The most ineffective and costly practice ever adopted by the Risk Management community is "market selection". Our apologies for ruffling feathers with this statement, but it's the truth. This practice involves divvying out insurance companies (i.e. markets) to 2 or 3 different brokers and then having those brokers only get proposals (i.e. quotations) from those markets. From a broker's perspective, you have just told me that you don't trust me, which begs the question, "why?" The gross flaw with this practice is that it makes the assumption that all brokers are created equal, as if there is no compelling difference from one broker or brokerage firm to the next. As soon as you as the insurance buyer feel that you need to do "market selection", then it's time to find a new broker.
With the increasing number of workers compensation claims being filed in the State of California, it's a wonder where risk managers, CFOs, and even CEOs find the time to keep track of the status of their injured employees. Add to that the increasing number of litigated and potentially fraudulent claims, the amount of time and information needed to adequately track each individual claim is borderline wasteful, especially for highly paid and highly valuable executives and employees. The solution -- enter Professional Claims Management.
For decades, contractors based their insurance brokerage decisions primarily on 2 factors: Premiums and Risk Financing Costs – This has always been required due to the competitive nature of your business. The requirement of cost as it has related to your bidding or negotiation model. Services Offered – From time to time, you required specialized services perhaps to comply with contractual obligations or OSHA requirements. In many cases these services and requirements were seen as a 'cost driver.'
For decades, Buyers of insurance and brokerage services have used various techniques to choose their Broker. 1. The Market Selection Process. This method was prevalent when there was a large number of underwriting carriers. It is now completely outdated, as marketplace upheavals have reduced the number of viable insurance carriers to a handful. 2. The Brokerage Capabilities Presentation. This selection method, popular from the mid 1990's until the early 2000's, was commonly known as a Broker 'Dog and Pony Show.' 3. Brokerage Request for Proposal. The last variation of the selection process involves a much deeper and intensive undertaking.
As a buyer of risk financing and risk control services, you should know this: Fee-based broker compensation is the only fair way for you to remunerate your broker. Notice I said fair. That means fair to both parties of the transaction. If you do it any other way, one of the two parties (you or they) will not be treated fairly as regards income or expense.
The perception of the insurance industry is that it never changes and that all brokers are the same. Frankly, this could not be further from the truth. In fact, there is much that separates brokers and brokerage firms (i.e. insurance agencies). There are bad, average, good and excellent brokers and firms, just as in any business. This is also why the "Market Selection" custom for shopping insurance is such a bad practice, as we discussed in a prior Bowermaster White Paper.
Sir Isaac Newton changed our understanding of the universe by proposing his Three Laws of Motion. By applying his Third Law of Motion, Mr. Newton's insight can help change our understanding of the hidden costs that are buried in the financial statement of a business. Essentially, the Third Law of Motion says that forces always come in pairs – for every action, there is an equal and opposite reaction. Neither force can exist without the other. The same can be said for a cost or expense that appears on an Income Statement. For every Direct Cost, there is an equal Indirect Cost.
If you are like most buyers of risk financing and insurance services, it is difficult to tell when you should consider a change. You are being called regularly and told that you should consider changing because the caller has the biggest, the best or most efficient Brokerage Firm. In many cases, you are being told that the real difference lies in their ability to finance your risk more cost efficiently.
As outlined in 'The Worst Choices a Buyer Can Make', we cautioned Buyers that they should not focus on market selection and carrier representation, as virtually all Brokers now represent the same carriers. To counteract this reality, many Brokers have developed their own risk control, claims management and specialized resources. And then the Brokers show these resources to Buyers under the banner of 'Value Added Services', as if the term 'Value Added' means anything to you as the Buyer.