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What's a broker to do?

As risk managers in the United Kingdom talk about how insurance brokers help them in risk financing, they are uncovering just how mercenary and unsentimental the risk manager-broker relationship has become.

By and large, risk managers want from brokers only what they cannot get or do for themselves. What that amounts to is an ever-decreasing piece of the action. When they use brokers, risk managers impose strict value-for-money criteria by paying fees as opposed to commissions. It is a far cry from the days-and it was not so long ago-when brokers dictated to risk managers.

No longer can the broker rely on the loyalty of a risk manager who lacks the know-how to act without the broker's guidance. Today, experienced risk managers place the bulk of their business directly with insurers because they reckon they can do it just as well as the brokers. Consequently, risk managers have a good feel for the market, which is what brokers depend on most for their livelihood.

The risk manager for the Wellcome Foundation, David Ovenden, deals direct because it allows him to build better relationships with his insurers. He believes that insurers are more likely to concede partial premium reductions or broadening of coverage if the deal is personal. Moreover, if a broker were involved, he says, the insurers might not make concessions for fear that the broker would try to arrange similar terms for other clients.

Ladbroke's risk manager, Paul Chambery, says he uses brokers only for special overseas coverage. "We don't use them in the United Kingdom for general, property and liability covers that we can comfortably place ourselves," he says.

Indeed, the professionalism of today's risk managers in the United Kingdom is reflected not only in the decreasing use of brokers, but in the selective and sophisticated manner in which brokers are utilized.

Simon Hackett, risk manager for Plessey, says he goes direct to underwriters for personal lines so his staff can deal with ongoing policy needs rather than with placing coverages. At one time, he says, he was placing nearly F4.5 million of business with the aid of only one assistant, using brokers as the "placing extension" of the department. For the most part, risk managers in the United Kingdom use brokers for a variety of reasons, such as when the market is limited or crowded or when it is constantly changing. Classes that require "an ear to the ground" or someone on top of market conditions are better left to the brokers. For instance, dozens of insurers offer automobile coverage, but the risk manager may not know which company best suits his or her needs. Risk managers also use brokers to access unattainable areas of the market or when there is insufficient capacity with their insurers. In addition, risk managers turn to brokers as employers seek to maintain or decrease staff levels. Other reasons may be to keep current with the goings-on in other countries or to access risk control services.

Great Expectations

One thing is certain: Brokers are not getting the easy work or the fees to which they have grown accustomed. Some risk managers use brokers just to test the market and relay information. Mr. Hackett says, "I use brokers to place business and to trawl the market to find out what it is doing. I also use them to generate new ideas from insurers where I feel there is a gap in the market. I like them to go out and see if they can find someone who is prepared to design a cover at a reasonable rate."

Mr. Hackett remunerates by fees, and the broker has to work hard for it. "On the more complex issues, such as placing all-risk, fire and perils policies where co-insurance is involved, and liability where there is a range of markets by way of excess layers, that's where the brokers really earn their money. They put together some quite complex programs for us," he says.

The Wellcome Foundation has also begun reimbursing brokers with fees. "Some of the fees are equal to the commission they would have earned, but my practice is not to allow the commission to just run through," says Mr. Ovenden.

In addition, Wellcome has introduced contracts for brokers that specify their obligations. "In the old days," says Ovenden, "you didn't quite know who the broker was working for, it wasn't altogether clear. Now we have written contracts stating what the broker will do, how he will perform, how he will measure performance and how much we will pay for it." That is just how it should be.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Jul 1, 1990
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