Do you have an agent or a “true” broker?

Posted by Edward X. McNamara on November 10, 2017

Balancing Growth and Profitability: 
An independent broker is the best hedge

Risk and success go hand in hand. If you want to strike a balance between growth and greater profitability, risk is inevitable. Unfortunately, the simple operation of a business makes the threat of mistakes inevitable too. The challenge for business owners and their executive teams is to not allow these threats to blind the view of your company’s opportunities.

For middle market business leaders, the risk exposures from potential mistakes can appear more daunting because the size of their operations does not justify employing inhouse, unbiased risk management counsel. The absence of this knowledge can amplify the potential consequences of both taking and not taking risks, creating unnecessary threats to profitability and barriers to growth.

Most large insurance brokerages have learned how to exploit this noise to their advantage. One way they do so is steering buyers to guaranteed cost products, which typically net the highest commission for the broker but often don’t adequately cover many middle market exposures. When this happens, your broker has conceded its independence and is an agent for the insurance carrier. This practice, however, should soon be forgotten, as more and more independent brokers are helping business owners gain sophistication on risk financing options, such as captives, self-insured and layered risk financing programs.

Capitalize on intangibles

As a Cleveland Browns fan, I’m accustomed to risks. Disappointment, heartbreak and frustration on Sundays in the fall are what I call seasonally affected risks. Because of these, however, I’ve come to further appreciate the value of a strong quarterback; someone who can read the entire field of play, understand the playbook and corresponding coverages, know the right personnel for any given situation and can lead a squad around or through barriers to improved performance.

The value of someone supporting the owner in this QB role is a lesson I learned during my first experience as a middle market business owner. As my business grew, I entered into new markets throughout the U.S. and expanded staff.  I was quickly confronted with the realization that my risks were compounding exponentially. I had a business to lead, yet this growing set of risks demanded I operate with knowledge and experience unknown to me. I needed to understand the difference of whether or not a risk could be removed, mitigated or transferred through insurance. I needed a captain of a team who had diverse specialties in risk management and insurance procurement. I couldn’t cost justify hiring a dedicated manager, let alone a whole team, so many risk exposures went underserved.

Worse yet, my need for a team captain was only heightened annually when my supposed broker would come to me at the last minute with an often highly inflated price increase on my policy premiums. Inevitably, the explanation was always to blame the market. The market? That’s like blaming the weather for something being wet, frozen or dried out. I wanted a broker who protected my company and employees and gave us the right coverages for obvious exposures. I wanted someone who would give us better than average representation with insurance underwriters, so that our risks would be priced as better than average or the market rate.

Seek intelligence

The journey to securing a franchise QB is challenging. Heck, Cleveland Browns fans have been waiting nearly two decades. You need not be so patient when recruiting your risk and insurance leader, as you can easily access the necessary scouting reports. Start by asking peer executives who do they trust and why? Once candidates are identified, survey their clients to learn if their representation with insurance markets is better than average and are they getting needed coverages, even for outlier risks. Do they have access to Lloyds of London? Talk with insurance carriers and their underwriters, as they can immediately tell you who are the most ardent negotiators.  Lastly, once armed with scouting background, query your finance staff and trust your gut, as working chemistry is critical to success.

If balancing growth and greater profitability is your goal, risks are inherent and mistakes natural. However, many mistakes or risks that are realized are too often really symptoms of other fundamental problems in the business that are procedural, operational or cultural. The advantage of truly an independent broker serving as a team captain is she/he can draw on other client experiences when challenging you to weigh these in the proper light. This value-added advice can then lead to opportunities for improving operations and creating efficiencies. More so, a truly independent broker not only removes or mitigates these risks, she/he identifies ways to drive out costs and open new windows to better products and services. When you have this kind of partnership, you have a true broker and not an agent; a partner capable of helping you realize your goals. •
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About the author Edward X. McNamara

Ed McNamara is CEO and founder. With his partners, he delivers protection and growth at their full-service commercial insurance brokerage. Their proprietary examinations of risk profiles gives them a window into client challenges and opportunities. This perspective helps them to identify prospective customers, partners, and strategic suppliers in their fleet who – through personal introductions – can enable their clients to grow, prosper, and become more competitive.