These are bargain-basement days for insurance buyers. In the fourth quarter of 2009, workers’-compensation and general-liability premiums dropped 5.5% and 5%, respectively, from the previous year, according to a survey of 1,100 risk managers by Advisen and the Risk and Insurance Management Society. Even the cost of directors’ and officers’ (D&O) liability insurance — a tougher market given that corporate boards are in the hot seat — dropped 2.8%.
The soft market makes it tempting to just call brokers for competing bids, sit back, and enjoy the show. Unfortunately, it’s not that simple. The recession has left most insurance buyers with substantially altered physical and financial assets, not to mention changed organizational structures and payrolls, all of which require changes in coverage. At the same time, the squeeze on brokers is not an unmitigated blessing for buyers; the competing pressures of shrinking margins and demand for better value have forced brokers to consolidate and cut costs. That means buyers need to be more vigilant, not less, about the underlying health of their broker and the level of service they can reasonably expect.
Arguably it is the largest brokers that have taken the biggest hits from falling insurance prices. At Aon and Marsh, revenues for the nine months ended September 30, 2009, decreased by about $200 million and $300 million, respectively, compared with the same period in 2008. The third top broker, London-based Willis, enjoyed a 5% rise in international fees and commissions during this period, only to see it washed away by a 5% drop in its North American revenue.
The impact on the quality of broker services is unclear. While the big firms cut employees last year, they are not disclosing the number and kinds of staff reductions. Aon’s recent restructuring has focused on back-office costs, says a company spokeswoman, and other companies claim that they have made, at most, only modest cuts in client-facing employees.
Can Service Remain Unaffected?
Many insurance buyers agree that their brokers have held the line on quality or even improved services. When the fortunes of SunCal Cos., a residential real estate developer, began to head south, “my broker came to me and reduced its fee,” says Gordon Adams, the company’s director of risk management. “There was no quid pro quo of any kind” from the broker, a Willis specialty-construction unit with which the company had a long-standing relationship. Others note that brokers have become more transparent about fees and now use the Web effectively to communicate policy information to buyers.
Still, if their down times persist, brokers will be hard-pressed not to reduce service quality. Even cuts in back-office staff can have an impact on service. A continuing shortage of claims handlers, insurance-policy administrators, and office staff could make it tough to get timely responses from your broker when questions about policies arise.
The best way for buyers to avoid delays or unpleasant surprises is to apply a little risk-management discipline to the broker relationship itself. In a soft market, the cost of coverage isn’t necessarily a differentiator — instead, you should follow a set of best practices for evaluating and managing a broker.