Who Needs an Insurance Broker?
When the Internet first sprang on the scene, many within the insurance
industry predicted the demise of insurance agents and brokers. They foresaw
that businesses and families would purchase insurance through the Web and
would no longer need insurance intermediaries. While a few insurance
companies and brokerage firms have made progress with electronic commerce,
it didn't take over the business as originally envisioned and the vast
majority of insurance is still sold the old-fashioned way through brokers
and agents.
From approximately 1985 to 2000, the commercial insurance marketplace was a "soft" or buyer's market. Insurance premiums decreased, while coverages broadened and limits increased. Buyers got a lot of insurance for their dollar. An agent or broker didn't have to be a genius or even a good technician to reap some of the benefits of the soft market'comprehensive coverage at an affordable price. With fierce competition for new business leading to coverage innovation and broadening, less pressure was placed on insurance buyers to be highly sophisticated or knowledgeable. Buyers were being wooed by agents and brokers.
Then in the third quarter of 2000, the hard insurance market began with significant stock market losses and a general economic downturn. Insurance prices that continued to increase during 2001 were accelerated by the events of September 11. The result was that percentage of premium increases grew during 2002 to an average of 30 percent, with many nonprofits experiencing even higher costs. The hardening insurance market has affected all businesses and nonprofits. The experts are once again discussing the downfall of the insurance industry and revisiting the roles of the various parties that participate in an insurance transaction.
Reactions magazine recently published the results of its 2002 Broker Survey of risk managers and insurance buyers, reinsurance managers and buyers, insurance underwriters, reinsurance underwriters, consultants and brokers. The results reflect a belief that the role of the broker is increasing. For example, when asked to rate the importance of the brokers' role in today's market, 49 percent rated the role as "very important," 24 percent said "essential," and 21 percent indicated "occasionally useful." It's interesting to note that the respondents are large insurance buyers, sellers, and service providers who are knowledgeable and experienced players in the market — not small or midsize insurance buyers. If large insurance buyers — who bring considerable experience and sophistication to the table — are relying increasingly on brokers, it's arguable that smaller consumers, including many nonprofits, should give additional thought to the important role that a broker plays as the nonprofit's intermediary with the insurance marketplace.
Nonprofit Consumers: The Broker's Role
Most nonprofits, like other businesses, have a limited understanding of the insurance industry and marketplace. These organizations are dependent upon the insurance agent or broker to guide them through this maze. The broker's major responsibility is to advise the nonprofit about the types of coverage it needs to finance its property and liability exposures. This assistance should be provided with an overall goal of helping the nonprofit manager to become a knowledgeable insurance buyer. As the cost of insurance increases, nonprofit executives and boards must make important fiscal decisions regarding the organization's insurance program. You may need to decide to purchase less coverage with higher deductibles and possibly lower limits at a higher premium than last year. You may have already experienced this phenomenon with your 2002 renewal, but be prepared. The experts are predicting the hard market will continue through 2003 and perhaps beyond.
Your broker can advise you regarding your coverage decisions, explain the meaning of key coverage terms and provisions, identify liability theories and loss trends, and help evaluate emerging new risks or exposures that your organization may be facing.
Coverage Developments
Many coverages are no longer available or have become extremely expensive. For example, coverage for terrorism losses is now excluded from most insurance policies, and the trend will only continue unless Congress enacts some form of reinsurance for terrorism events. Many nonprofits are facing loss of coverage for abuse and molestation due to cost, availability, or the requirement that a nonprofit implement an array of costly screening techniques. Most insurance companies are excluding coverage for mold and fungi. Workers' compensation continues to be expensive coverage, and there are availability problems if the organization has a high concentration of people working at one site. To be successful as a consumer of insurance, you need to assess the effect of these changes on your organization. Your broker can help you make sense of these developments and provide valuable information in evaluating your insurance needs.
Insurance companies are introducing new forms, endorsements and exclusions regularly, and few of these changes are broadening coverage. Many of these changes are responses to creative plaintiff attorneys, judges and juries that have introduced new theories of liability and negligence in various court decisions. Although some of these decisions may benefit victims, the majority of the theories expand the cost of claims and coverage intended to protect against claims. Your broker can keep you informed of these new changes and how they affect your organization.
New Exposures and Risks
Widespread Internet use and other changes in today's society have introduced new dangers and opportunities for your organization. Your broker can advise you of changes within the insurance industry that address these threats and opportunities.
Trusted Business Partner
To meet your insurance needs effectively, your insurance broker should be a trusted business partner'similar to your accountant, banker and attorney. In order to secure the right coverage at an appropriate price, the broker must be familiar with all of your programs and services. An uninsured loss that stems from the failure of a nonprofit to be forthcoming about its operations can threaten the survival of your organization. An informed broker can reduce the possibility of this occurring.
The broker should have expertise working with nonprofit organizations to understand any unique aspects of your operation. Additionally, the broker should have access to those insurance companies that underwrite nonprofits. You and your broker should know that not all insurance companies write nonprofit organizations, and if a company writes some nonprofits without a commitment to the sector, there's always the possibility that the company will quickly abandon nonprofits at the first sign of trouble. A knowledgeable, trusted insurance advisor is vital to your organization's success.
Broker Compensation
Despite a continuing debate about the way in which insurance professionals are compensated, most agents and brokers continue to be paid directly by carriers on a commission basis. The commission on a particular account is a percentage of the premium for that account. When the premium increases, the dollar amount of the commission goes up, as well. When the premium goes down (sometimes due to effective negotiating on the part of the broker or agent, or in other cases due to changes in coverage or a competitive environment), the commission goes down. In addition to commissions, agents and brokers may earn additional fees or other rewards from carriers based on the volume of business placed with a particular provider. The commission percentage may be based on the volume of business an agent or broker places with a particular carrier — the highest commission rates may be reserved for preferred brokers or others that place what the carrier considers to be a substantial amount of business. Since the commissions earned on small accounts (annual premium of $25,000 or less) are also small, it's difficult for a broker to commit resources to assisting organizations that often need the most help.
Summary
Brokers and agents play a vital role in today's hard market. Nonprofits without a staff member with insurance expertise tend to rely even more heavily on the their agents and brokers. A broker provides valuable insurance information and an assessment of the appropriate costs for your insurance. In the Reactions' survey only 14 percent of the respondents indicated the most important aspect of their dealings with the broker was the ability to get a good price. In contrast, 47 percent cited "familiarity and trust through a long term relationship" as the most important facet of their dealings with a broker. A knowledgeable, service-oriented broker is an invaluable asset to the proper management of your nonprofit's insurance program.
For more information on working with an insurance agent or broker, or other aspects of managing your insurance program, see the Nonprofit Risk Management Center's new book, Coverage, Claims & Consequences: An Insurance Handbook for Nonprofits. Click here for more information or to order a copy. To speak to a staff member of the Nonprofit Risk Management Center about any of the issues addressed in this article, call (202) 785-3891, or submit your question via e-mail using the Ask a Question feature on our Web site.