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What is the proper bidding approach?

MOST RISK MANAGERS know that bidding is an important part of the insurance acquisition process. If the bidding process is not properly structured, confusion and misunderstanding may result which can weaken good relationships with insureds, underwriters and agents. The following scenarios illustrate the crucial role that bidding plays:

A small company transfers the insurance bidding responsibility to its broker. The broker, while qualified, may not have working relationships with all underwriters potentially interested in the account, and the underwriter not involved in the account may find it difficult to believe that his or her company has a reasonable chance to acquire the business.

Take the case of when a company bids its insurance on an annual basis. There may be excellent reasons for bidding each year--such as high premium dollars, changing service needs and coverage gaps--but it is likely that without careful documentation, underwriters may view this as a shopping exercise and may lack the motivation to properly serve the account.

Another case in point is when a company bids, but insist on the quote with the lowest cost. It is possible to combine coverage, limits, exposure and service needs with the lowest cost but this is not always the case. Sometimes a low quote eliminates part of the program most needed by the insured. The underwriter may have also provided for rapid increases in premium if losses begin to appear on the account.

All in all, bidding provides the opportunity to confirm impartiality and honesty in handling an important financial transaction. There are many horror stories about programs which were never bid and of the consequent irregularities. In one state, a regulatory commission insisted the insurance program of a utility be put up for bid because an insider controlled it for years. Certainly, when a public entity is involved or when there is diversified ownership of a corporation, board members face a significant personal liability potential if the insurance program is inadequate or has been handled in a questionable or dishonest manner. In one instance, collusion between board members and the agent resulted in prison for some board members. In a third situation, a broker was so tied to a company that, in a competitive bid situation, he was given the competing programs and was asked to revisit his underwriter to match such quotes.

Risk managers should not rely solely on the agents advice. The agent providing the commercial insurance is important to the insured because he or she has a significant amount of cost and effort already involved in the program and has worked with the risk for years. The agent may question the need for any bidding process involving other agents.

There are signs which suggest that bidding could be helpful to a company. Examples of this are if the expiration date of various policies are spread throughout the year or if multiple companies appear to be used unnecessarily. For instance, whether or not an all-time retrospective plan is desirable cannot be considered if the general liability, automobile liability and workers' compensation coverage are regularly written with different companies.

All prospective agents and brokers should be given complete and timely information about the exposures, payrolls, losses, coverages and limits. This, however, is not as easy as it sounds. Often the organization has not had a risk management audit and, therefore, may be renewing coverage instead of seeking appropriate coverage and limits. It may also be that the organization may not have an established risk assumption and financing policy, and is not prepared to ask for the range of alternatives needed. Likewise, exposure schedules may be incomplete or loss information may be limited. The corporation may be rushed into renewal bidding, not prepared to spend the time amassing adequate data. These limitations place an unnecessary burden on the agent. In other words, whenever a corporation is not prepared to require competitive bidding, it may never know how unsuccessful its approach has been. Unfortunately, these missed opportunities tend to reinforce the contention that the existing agent has, and continues to provide, the best program of protection.

If competitive bidding is new to either the risk manager or the organization, outside guidance should be sought to reaffirm impartiality and objections to all participants. Bidding assistance is usually available from other experienced risk managers, but a different source is acceptable as long as there is recognition that these other "neutral" managers do not have responsibility for the results. They should not be allowed to take charge of the project, and they may not be able to become fully conversant with all of the exposures, needs and potential problems. Outside assistance should not be viewed as a criticism, but rather as a way to shorten the learning curve for the organization.

Guessing Games

The bidding process can be divided into several areas. The first concerns specific, written requirements. Many organizations distribute copies of their current policies to various agents and bid them good hunting. Such an unstructured approach can lead to disaster. Should coverage be based on what is carried or what is really needed? Is the bidder accountable for specific language, pricing, limits, deductibles, service or some combination of these? Without specific requirements that are written and organized, neither the client nor the agent knows what the goals are for the company's insurance program. Avoid the "I'll know what I want when I see it" syndrome. This is not a guessing game.

To illustrate the need for a written requirement, take the case of a hospital which bids its professional liability program, only to renew claims-made coverage without a late reporting provision and no change in the retroactive date of the renewal policy. When they reported a claim, it was denied by both insurance companies. Yet clear handling of the specific requirements for replacement would have avoided the gap or alerted the hospital to the danger.

Incomplete data or a time period that's too short--less than 60 days for a normal renewal and up to 90 days for a difficult placement--has resulted in many markets refusing to quote the renewal. Both agencies and brokers have been stopped by inadequate time or data.

The need for specific language may require dialogue with the underwriter. Without this exchange, there will be no change from the standard form, to one meeting the insured's specific needs. Problems can occur with named insured language, loss reporting requirements, director and officer liability exclusions, personal injury changes, agreed amount language, and business interruption requirements.

What is meant exactly by specific language? Not only must the coverages, limits, exposures and deductibles be identified but precise requirements -- such as general liability, automobile and other liability occurrence and claims-made coverage -- under each policy are also important. In addition, retroactive dates and the handling of late reported claims should be addressed. In addition, notice of an accident should be specified as should the person or people within the company that must receive notice.

Questions involving other issues requiring specific language include: How are volunteers to be covered? How are punitive and exemplary damages addressed? Can personal injury protection be broadened beyond the normal torts? Which aircraft and watercraft, if any, are to be covered and under what circumstances? How does the excess and umbrella layers follow the underlying liability and are there additional exclusions or possibly broadening extensions at upper levels?

Property and Time

The policy language with respect to blanket, replacement and all-risk protection is important. The risk manager needs to specify whether coverage, for example, is to blanket over all locations, or for buildings alone or for both buildings and contents. The risk manager may also want to secure a quotation on blanket coverage or the property and time element combined. The risk manager should consider past fire losses or what-if disaster scenarios to draft the kind of language changes needed to refine the loss adjustment process.

Other issues under the property and time element include how subrogation waivers are to be handled and which properties are to be included within the building/contents language. Notice of cancellation, workers' compensation, boiler and machinery, changing of specific exclusions or definitions are other topics revealing the importance of being highly specific in bidding requirements. Vague specifications have caused corporations trouble with evaluating bids.

Bidder Qualifications

To bid on a $100,000 premium or more gives the agent the opportunity for $10,000 or more in commissions. The selection of an agent should be based on what is best in the long-run for the company. The agent's experience, accounts, its relationships over time with insurers, experience of servicing technicians on staff, errors and omissions insurance, and the general nature of the agent's business are all relevant factors to be considered. For instance, a personal lines or a one-man commercial agency will not have the experience and knowledge to deal with the complex needs of a municipality or a large manufacturing concern, nor will it have the know-how to handle special concerns, such as pollution, longshoremen, oil extra expense, and terminals and pipelines. It is also important to know how various markets are accessed by the agent, whether it be directly, via a second agent or managing general agent, or a surplus lines broker. Also, how many layers of brokering are involved in dealing with London? If there are several layers, be aware that each participant will receive a commission thereby weakening the direct line to London.

There is one exception to the general rule of bidding and the assigning of markets. Market assignment involves the identification by each agent of the markets which are to be used in the process, by identifying clients, individual premium accounts, total premium and the number of years with the company There are several ways to assign markets, including first-come, first-served, alternating to allow each bidder its first choice, and by lottery. In all cases, the process should be completely objective and verifiable.

In certain lines of coverage, there are only a limited number of markets. Requesting that multiple agents search these limited markets is impractical. In these situations, the risk manager should confirm, in writing, that market restrictions apply and why the most qualified agency has been selected to handle the search.

In most cases, agents do not want markets to be assigned. Yet, market assignment is an indispensable and reasonable procedure needed to protect the existing agent against multiple inquiries to any one company. When understood by competing insurers, assignment creates the best chance to examine the risk and to determine its interest in bidding. It should be remembered that bidding on an account is time-consuming and expensive. In a hard market, insurers may become discerning in bidding situations. If too many agents are involved in bidding or if the process appears to be perfunctory only, lacking a consultant, there will be limited interest in bidding. On the other hand, unrealistic bidding requirements can alienate prospective underwriters as well.

A number of problems have occurred when the market assignment process has not been used, ranging from non-qualified agents tying up markets prematurely to multiple requests to the same underwriter having shut down a market. Another problem could arise if agents have gone to different companies within the same group, again closing markets, and they have identified managing general agents or syndicates which again results in multiple requests to the same company.

The bidding package should require a number of agreements: the entity interprets all questions in the specifications; the agent accepts all corporate decisions; the entity may accept any terms of the bid dealing with price, limit, protection or service; the entity may accept all or part of any bid or reject all bids; and the entity awards all markets to the winning agent, if so determined by the entity, the losing agents agree to release their markets.

While these requirements may seem harsh, they are absolutely necessary if the entity is to achieve its bidding objectives without public rancor and adverse publicity.

The requirement of an unintentional errors and omissions endorsement is important and should be based on good faith. When all parties are cooperating, the insured should not be penalized by an unintentional error or omission at policy inception which could otherwise act to deny coverage. The agent should secure all rating information and copies of all reports from the insured, and examine all locations.

How important is this endorsement? If no error occurred, the endorsement should still provide peace of mind. However, in a specific instance where the endorsement was included and the agent agreed, and a subsequent loss occurred on a non-listed location, the six-figure loss payment affirmed the need for the endorsement.

Financial Considerations

How qualified is the insurance company? This is not an easy question to answer. Researching an insurer's financial condition is not sufficient because companies can slip and the ratings can change overnight. The company can also change operations, eliminate states or discontinue lines of insurance. This is not to say the ratings don't have their value. They may indicate if weakness exists in its financial condition or in reinsurance. It may show that an insurer has a satisfactory loss ratio, but which is also heavily involved in assumed reinsurance and, therefore, not under the equivalent statutory regulation of approved primary writers. In other words, the loss ratios were, for all practical purposes, irrelevant.

Risk managers can take advantage of the valuable assistance available from major brokers who regularly evaluate domestic and foreign companies for strength and capacity. Certainly, in today's extremely volatile financial arena, both American and foreign companies need qualified evaluation quickly.

The quality of the company may be difficult to ascertain when a managing general agent or syndicate is involved. Lead companies are listed and the identification of other participants may not be known. The insured should recognize that joint liability does not exist under syndicate contracts, and if an insurer fails, the insured picks up the tab. This area of insurer evaluation is increasing in importance and is the most important reason for the risk manager to use objective counsel in the bidding process.

The agent's responsibility in bid submissions is paramount. The steps which must be completed by the agent in the bid process include verification of bid compliance; verification that, if awarded the bid, the actual policies will be provided and that binders will be secured in a complete and timely manner; and assurance that policies will be delivered within an acceptable period in accordance with the bidding submission.

Initially, the agent should specifically address each requirement in the bidding; a broad comprehensive statement of compliance is inadequate. The agent may not understand a specific request or not be able to meet that request. If the agent addresses each specification in the response, there will be no surprises at the end of the day. Also an agent may want to state that he or she can offer an alternative if a requirement can't be met.

There may be trouble if the actual binder or policy varies from the bidding package, especially if a loss has already occurred. An insurer's unwillingness to honor a loss will necessitate review of the bidding package as well as the agent's relationship to the insurance carrier. If the agent is unable to commit the insurer to payment of the loss, leaving the insured's and the agent's errors and omissions carrier to fight it out, he or she is acting more as a broker than an agent. This stresses the importance of knowing agency-insurer relationships. Brokers act on behalf of insureds whereas agents act on behalf of the insurers they represent. In large loss situations, such as umbrella or directors and officers liability coverages, relationships are even more important.

An insurance program is an important expense for any organization, whether it is a public entity or private corporation. In an ever-changing insurance market, the renewal of an insurance program requires careful planning. Risk managers cannot afford to lose sight of their goal to secure the best, most cost-effective insurance and risk management package for their firms. This could translate into retention of agents and insurers for coverage, claims handling, safety and deductible adjustments. Yet, it could also result in replacing the entire program. The first step is to realize the importance of the process. The end product will be what is truly needed for the company or organization. New approaches to products and services are essential for survival in today's competitive business environment.

Arthur E. Parry, Ph.D., is manager of risk management services for The Wyatt Co. in Dallas, TX.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Parry, Arthur E.
Publication:Risk Management
Date:Dec 1, 1991
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