At some companies the RFP process for insurance brokerage services has become unnecessarily complex. The goal of an RFP process is of course to determine which insurance brokerage best fits a company’s needs.
In this article I discuss the only five questions you need to conduct an efficient RFP, but first here are the three common mistakes that I see companies make as they go through the insurance broker RFP process.
Trying to Reduce Everything to a Spreadsheet
More and more, companies are engaging in procurement-driven RFPs, which attempt to reduce service offerings to a data-driven spreadsheet.
Procurement departments can definitely add value when their tools and approaches are used deftly. Unfortunately, a lot can be lost if the spreadsheet—and not a company’s actual needs—becomes the driver of the RFP process. This is especially true when it comes to arranging for services.
Questions like asking a broker to rank insurance carriers by claims handling abilities, for example, reveal a lack of understanding of the nuance in how claims are actually handled and paid.
Much like with the US News and World Report “Best Colleges” list, when people get too tied up in rankings, they often miss the critical component of “fit.”
My recommendation is to take a customized approach to finding the right broker for you by asking the five questions listed later in this post.
Not Reaching Out to Referrals
Some companies mistakenly base their decision solely on the presentation rather than talking to other people in their ecosystem about their insurance brokerage decision.
If you have the chance to speak with someone who has worked with a prospective insurance brokerage during your assessment process, take the opportunity to do so.
This may come in different forms:
- You might call up someone you trust, such as general counsel or a CFO you know, your outside law firm, your accounting firm, etc., to ask for recommendations to include in your brokerage search process.
- You may discuss your options with someone in your network who has worked with the brokerage you are considering, and can give you their insights on the relationship and their performance.
- You could ask for and receive from your brokerage candidates the contact details of current clients that are similar companies to you in size and risk profile.
Focusing Primarily on Cost
Sometimes the decision-making process gets reduced only to the cost, which is surely not surprising given the expense of insurance. Cost can also feel like an easy thing to compare.
Buyer beware: The lowest price might not be the best value, or even available. For example, consider that you can often lower the price of D&O insurance by agreeing to a very high self-insured retention (like a deductible), but doing so might leave your balance sheet significantly exposed.
Concerning whether the price is even available: Sadly, not all brokers are honest. Under pressure to make their own numbers, an individual broker might give into the temptation to give you a price he or she is unlikely to meet, figuring that by the time the rubber hits the road, you will be willing to forgive the transgression.
In addition, it can be the case that a brokerage that has less business and is consequently in the market less frequently doesn’t have enough visibility to be able to predict your cost accurately.
Thus, when you rest your brokerage decision on price, the winner will be the brokerage that promises you the lowest price, regardless of the viability of that promise. When the actual pricing comes in, it’s the insured party that will still have to pay the bill—even if it is significantly higher than originally predicted.
Sometimes companies ask multiple brokers to go into the insurance market and obtain bids so that the company can compare the results among the brokers. The idea is that the company will then choose the broker who comes back with the lowest price. Unfortunately, this will not work as intended because of the basic law of supply and demand.
While there are many insurance carriers, the number of carriers willing to write the first or primary layer of insurance is much more limited. The primary layer is the most important layer since it is so foundational both for the terms and the pricing of the insurance program. Remember too that each carrier will only give a quote to one broker. This means that if a company divides the market between brokers, each broker is working with fewer markets (the supply side of insurance). The result will likely be suboptimal pricing compared to if one broker were working with the entire market.
Five Simple Questions to Ask Your Broker
Here are five questions that are likely to help you determine in an efficient way which insurance broker will be a good fit for you.
- What can you tell me about your firm and its culture? Culture eats everything else for breakfast, to misquote a famous phrase. When you ask this question, you are listening for an answer that reveals how a firm thinks about the task of placing insurance for its clients. When it comes to complex insurance needs, a service and technical skills-oriented answer is the one you want to hear.
- In your view, what are the key exposures my company faces? The answer to this question will tell you if the brokers you are interviewing “get” your company. It usually also reveals something about their communication style. For example, if they can’t explain what they mean without jargon and you don’t like jargon, this might be a red flag for you.
- What do I need to know about the insurance policies you would recommend, and your process for placing them? When your company is of a size that you would want to conduct an insurance brokerage RFP, you are probably also of a size where your insurance is no longer a commodity product. This question is designed to help you discern whether and to what extent the broker you are interviewing is able to take a customized approach to your insurance needs.
- What additional services do you provide? Be sure to ask specific questions about claims advocacy and to what extent this is already included in your service fee or is a separate charge. This is also a chance for your interview candidate to tell you about the services in which they have invested on your behalf.
- What will all of this cost? Here you are looking for transparency. A good broker will be glad to break down costs for you, including the costs of their services. As a reminder, most insurance premiums include commission paid to the broker unless otherwise specified.
You can read more about the five questions and a saner RFP process in an earlier post I wrote here.
The views offered in articles posted to the D&O Notebook are the views of the author and not necessarily those of Woodruff Sawyer.