CHOOSING AN AGENT OR BROKER

One of the most important decisions any business owner or manager makes in regards their company's commercial insurance program is their choice of which insurance agent/broker to purchase insurance through. Yet many business executives make this choice "by the seat of their pants", relying on subjective and personal criteria that often don't lead them to the best choice for their company. Here then are some suggestions for making better choices in this risk management equivalent of a beauty contest.

What kind of agent is he or she?

The first and most fundamental aspect of the agent to distinguish is his or her relationship to the insurance company. That is, is he an independent agent, or does he work for a direct-writer insurance company? Agents of direct writing companies, like Liberty Mutual, are employees of that particular insurance company. An independent agent is not an employee of any insurance company, but is rather an employee of an independent insurance agency which typically has contracts with a number of different insurance companies. The independent agent normally has access to more than one insurance company to which to market your company's insurance program, but remember that independent insurance agents and agencies do not have access to any and all insurance companies. The number of insurance companies that a particular agency has contracts with can vary significantly. Sometimes independent agents, in their zeal to acquire your business, may exaggerate the number of companies they can access for you.

An insurance broker is a licensed insurance producer who is not selling insurance for a company with which his or her agency has a contract. The difference between an agent and a broker is pretty technical, and most independent agents act as either agents and brokers, depending upon which insurance company they are dealing with. Many states have moved away from making the distinction between agent and broker, preferring the term insurance producer for anyone selling insurance in any capacity.

When choosing your agent, just keep in mind that an agent for a direct writer lives and dies by what his employer-insurer is doing in the marketplace. This kind of agent normally can produce few if any viable alternatives if his or her insurance company isn't being particularly competitive in pricing or coverage. An independent agent normally has access to more than one insurer, and so theoretically can provide more alternatives in pricing and coverage. But the differences between one independent agency and another can also be significant in these areas.

Evaluate the Agent/Broker

Insurance can seem like a commodity, with the only significant variable being price. But this is not entirely true. While there is considerable standardization in insurance policies, this standardization is far from absolute. The devil is in the details, as the clich goes, particularly regarding insurance. You need your insurance agent to be your outsourced insurance advisor about coverage, companies, claims, and other aspects relating to how your company protects itself via insurance. To select that advisor wisely means foregoing the pleasure of picking the agent whose personality you find most engaging, or who makes the best golf companion, or who provides you with the best free sports tickets. Sometimes it may even mean picking the agent who doesn't have the lowest price.

Ask about what professional designations the agent has. A professional designation like CIC or CPCU doesn't by itself guarantee an agent is expert in all the insurance aspects you require, but all other things being equal a designation does signify the agent has made a commitment to professional development. A professional designation is one of the few objective benchmarks you can establish regarding insurance knowledge. The licensing systems in most states establish a bare minimum of insurance knowledge. Even agents with years of experience may not have as much insurance expertise as you might wish. Sometimes successful insurance agents are successful more for their sales skills than their insurance expertise.

When you're choosing your insurance advisor, ask him or her for their personal resume or CV. From your perspective, you want your agent to be experienced and knowledgeable in insurance coverage, not just in insurance salesmanship. Ask about the last insurance related seminar the agent attended. Or the last insurance book he or she has read.

Make sure your agent is on notice that you expect him or her to be an active advisor. Put it in writing, and keep a copy in your files. At the same time, understand that no one can be an expert in everything. It's important that an agent know the limitations of his or her expertise, and be confident enough to tell you he or she doesn't know the answer but will find out for you.

Here's one technique you might want to try. Pick an insurance related question, a question about how a policy would respond to a certain kind of claim, or how to properly determine a certain property limit. Research the matter yourself and find out the correct answer in advance. Perhaps you've had a past experience you can use, an experience when a problem in coverage was discovered. Ask your current or potential agent how he recommends coverage be handled to address the situation. This can reveal a lot about the kind of agent you're dealing with.

Remember, even a good agent may not know the answer off the top of his head. But a good agent will not give you a wrong answer that he makes sound convincing (something I've sometimes seen with agents who understand sales better than insurance). A good agent will either know the right answer, or will acknowledge he doesn't know but will find out for you.

Insist on detailed written proposals

This may sound like an obvious point to a lot of business managers, but it's a precaution some purchasers of commercial insurance fail to insist upon: get a written and detailed proposal of all insurance coverages before making your decision. Such a proposal should detail not just cost but coverages, limits, and the payrolls, sales, rates and classifications that affect coverage and price. And make it clear that you don't just want the agent to quote your coverage off your old policies---you also want their input regarding alternatives, improvements, and corrections to your old policies.

The flip side to this coin, though, is that you as a business owner should not take the results of a good agent's efforts in this regard merely as a stick to keep your existing agent in line, or to check up on him or her. Don't use competing quotes exclusively as a free source of risk management advice. If you do, while allowing your coverage to remain with a less competent or less knowledgeable agent because of other considerations, you're making a mistake that may well come back to haunt you and your company. Be prepared to be ruthless in rewarding excellence when it comes to choosing your insurance agent.

Agent/Broker Compensation

There's been a bit of a scandal in recent years regarding compensation for insurance brokers. New York State Attorney General Spitzer uncovered serious wrongdoing on the part of some well known insurance brokers and insurers involving compensation of insurance producers. (Many states in recent years have shifted to referring to all those who are licensed to sell insurance as producers, as the distinction between agent and broker has become so blurred.) The scandal involved brokers (who were being paid fees by their clients because they technically weren't receiving commissions from the insurers). These brokers would manipulate quotes from insurers in order to steer their clients towards particular insurers who were paying those brokers so-called "contingent commissions" behind the scenes. These brokers and insurers acted to give the illusion that the broker was shopping the clients' business to obtain the best deal for the client, but in fact they were not--they were colluding to produce inflated proposals to make the clients think that the insurer recommended by the broker was offering the lowest price, when it likely wasn't. But the insurer was paying the broker, behind the scenes, commissions that provided the incentive for this deceptive practice.

As the client of the agent/broker/producer, you certainly have a right to demand to know all the compensation that the agent/broker/producer will receive from insurers if you place your insurance business there. Full disclosure is something that a reputable agent/broker/producer shouldn't object to, and is something you have every right to have as part of your decision making process.

Here is a link to a position paper developed by the National Conference of Insurance Legislators (NCOIL) regarding broker compensation.

After the Sale

When examining the service given by your agent, ask yourself if he or she carefully reviews your existing coverage and suggests improvements. Don't assume the agent is doing this as a matter of course. Insist on an annual review of coverage, a written review. If the agent is unwilling, or unable, to provide this, it may be a warning sign that you are not getting the level of insurance expertise and service you need.

Waiting until there is a serious claim to find out that your agent has been merely continuing your old coverage at a somewhat better price can be a costly lesson. Is your old coverage really sufficient? Or have there been coverage problems there for years, just waiting to assault your bottom line in the event of a claim.

One of the wisest insurance professionals I ever knew used to liken insurance to a parachute. You never find out how well it's been prepared until you really need it, and then it had better have been prepared right. Don't assume your insurance parachute has been packed right, just because your agent seems like a nice person. A good agent may well ask questions you can't answer easily, but that you need to address if you want to make sure that parachute is going to work when you need it to.

Do you have enough property insurance to avoid coinsurance penalties? To actually rebuild your property in the event of a total loss? Are you covered for employment-related practices? How about for mistakes in administering your employee benefits programs? Do you need Directors & Officers Liability?

No matter how small your commercial insurance account may be, you should insist upon an annual written review of coverage. Ask for your agent's written input regarding property limits, business interruption limits, adequacy of coverage, and alternative approaches to insuring your exposures. If you cannot get this from your agent, it may be time to shop around. Some agents are very good at giving the impression they are actively taking care of your insurance needs, without their actually expending the effort such a commitment requires. A wise purchaser of commercial insurance insists agents put their money where their mouths are, by demonstrating actual effort and expertise regarding proper insurance coverage. If your agent can't meet those tests, rest assured there are plenty of others out there who will.

This article is an excerpt from a newsletter on the web page of Advanced Insurance Management, LLC, and written by Ed Priz, their President.