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Developing Broker-Services Agreements

By Gary Griffin, ARM

For many businesses a substantial percentage of their revenues goes for purchase of insurance. In most instances, those insurance policies are placed on behalf of the insured by one or more insurance brokers. Income received by the broker usually is derived from insurer-paid commissions, from a fee negotiated with the insured or from some combination of the two. Regardless of the form of compensation, the insured pays either directly or indirectly for the broker to perform certain services. Those services sometimes are limited to the marketing and placement of insurance or they may include more involved hands-on assistance with such things as detailed 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 businesses do not have service agreements with their insurance brokers. This can be true for even very large organizations where the fees and commissions earned by the broker can range from several hundred thousand to millions of dollars each year.

The overriding benefit of a broker-services agreement is that the expectations of the insured and the responsibilities of the broker are reduced to writing. This helps eliminate disputes that might arise over what specific services were actually to be provided. A written service agreement also provides benchmarks for measuring performance. (We have seen many broker promises go unfulfilled.) Going through the process of developing such an agreement not only nails down what the broker is going to do but also requires the insured to focus on the services actually needed. If the insured simply requires the placement of certain coverages, then the broker’s compensation may be more than the value of the actual service provided; and the insured may wish to negotiate a more fair compensation.

It is unclear why more insureds do not have a formalized service agreement with their broker detailing the specific services the broker is to provide. One reason might be that developing such an agreement requires a good deal of thought and effort by both parties. Also some insureds who have had many years of satisfactory service from their broker may not feel a service agreement is necessary nor do they fully appreciate the benefits such an agreement can provide. While most brokers will agree to entering into a service agreement, there may be resistance on the part of the broker if the agreement contains sweeping hold-harmless or indemnity provisions, especially as respects risk identification.

Even small accounts may warrant services in addition to the mere placement of insurance. Many insureds should expect much more than they receive. The following are functions you may want to incorporate into your own broker-services agreement.

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 may be required. The broker also should help prepare a report identifying key loss exposures. Where the gathering of data requires the physical inspection of property or interview of personnel, those activities should be identified and scheduled.

Articulate Risk-Management Objectives

The broker service agreement should articulate the insured’s risk management priorities, goals and strategic plan with the stated purpose of designing a program that is appropriate 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 responsiveness of each insurance policy’s terms and conditions to loss exposure and to recommend appropriate coverage modifications. The coverage audit also should include a review of all insurance agreements to assure that they are placed with reputable and financially responsive insurers. All findings and recommendations should be provided to the insured in a written report.

Risk Control Evaluation

Traditionally, risk-control services have been insurer-provided; however, the broker may be able to review the insured’s risk-control programs for adequacy and effectiveness and assist in the development of risk-control objectives. Once those objectives have been established, the broker may also be able to develop a plan for future servicing. This might include the use of a specialized insurer, broker or outside service provider or consultant. It also may be desirable for the broker to establish risk-control measurement criteria and to provide an ongoing overview and measurement of its effectiveness. Risk-control services like those described may be outside the normal scope of service and may be subject to additional cost.

Risk-Financing Alternatives

Where agreed upon, the broker may be able to 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 conduct a detailed review and evaluation of historical and current risk financing plans assessing their adequacy and effectiveness. Available risk-financing alternatives should be developed and the relative advantages or disadvantages reported to the insured.

Suggested Broker Administrative Functions

Service-Plan And Risk-Management Administration

In some instances, brokers may provide little or no service beyond effecting the renewal of an existing policy and issuance of certificates while receiving a full commission. To ensure that this situation does not arise, the service agreement should contain the broker’s promise to fulfill the following administrative functions:

• The broker should acknowledge that each policy, binder, endorsement or other document received has been read and that those documents are accurate and provide the coverage intended. Many insureds would be appalled at the frequency with which policies are issued with blatant errors or omissions, poor grammar and frequent misspellings. Because insurance policies are legal documents, meticulous policy review by the broker should be demanded.
  
• To the extent not performed by the risk manager, the broker should issue, record and track insurance certificates, binders, auto identification cards, etc.
  
• The broker should verify rates, premium amounts and audit results.
  
• Sometimes as optional service, the broker may be able to provide contract risk review and analysis. This task usually requires the broker to develop a strategy for reviewing all contracts for the purpose of ensuring 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, the management of claims can consume much time and expense. Some brokerages have entire departments devoted to providing varying degrees and types of claim service depending on the insured’s needs. A good deal of claims service should be expected as part of a broker’s normal commitment. Whatever level of claim service is desired, the service agreement should reflect these needs and elaborate the insured’s claims philosophy. At minimum, the broker should commit to reviewing and establishing the insured’s claims-management needs. This should include a review of the adequacy and timelines of all loss runs and reports and to make changes as needed. The broker should commit to act aggressively in helping to resolve all outstanding claim disputes and to act with dispatch in processing and achieving timely payment on all future claims. Where claim service providers are employed, the broker may 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 also should agree that all such information and material including knowledge of such information and records will be kept confidential. 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. These meetings are necessary 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.

Regardless of the extent of services contemplated by the agreement, the insured should receive a stewardship report prior to the broker conducting any renewal efforts. Such a report should chronicle the broker’s activities during the service period and project or recommend activities for the coming year. The report should detail the hours spent and expenses incurred by each service team member on work performed for the insured. A summary for each policy showing the earned premium, incurred losses and loss ratios should be provided. 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

The broker may help develop a risk-financing plan. Such a plan should include, as a minimum, a description of the proposed program structure and the desired terms and cost. The plan should include a description of desired services and who will provide those services. All insurance underwriting submissions should be prepared and presented to the insured for approval prior to submission to the markets.

Marketing And Negotiation

While marketing and placement of insurance is often taken for granted, establishing some game plan and regimen to the process 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 within the brokerage. These professionals are often paid large salaries because of their effectiveness at getting the insureds the best deal. While it is important to let them do their job, insist that certain milestone dates be established so that proposals can be delivered with ample time to make informed decisions.

Implementing The Agreement

Keep in mind that the purpose of the broker service agreement is to clearly identify what services are needed and to receive a commitment that those services will be provided. While the agreement need not be complicated, it does require some thought and effort to be effective. Where a service agreement is desired for a broker on existing business, and where a long-term relationship exists, there may be little urgency in finalizing the agreement. While this helps to ensure that a hurried and inadequate agreement is not implemented, a target date should be established. Key renewal dates often are good times to finalize such contracts as they are periods when the insured should already be focusing on risk management and insurance issues.

When the insured anticipates changing brokers or conducting a broker-selection process and wishes the selected broker to enter into a service agreement, the insured should have the basics of the agreement developed well in advance of selecting the broker. We are aware of at least one instance in which the broker agreed as part of its selection to enter into a service agreement. Nearly a year after being selected, the insured still did not have a signed commitment from the broker. Only after the broker was threatened with losing the renewal business did it ultimately sign the agreement. Having to threaten your broker with such action might signal a red flag and may mean it is time to consider a more willing service provider. Still, this example underscores the fact that insureds may best be able to effect such agreements when awarding new business or when considering giving existing business to others.

Conclusion

Too often, insureds have only a limited awareness of what it is they receive from their broker other than knowing that the placement of an insurance policy has been made. Reducing the expectations of the insured and the promise of the broker to writing in a formal document not only better assures that those services will be delivered but establishes a sound basis from which a determination of value can be made.

While the above elements of a broker service agreement will not be appropriate under all circumstances nor for all insureds, they illustrate the extent to which such agreements can be drafted and hopefully pave the way from which you and your broker can develop a service partnership. In this way, risk managers can better ensure that they are acquiring services from their brokers that actually are of benefit to their companies and that the dollars spent in acquiring those services are maximized to their full potential. 

ABOUT THE AUTHOR

Gary W. Griffin, ARM, is Principal Consultant of Warren, McVeigh & Griffin, Inc., an independent risk management consulting firm based in Newport Beach, California.

riskVue | The webzine for risk management professionals
July 2002