DEVELOPING BROKER SERVICES AGREEMENTS
by Gary Griffin
This document by Gary Griffin illustrates the detail with which you can draft a broker service agreement and paves the way for you and your insured to develop a meaningful and profitable service partnership.
For many businesses, insurance represents a substantial percentage of their revenues. In most instances, one or more insurance brokers places insurance policies on behalf of the insured. The brokers’ income is usually derived from insurer-paid commissions, from a fee negotiated with the insured, or from some combination of the two. The insured pays — directly or indirectly — for the broker to perform certain services which might be limited to the marketing and placement of insurance; or they might include hands-on assistance with such things as risk identification and measurement, loss control, claims consulting, and actuarial studies.
Although most businesses enter into some form of written contractual arrangement with many of their vendors, most don’t have such contracts with their insurance brokers. This can hold true for even very large organizations where brokers’ fees and commissions can range from several hundred thousand to millions of dollars each year.
The benefit of a broker-services agreement is that it defines in writing the expectations of the insured and the responsibilities of the broker. This helps eliminate disputes that might arise. A written service agreement also provides benchmarks for measuring performance. Developing such an agreement nails down what the broker will do and requires the insured to focus on the services they actually need. If the insured simply needs placement of certain coverages, the broker’s compensation might exceed the value of the service provided; and the insured might wish to renegotiate the compensation.
It’s unclear why more insureds don’t have formal agreements with their brokers. One reason might be that developing a contract requires a good deal of thought and effort by both parties. Insureds who have had many years of satisfactory service from their broker might feel that a service agreement is unnecessary, or they might not fully appreciate the benefits such an agreement can provide. Although most brokers will agree to a service agreement, they might resist sweeping hold-harmless or indemnity provisions, particularly those that involve risk identification.
Even small accounts might warrant services in addition to the mere placement of insurance. Here are some functions you might want to incorporate into your own broker-services agreements:
SUGGESTED BROKER RISK MANAGEMENT FUNCTIONS
Risk Identification and Analysis. The broker should gather and analyze operational and contractual data for the insured or assist the risk manager in accomplishing these tasks as required. The broker also should help prepare a report identifying key loss exposures. Where the gathering of data requires a physical inspection of property or personnel interviews, the broker should identify and schedule these activities.
Articulate Risk Management Objectives. The broker service agreement should articulate the insured’s risk management priorities, goals, and strategic plan with the purpose of designing a program to meet those goals. The agreement also should establish performance criteria to measure results in attaining the stated goals.
Insurance Coverage Audit. The broker should determine the loss exposure responsiveness of each insurance policy’s terms and conditions and recommend appropriate coverage modifications. The coverage audit should review all insurance agreements to assure that they’re placed with reputable and financially responsive insurers. The broker should provide all findings and recommendations to the insured in a written report.
Risk Control Evaluation. Traditionally, risk-control services have been insurer provided. However, a broker can review the insured’s risk-control programs and help develop risk-control objectives. Once they establish those objectives, the broker could develop a plan for future servicing through a specialized insurer, broker, outside service provider, or consultant. The broker should establish risk-control criteria to measure its effectiveness. Risk-control services such as these might be outside the normal scope of service and incur additional costs.
Risk-Financing Alternatives. Where agreed on, the broker can provide loss projections and statistical risk analysis. This might include identifying appropriate risk-retention levels based on loss exposures and financial data. Where appropriate, the broker should evaluate historical and current risk financing plans to assess their adequacy and effectiveness. The broker should develop risk-financing alternatives and report the relative advantages or disadvantages to the insured.
SUGGESTED BROKER ADMINISTRATIVE FUNCTIONS
Service Plan and Risk Management Administration. Some brokers might provide little or no service beyond renewing an existing policy, issuing certificates, and collecting full commission. To better serve your clients, make sure your service agreement contains the broker’s promise to fulfill these administrative functions:
- The broker should acknowledge that they’ve read each policy, binder, endorsement, or other documents, and that those documents are accurate and provide the coverage intended. Insureds would be appalled to discover blatant errors or omissions, poor grammar, or frequent misspellings in their policies. Insurance policies are legal documents; make meticulous policy review mandatory.
- If the insured’s risk manager doesn’t perform these functions, the broker should issue, record, and track insurance certificates, binders, auto identification cards, etc.
- The broker should verify rates, premium amounts, and audit results.
- As an optional service, the broker might review and analyze contract risks. This task usually requires the broker to develop a strategy for reviewing all contracts to ensure compliance with insurance requirements, noting any uninsured exposures.
In addition, the broker should keep the insured abreast of pertinent insurance industry developments — both current and anticipated — and develop effective strategies for aggressively managing those developments.
Claims Management. For some insureds, claims management is time consuming and expensive. Some brokerages have entire departments devoted to claims service. An insured expects such service as part of a broker’s normal commitment. The service agreement should reflect these needs and elaborate the insured’s claims philosophy. At a minimum, the broker should review and establish the insured’s claims-management needs. This should include a review of the adequacy and timelines of all loss runs and reports, and making changes as needed. The broker should help resolve all outstanding claim disputes and process all future claims to achieve timely payment. Where claim service providers are employed, the broker might be able to monitor and audit the effectiveness of those services.
Ownership and Confidentiality of Records. All information, records, and data provided to or accumulated by the broker should remain the property of the insured. The broker should also agree to keep confidential all such information and material. The broker should agree not to disclose such information or records to any party without a direct underwriting need to know.
Service Measurement and Stewardship Reports. The service agreement should schedule periodic services-evaluation meetings to determine whether the broker is accomplishing its service commitments as measured by pre-defined criteria. Periodic meetings also allow both parties to identify existing or potential problem areas and to deal with them before they get out of hand. Such meetings help foster an efficient and cordial working relationship between the risk manager and the broker service team members.
Before renewal, the broker should give the insured a stewardship report that chronicles the activities during the service period and projects or recommends activities for the coming year. The report should detail the hours spent and expenses incurred by each service team member. Provide a summary for each policy showing the earned premium, incurred losses, and loss ratios. This summary also should include a full accounting of premiums and fees paid by the insured including all commissions or other income earned by the broker.
SUGGESTED BROKER MARKETING FUNCTIONS
Program Design and Specifications. Develop a risk-financing plan that includes a description of the proposed program structure, the desired terms and cost, a description of the desired services, and who’ll provide them. Be sure to prepare and present all insurance underwriting submissions to the insured for approval before you submit them to the markets.
Marketing and Negotiation. Although marketing and placement of insurance is often taken for granted, establishing a plan can increase the likelihood of achieving the insured’s objectives. Having your insurance program successfully marketed and placed under the best terms is usually directly attributable to one or a few individuals in a brokerage who can get the best deals. Although it’s important to let them do their jobs, insist on certain milestone dates so you can deliver proposals with ample time to make informed decisions.
IMPLEMENTING THE AGREEMENT
The purpose of the broker service agreement is to identify the needed services and to make a commitment to provide them. The agreement doesn’t have to be complicated, but it does require some thought and effort. On existing business, and where a long-term relationship exists, there might be little if any urgency to finalize an agreement. You should set a target date to ensure that a hurried and inadequate agreement isn’t implemented. Key renewal dates often are good times to finalize such contracts, as they’re periods when the insured should already be focusing on risk management and insurance issues.
Too often, insureds don’t know what to expect from their broker other than the placement of an insurance policy. A formal agreement documents the insured’s expectations, states the broker’s promise of service, and establishes a sound basis to determine the value of the relationship. Although these elements won’t be appropriate for all circumstances, they illustrate the extent to which such agreements can pave the way from which you and your insured can develop a service partnership.
Gary W. Griffin, ARM, is principal consultant of Warren, McVeigh & Griffin, Inc., an independent risk management consulting firm based in Newport Beach, CA. He can be reached at (949) 752-1058, fax (949) 955-1929, e-mail [email protected], or visit www.griffincom.com.