Is Your Broker Mediocre?

It may be a buyer's market, but choosing the best broker is far from easy.

1. Make sure the broker understands your business. “One of the critical success factors is [brokers'] understanding of our business, so they can acquire the right insurance for us,” says Michael Twomey, CFO of Newgistics, a cargo transporter. Most risk managers feel that such understanding is best served by long-term buyer-broker relationships. Large brokerages are likely to have units with deep knowledge of a given industry, but they are more likely than small firms to shift around the people who work for you. Some buyers, like SunCal, which stuck with the same unit when it moved from Aon to Willis, feel that individual brokers are more important than the firms that employ them.

2. Communicate regularly between policy renewal dates. Institute processes so that operating units communicate to internal risk managers any changes that could affect coverage. Such changes could include a new location, new equipment, or a change in cargo to be shipped. Let your D&O broker, in particular, know about possible legal risks stemming from mergers and acquisitions, falling share prices, and product defects.

3. Start early on renewals. If you think you might want to change brokers or make a radical shift in your insurance coverage, get a request for proposal out to potential brokers at least six months before your current insurance expires. If you plan to stick with your incumbent, meet with the broker at least 90 days before renewals to review in detail all exposures. To get the proper coverage, the risk manager should give the broker complete information about the company’s assets and operations. In the case of workers’ comp, for example, has the workforce shrunk or grown and have new physical activities added new exposures?

4. Decide how to pay your broker. Finance chiefs should keep their companies’ current cash and budget needs in mind when determining how brokers will be compensated. “A commission setup improves cash flow, because the insurer pays the broker up front,” notes Terry Fleming, president of the Risk and Insurance Management Society and director of risk management for Montgomery County, Maryland. On the other hand, fee-based compensation helps buyers see more clearly what they are paying for.

5. Don’t change brokers too often. In a soft market, it is tempting to jump from one broker to another in search of deals. But if you want to develop a solid partnership with your broker, don’t switch every year. A reputation for skipping around could hike your premiums or make it tougher to find decent coverage when a hard market returns.

6. Match the brokerage to your company size. Multinational companies need global brokers, as do large national companies. A smaller company might receive more attention from a smaller broker.

7. Insist on transparency. To make sure that brokers are acting solely in your interest rather than that of the insurer, ask the broker to confirm that in writing. Pay special attention to contingent compensation (extra payments insurers pay brokers based on the performance of their clients’ business).

If broker acceptance of such compensation is “warping the decision process, and [the broker] is not really looking at doing a good search of [insurers] out there, that’s a problem,” says Ron Fior, CFO of Callidus Software, a vendor of sales-performance tools. Not that it’s a problem at Callidus: the company’s broker, USI Holdings, routinely provides Fior with lists of the dozens of insurers it has contacted.

David M. Katz is New York bureau chief at CFO.

Broker Checklist

Have you…
• met with the broker three months before the policy-renewal date?
• told the broker about changes in company assets and risks?
• decided whether fees or commissions are best?
• made sure the broker discloses income from insurers?

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