How buyers can slide back into the driver's seat: risk managers have an important role to play in keeping their brokers honest and fair in the wake of allegations of bid rigging, steering and contingent commissions, one consultant argues

Risk & Insurance, June, 2005 by Charles Lee

Unfortunately, I have seen frequent evidence of the selection of a broker being driven by the "insurance deal" that the broker offers for the next renewal. In those cases the broker--viewed as an agent--makes a sales call. The risk manager, in these cases really just an insurance buyer, likes what he or she hears relative to the price of a policy, and then retains the broker/agent without much more deliberation.

That buying practice is in sharp contrast to corporate practices in selecting other professional service providers, from auditors, to accountants, to actuaries, to law firms, to consultants. In those cases, the buyer behaves as professionally as the service provider.

PROFESSIONAL PRACTICES

Companies looking to professionalize their insurance buying practices should consider the following:

* Thoughtfully gather information on the universe of brokers.

* Analyze in detail their company's needs, determining, for instance, whether the company simply needs a broker who can provide access to the retail insurance market or a broker who can offer a more sophisticated approach to risk and capital management.

* Develop criteria for the broker that would best fit the needs and unique characteristics of the company, including: industry expertise, analytic capabilities, access to appropriate insurance markets, depth of resources and turnover of personnel, professional staff qualifications, experience of the engagement team, a record of ethical behavior as reflected in the firm's stated values and ethical standards and its internal audit standards and protocols used to evaluate compliance to these standards, a client list and recommendations by clients and a value-added fee structure.

* Assemble a candidate screening team and process that, in some cases, may include members of senior management, members of the board of directors, or even a standing committee of the board.

* Create a formal Request for Proposal that the buyer provides to the relevant members of the universe of potential providers.

* Design and implement a process to review proposals.

* Develop common criteria for evaluating proposals.

* Manage the process in a way that the final selection is based on rational criteria for which the buyer can give a good account.

* Contract in a manner that ensures transparency of fees and service performance. Ask questions early and request full disclosure, especially if broker fees and/or commissions are unclear.

If this sort of process is appropriate for a host of other professional services, then it certainly ought to be appropriate for-selecting professional insurance brokers. Like other professionals, brokers do have a valuable, unique expertise.

However, they owe a duty of care to their clients beyond being a mere agent. The best way to assure that they fulfill that duty is for buyers to demand it of them--with a selection process and an ongoing oversight that holds them to the standards of a professional.

CHARLES LEE specializes in strategic risk financing for the Tillinghast business of the consulting firm Towers Perrin in the company's Dallas office. He can be reached at risk letters@lrp.com.