly with the rise in emerging technology and the digital era, insurance products are continuously refined and often difficult to interpret without a deep understanding of both the industry and the new insurance contract language. Consider cyber insurance. There is no standardization among the industry and almost every carrier has their own underwriting application and insurance policy language and structure. This leads most retail brokers to utilize a wholesale broker (specialist) to place the risk as they do not understand how to properly explain the risk or terms of coverage (I can't say that I blame them). It requires an understanding of both the information security world and the varied insurance coverages, which seem to change by the day in the young cyber industry. I’m not even going to touch upon the entire industry’s lack of knowledge when it comes to underwriting cyber risks.
If we take a step back, it is easy to see that in many cases we now have a lack of adequate intellectual capital without an industry expert to negotiate solely in the client’s best interest. Again, this is a function of the industry, not insurance brokers. We will always need the appropriate representative to facilitate deals and process customer inquiries such as certifications of insurance. I think to myself that maybe it’s because the insurance industry has functioned this way for hundreds of years that we still have such antiquated systems and processes for which it is governed as I’m not sure if this is a matter of public awareness or because it’s convenient (or maybe the CFO’s brother-in-law is the broker).
Until the recent surge in “InsureTech” and the use of big data and emerging technology, the industry has not been threatened by disruption and has been complacent with the existing, transactional process that has made insurance to be thought of as a commodity in many cases.
With almost every CFO I speak too, the first question I get is, “ so how much are you going to save me on insurance?” As a common response, I like to say, “if you want to pay 10 cents for insurance, I can get you insurance for 10 cents. But when there’s a $5 million claim that’s not covered, you’re going to quickly forget about the $300K I saved you.”
This quickly changes the dynamic of the conversation into one that is coverage centric and focused on asset protection, the primary reason for why we have insurance coverage. Fortunately for our clients, our competitive process has consistently yielded significant year-over-year savings with one of our Private Equity clients reporting a ROI (total portfolio premium savings vs. fees paid to us) of 12-to-1. When this is applied to their various multiples, we’re talking about millions upon millions of dollars in addition to significant coverage enhancements and the peace of mind in knowing that they have someone solely negotiating on their behalf with the expertise to keep their assets and investments best protected.
As we consider new models of distribution and leveraging the rise of technology to enhance insurance products and the customer experience, there is a strong case to be made for a new distribution model that creates this competitive landscape in a way all parties can participate within the same ecosystem. Middle-Market to Enterprise clients will always need appropriate representation and human interaction to guide their decisions and assist in the purchasing process, but perhaps a blockchain-based solution that puts the customer in control of a common marketplace of brokers and insurers is an effective solution to solving these inefficiencies and yielding the most effective results on a consistent and transparent basis….
Part 2 to follow on how we can leverage these technologies to create a new distribution model that is in the best interest of not only the client, but all industry players and representatives.