Reasons why YOU shouldn't control the "Tender" Process

At Hunt Adams & Associates, we have been designing and managing insurance portfolios for corporate clients for the last 25 years, and have made some observations over the years about what happens when you, the client, control the “tender" process. As mentioned above, our experience is that there are three essential service providers who you need to have long-term relationships with for best results; they are your Bankers, Auditors, Insurance Brokers and in many cases your lawyers. If you go out to "tender" every year, and after receiving all the submissions, you appoint a new Service Provider, you will find these annual changes are disruptive and open you up to a variety of risks associated with the operational practices and methods of different providers, and in the case of insurance, the non-competitive quotes submitted by Insurers.

As Insurance Brokers, we are required to carry Professional Indemnity Insurance, to protect your business from errors and omissions associated with our profession, but if you have 3 Insurance Brokers, it becomes difficult to decide which one has erred, as all 3 cannot be expected to advise you best on all your requirements; each one will assume that the other broker is responsible. The ideal arrangement would be for you to have one Insurance Broker, who can then design a portfolio for you using up to but not more than 3 or 4 Insurers.

1.    Relationship

The business of insurance has always been driven by relationships, which can take a long time to establish, particularly when they exist at different levels. There may be a personal relationship at Director level, but those at the levels below need time (i.e. more than a year) to get established. Staff in your team and ours need time to learn each other’s business cultures and understand each others requirements over a range of technical and administrative issues, and each have different expectations.

The problem with the principal such as yourselves, as a large commercial or corporate client, controlling the tender process is that at any one time, you could have as many as three or four brokers handling your portfolio and eight to twelve Insurers actually issuing policies; these Brokers and Insurers can change on an annual basis, therefore any one of the Brokers selected for the year could just be getting to grips with your portfolio and getting to fully understanding your business by the time year-end comes, when they have to endure another tender process, and face the fact that they could lose all or part of the portion they have been administering. There is no continuity, and if the Insurer has performed badly in terms of service, they too will lose the business. As a result, you build up no experience with any one Insurer in the market over a decent period. They will be happy to take your money each year as it is a significant contribution to their annual premium income, but they will also know that when renewal comes, the loss of your business will leave a huge hole in their premium income figures, and as a result, they will not be that excited about going the extra mile for you.

Changing Insurers every year does not normally leave a good impression with the players in the market, as the culture of Insurers is to go out of their way to establish relationships with you, and where they know that they will probably not have a long term relationship, they will tend to adopt a harsh, inflexible and non-negotiable attitude towards you because of your tender approach; there is no motivation for them to assist you in difficult circumstances. Where a long-term relationship is established, Insurers will be inclined to assist more. Some of our largest clients have been with us for more that 10 years, and their insurers now value this association and even pay claims that are not strictly covered in terms of the policy, in recognition of the value they place on the relationship.

Relationship marketing is one of our key values as a company, and we have seen over the years that where new relationships are formed, the initial period of adjustment on both sides is difficult, and when disputes arise, where there is no relationship at a high level, staff at the operational level on both sides tend to apply their respective internal rules, and this easily leads to a breakdown in understanding. We work hard on nurturing the relationship at every level, so that this scenario does not arise, and this ensures that when a dispute arises, the relationship often prevents issues getting out of hand. Besides our strong emphasis on relationship marketing, we also use our unique systems to achieve a high level of service delivery. Our systems allow us to deliver a minimum standard of performance consistency, and once we are consistent, we place equal emphasis on continual improvement. We do not particularly favour internal operational rules as these tend to create robots among our staff and rules prevent them from being flexible, and this, from our experience, often leads to disputes.

We will not try to presume that there will never be a disagreement, but where one does occur, and a problem is brought to the highest level in your company, because of the relationships that will be established at that level, a potentially explosive problem can be solved by discussion. There will always be someone for you to appeal to.  

2.    How many tenders should be done

At present, whenever you go out to tender, there are two tender processes being carried out at the same time: -

• the  tender to establish which Broker to use
• the tender to establish which Insurer to use

Traditionally, in terms of the Insurance Market, it is accepted that the Brokers are the professionals, whose job it is to get to understand your business enough so that they can be useful to you. They are equipped to carry out the tender process on your behalf; therefore if you take over this function, you are unknowingly limiting your ability to obtain the best combination of covers. Brokers have years of experience in the insurance market and therefore, have the ability to carefully place your risks with the Insurer best suited to carry those risks, and in the event of a claim, respond in a way that will not reflect negatively on the whole market. When you choose your Brokers and allow them the freedom to design your portfolio, then there is only one tender process carried out each year if they consider it necessary, depending on what would have happened during the just-ended year.

As Brokers, we are first of all concerned about what is best for you, and will consider the claims experience built up with Insurers as well as the relationship we have with that Insurer. We will not move a policy to another Insurer simply because the other Insurer submits quotes that are lower, we have to look at all the characteristics of the next Insurer, such as their reinsurance arrangements, their balance sheet, size, length of time in business, their reputation when it comes to claims settlement, their experience with handling corporate business etc.

A Broker is best placed to decide on which Insurer should carry the risks that are associated with your business. The worst thing, in this market, is to change Insurers every year, as you do not give yourself an opportunity to test any particular Insurer or Broker over a decent period of, say, 5 years - minimum.

In 2009, Insurers entered unfamiliar territory, when the Z$ was virtually “dumped” for the US$; the ten years ending December 2008 saw the Zimbabwe economy record one of the highest rates of inflation in history, and the currency which had to be re-valued frequently, lost 28 zeros. What this meant was that any reserves the insurers had built up over the years were totally worthless by December 2008, and all the Insurers had to start building up their reserves from scratch.

During this hyper-inflationary period, Insurers carried less and less of the risks passed onto them until eventually, their Reinsurers were carrying 100% of the risks and simply paid insurers a commission for passing the business on to them. At the beginning of 2009, Insurers began trying to re-gain control of the industry by carrying more of the risk, but many have gone about it the wrong way, offering uneconomical rates in a desperate attempt to build up their reserves. Therefore, the market has changed drastically, with the traditionally large Insurers still looking large on the outside, but being unstable and under-capitalised in the background, while having absolutely no reserves. We have been placing risks with a variety of Insurers during this period and are well placed to decide which ones are sitting on decent reserves, and which ones are on the verge of collapse, or are just unstable.    

3.     Risk Management 
    
This is an essential process for both your business and Hunt Adams in that certain alternative risk transfer, minimisation and prevention methods need to be considered. Our team will be interested in discussing your concerns and requirements so that we can have a look at your whole portfolio and advise you accordingly.  However, for any risk management program to be effective, there have to be clear records of previous programs, what was agreed and implemented from that program, and the results thereof. In short, there needs to be a past record that can be reviewed and altered according to changing trends or changing risk patterns. Again this requires that you consult consistently with the same team, so that genuine programs are not disrupted by a new team’s suggestions. 

Hunt Adams has 25 years worth of experience, backed up by arguably the strongest broking team in the market, so we have tried and tested systems that have reaped positive results for all our clients.

4.    Insurers prefer to look at the bigger picture

There are two key relationships at work with any decision to award your portfolio to an Insurance Broker; firstly the one with the Broker himself, and the other between the Broker and the Insurer. 

Very often, Brokers will place the entire portfolio with one Insurer, so that at the end of each year, the Insurer has the opportunity to review the performance of the whole portfolio, not just one policy. The major advantage of this is that if two or three policies have performed badly when compared with all the policies on the portfolio, Insurers will consider the performance of the whole portfolio and if they see that they have actually made a profit overall, they can easily be persuaded to take a softer approach to the client. Where the policies are split between eight to twelve Insurers, each one will want to make a profit out of the policy they have and if their policy is in a loss-making position at year-end, they will not hesitate to adjust the terms or even cancel the policy as they do not have the advantage that comes with holding the whole portfolio.

5.    Administration

Administering an insurance portfolio that is spread across as many as eight Insurers is cumbersome for the following reasons: -

a.    Your back-office staff have to be familiar with the cover applicable for every event that takes place, so that they do not waste time submitting papers to the wrong Broker or Insurer

b.    One claim can involve more than three insurers; for example, if one of your managers has an accident involving another party, the following Insurers will be involved: -

      i.    Motor Insurer

      ii.    Employers Liability Insurer (if the accident took place during working hours)

      iii.    Umbrella Liability Insurer (if the damage to the other party’s vehicle is extensive)

      iv.    Personal Accident/ Group Personal Accident Insurer (if the Manager is injured in the accident)

The whole administrative process can be made easier by simply engaging one Insurance Broker, who will constantly be in touch with your claims, finance and administration teams, and be available at all times to assist with preparing claims documentation, appointing Vehicle Assessors and ensuring that no time is wasted in submitting claim papers to Insurers.

What normally takes place when a client wants to review their insurances is to authorise us to look at their existing arrangements, and advise on adequacy of cover etc. The “Letter of Authority” to review your insurances is not widely used anymore, so we can have a holistic view of your whole portfolio and design a package tailor-made for your exact requirements at any time. In view of this, we would welcome an opportunity to have access to details of your whole portfolio so that we can thoroughly examine it and advise you correctly and more professionally on the way forward.