How NOT to Buy Insurance

Why having multiple brokers compete for your business actually brings worse outcomes.

Insurance is the DNA of Capitalism.  Without it, loans are not made; bridges don’t get built; and spaceships don’t zoom into outer space.  So why do so many businesses have a love / hate relationship with their insurance program?   Chances are, they never heard this piece of advice; or just do not follow it: “Pick your Jockey, and then your Horse”

Imagine you own a stable of racehorses, and want to race one for prize money.  How would you go about choosing the best “Jockey/Horse” formula?  Chances are you would court the best Jockey, and then let the Jockey select the horse that responds best under race conditions.  You would track the speed and performance of each horse, and then pick whichever one the Jockey got to perform the best; and that would be your team on race day.  But most businesses conduct their insurance renewal by having 5 jockeys try to ride 15 horses…how the heck are you supposed to figure out who’s really going to perform the best?  It just does not make sense!

To really break it down, let’s start by unpacking the relationship between insurance carriers and insurance brokers.

The insurance carrier underwrites business based on empirical data (i.e. loss runs, business credit reports), and based on the advice and counsel of insurance brokers.  Insurance brokers are the Jerry McGuire’s of getting a business insured (Remember that famous movie quote, “Help me help you!”).

Their job is to paint your business in the best possible light to an underwriter, and get multiple carriers to compete for your business.  Insurance brokers can advise you when a claim happens, and can help ‘back channel’ a resolution since they have multiple contacts at most of the insurance companies and work with them frequently.  Brokers are the primary source of business for insurance carriers.  If a broker brings a particular carrier a lot of business, they’ll get access to better pricing and can occasionally get an underwriter to offer valuable concessions on the terms and conditions.  Alternatively, if an insurance company wants to entice a broker to give them more business, they might take a few deals at a loss as a way of showing that broker they’re serious about building a relationship.  It’s a complex game, and to orchestrate a win for your company, it’s to your benefit to allow one broker to see the whole field of carriers competing for your business; only they know the right levers to pull to get each carrier to compete for your valuable premium dollars.

Unfortunately, most businesses evaluate a broker based on a relationship from the country club, or based on their ability to bring in the lowest quote during a “broker showdown”.

Broker showdowns are the industry slang for the process by which a company calls two or more broker firms to the table, says “pick your 5 best insurance carriers”, and has them compete for their business and the “best” deal wins.  Unfortunately, this kind of gamesmanship results in a second rate deals for the business seeking coverage.  Here’s why:

1. Many times, you have the wrong broker going to the right carrier, or vice versa.
2. Many times, the insurance carrier knows this, and doesn’t put their best quote on the table because they know they’re probably not going to get your business anyway. The underwriter wants to save their internal “pricing power” for deals they are sure they’re going to win…and be sure they ask the broker “is this deal competitive; how many other players are there?” every time.
3. Great brokers don’t waste their time with “broker showdowns” so eventually you’ll stop attracting the interest of firms that want to partner with their clients; firms that can actually make a difference for your company. Instead, you’ll be stuck with the type of transactional broker that only shows up when it’s time to renew…usually with an increase in premium.

In the commoditized world of insurance, there are TWO factors that should matter most to your business:  The ability of an insurance carrier to pay a claim; and the ability of your broker to manage your open claims processes effectively to your benefit.  Negotiating loss reserves, settlement terms, and other aspects of the machinations of your insurance program is what you should rely on a broker for…and that is how they should be evaluated.

For strategies and tips for selecting an insurance broker, or to learn more about what Exude can do for your business, contact Greg Offner at goffner@exudeinc.com or 215-970-4592.