What if your Insurance Company is mad at your broker?

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By Carl Santa Maria

If you are responsible for the risk management function in your company a major responsibility includes the development of insurance programs, managing your broker, deciding on what to buy, how much to pay, handling of claims, and satisfying insurance requirements of customers.

By definition a broker is different than an agent. While both can have contracts with insurance companies a broker represents the insured and an agent represents the insurance company.

A broker’s job is to help identify threats to client businesses, evaluate the risks and design programs to deal with these issues in the most effective and cost efficient ways. Often the best ideas don’t involve insurance but the elimination of coverages that may not be necessary and, instead, target on mitigating, reducing, or eliminating the threat entirely.

When insurance is needed, it is important to consider a number of variables. Do the terms of the policy adequately provide protection? Are the limits purchased appropriate? Is the cost of the insurance competitive? Is the insurance company of sufficient financial strength to deliver on its responsibilities? Does the insurance company have a reputation for handling claims fairly and efficiently? These are just a few.

The insurance company seeks to write policies for risks that are well managed, for companies that are well run, and which offer a reasonable opportunity to earn a profit. When there is a fair exchange of value that is a good thing. Evaluating this existence of this equilibrium is very difficult.

A top broker works to create a program model, vet it thoroughly with his client, and search for a product that most closely conforms to the model. This approach changes the paradigm of the process from supplier (insurance company) control to buyer (client control) and will produce better outcomes consistently over time. The client decides what he will pay and at what cost and the supplier will either agree or offer alternatives.

Disturbances in the market can occur. This is particularly true if the broker is not aggressively monitoring the marketplace or merely renewing programs automatically, often at the last minute. The market can change quickly.

Recently, a company which had been insured by the same broker and carrier for a number of years was concerned about unexpected premium increases. The business was aware that its competitors had far lower costs. After the renewal was issued (at the 11th hour), the company reached out to another advisor for a program review. Not surprisingly the program costs could be reduced significantly, without reduction in quality, by moving the program to another insurance company. The savings was significant even after incurring a cancellation penalty. The holding insurance company was very upset that it lost the business and felt that the new broker had treated it unfairly. So the insurance company was mad at the broker for responding to an unsolicited inquiry, developing a better option, and replacing a program that was uncompetitive. It seems that the responsibility resides with the former broker and to some extent, the underwriter who priced the renewal.

Similarly, an insurer was undecided about continuing to insure a segment of a company’s operation. The insurer alerted its intent to cancel the coverage mid-term.  The broker appealed and delivered risk improvement information. Never the less the carrier insisted that the broker try to find another market for the exposure. Another carrier was agreeable to picking up coverage on the condition that the entire account be moved to them. The new carrier provided a very competitive package, including the problematic exposure. At the last minute the holding carrier relented on the cancellation, but the difference in coverage and cost resulted in the replacement of the account with a new carrier. The new carrier was only brought in at the insistence of the holding insurance company. The insurance carrier was mad at the broker for the change.

The overriding principle is responsibility to the client. If the broker hadn’t acted in the best interest of his client he would have been derelict in his duty. If the carriers had not forced the issues they would not have lost the business.

Business is best conducted as if the process and result could be shown on the 6 o’clock news. Would the insurance company or broker be most uncomfortable with those optics?

Maybe it’s okay for your insurance company to be mad at your broker!

 

Employee Health Plans: Assume a Little More Risk for Significant Cost Savings

By Craig Santa Mariaemp health coverage

Health insurance is a key piece
of the total compensation package you provide to your employees. But how many of them actually make significant use of that benefit?

According to Bob Stosick, the employee benefits expert at Santa Maria & Company, the answer is: a very small percentage.

“If an employer is purchasing one of the dozens of off-the-shelf, low-deductible plans, he or she is likely spending a lot more than necessary,” says Stosick. “Insurance carriers price those plans based on the assumption that every policy holder will make significant claims. Knowing that the actual claim rate is much lower makes it a little easier to understand why many of those companies make windfall profits every year.”

In an effort to save money, many large employers self-fund their employee health plans, meaning they act as the insurer paying any claims themselves. Their fixed costs are lower because they are not paying the markup that becomes profit for the traditional carriers. However, the variable costs, the actual claims, present a significant, widely variable risk.

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Bob Stosick

“The good news,” says Stosick, “is that there is another option that could significantly reduce your costs and your variable cost risk, while still providing a low-deductible plan to your employees. That solution is a partially self-funded plan.”

 

By partially self-funding, you purchase a high-deductible plan at a much lower cost and use the savings to fund the benefit difference between the high deductible you purchase and the low deductible you provide (your variable risk). Simply, you provide a low-deductible plan at a lower cost by assuming a little more risk.

Here is a hypothetical example* to illustrate how a partially self-funded plan works:

  • Your carrier offers you a plan with a low annual deductible of $2,000 that will cost you $40,000 per year (80%) and your employee $10,000 (20%)
  • Instead, you purchase a plan with a higher deductible of $5,000 per year that costs you $24,000 (80%) and your employee $6,000 (20%).
  • If the employee uses covered services that cost $18,000, the employee pays her deductible of $2,000, you pay 80% of the next $3,000 up to the $5,000 purchased plan deductible. At that point, you are no longer responsible for additional claims. In a typical plan, the employee will continue to pay 20% of additional charges until reaching her out of pocket maximum, with the carrier paying the rest.

* These dollar amounts are not based on actual plan rates, but are simply used to illustrate the concept.

It is not unusual for an employer to save $1,500-$2,000 per employee on medical costs by employing this strategy. In both fully and partially self-funded scenarios, companies typically use an independent plan administrator (IPA’s) to administer the company’s responsibilities in the plan.

“It’s important to note that each company’s situation is different, so there is no single correct solution for everyone,” Stosick reminds us. “Your best bet is to speak with a knowledgeable and experienced employee health plan broker who can help you determine the best solution for your business.”

 27-artCraig Santa Maria is President and COO of Santa Maria & Company (SMC), a risk management consultancy and commercial insurance brokerage in the San Francisco Bay area with deep expertise helping companies protect what is most important to them: their assets, their employees, and their futures. Contact SMC at 925-956-7600 or online at www.smcrisk.com.

 

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