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Brokers need to concentrate on quality of service.

Brokers Need to Concentrate on Quality of Service

What justifies an insurance broker charging a commission related to premium volume for his work in placing a large commercial account? Is it for any reason other than historical precedent? It is becoming increasingly difficult to find brokers prepared to defend this basis of remuneration, yet it continues--but not for much longer.

Who, except risk managers inured to this age-old habit, would freely agree to a business contract with a scale system of payment where you paid less for the best result and more for worse results? Brokers will, of course, argue that you cannot measure their work merely by the cheapness of the premium quotes they obtain. It is a fact, however, that this is how most business is done.

There are factors such as security and the quality of broker services to consider apart from price. However, these considerations cannot be used to justify payment by commission. How can you relate the quality of services provided by a broker to the premium paid to the carrier? How can you relate the value of a broker's expertise in securing sound and reliable carriers who will be on hand to pay claims to the premium volume paid to the carriers? You cannot do it in any rational way. Moreover, if you looked into the reason why the top half dozen brokers in London won their recently acquired accounts, you would find that price was an important factor. Furthermore, none of them would admit to using inferior security or to providing poor service, and they would probably be right. The best service, security and price are often found together. A good broker will market the risk in the best way, get a good rate and security and provide good services more economically than less skilled brokers.

The image of even good brokers is tarnished by the commission system of payment and the suspicion that the broker wants to sell insurance to increase his income. It is time that commission-based remuneration of brokers is ended in favor of shared commission systems and agreements which convert expected commission to a fixed amount. Each method is tainted by relating broker payment to premium volume.

The good broker is a professional on par with the company accountant or lawyer and should be paid for the time worked and for level of professional skill. There is little doubt that the broking industry and its clients would benefit from a change of relationship in which brokers could concentrate on providing high quality and properly paid skills.

Fee-earning is the insurance services trend recognized by the major insurers, particularly large reinsurers like Swiss Re and Munich Re. Those companies rightly believe that technical service in loss control, analysis, financial planning and risk management will play a large part in the future and could soon outstrip income from premiums on large accounts. If they are right, the brokers will have no choice but to move from commission to fees, as premium-related remuneration gradually disappears.

The sensible brokers are already thinking about changing their approach so that they are organized structurally and technically to take advantage of an inevitable change in their role. The future will demand from brokers a more disciplined and efficient approach to the handling of accounts, including concentration on providing high quality service. Much of current broking work consists of acting as a "post office" between the client and the insurer. It is unproductive, inefficient and costly.

Buying-in skills are always an option. Acquisition of fee-earning risk- and insurance-related consultants (e.g., Swiss Re's acquisition of Fred Reiss's International Risk Management) is one possibility for the broker determined to maintain a role in servicing major corporate insurance buyers. The priority, however, is a fundamental change of attitude.

Chris F. Best is the editor of Foresight, a London-based risk management and insurance journal published by Risk and Insurance Group Limited.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Jan 1, 1989
Words:651
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