Most consumers have no idea what I’m talking about so let me share a story with you.
A few years ago, a large commercial business owner wanted to “test” me out to see if I could compete with the large insurance brokerage firm that had represented him for years. He had just completed construction of his second large manufacturing location so rather than go to his current broker to add it, he asked me to review and provide terms. He was pleased with the results and we bound coverage.
When the balance of his insurance portfolio was due to expire, we went to work. A proposal was provided to the insurers that I represented. Again, I was successful and the entire commercial account was now represented by my brokerage firm.
Here’s the interesting thing, one of the insurers I had approached and the one that was ultimately successful indicated that the previous broker had “shopped” this account every year for years. They were surprised to learn that the client had never been advised that the broker was “shopping” the account. Nor were they advised that the new insurer’s terms were more favorable than what the previous broker had offered through one of his other insurers.
So, what was going on in the background?
The previous broker was not acting in the best interests of the client but themselves. They had no intention of providing the insured with less beneficial terms. They were just blocking the market so no other broker could get terms. The insured was paying the higher premium amount thus increasing the revenue the insurer paid to the broker. How is that fair?
The insurance tendering process is in no way similar to the well-known construction bidding process.
In construction, multiple general contractors will submit their tender prices to the owner using selected sub-trades as necessary. Those sub-trades will provide their quote to one or many of the general contractors. Just because they submitted terms to one contractor doesn’t preclude them from providing the same or even different terms to the others.
In insurance, most insurers provide terms only to the first broker with complete submission. The insured may have gone to 3 brokers however only the first one will get terms. The other two, who submitted after will not. The first broker has effectively “blocked the market”.
There are a few variations depending on the insurer. The following are some rare market options:
- The insurer will only provide terms to the broker with the most complete submission.
- The insurer will review all submissions and if the information varies from one broker to the next, specifically as it relates to claim, they will decline to quote any broker for at least one year.
- They will go back to the broker/brokers and request a brokerage letter appointing just one broker to represent the client.
- They will accept an assignment letter where each broker is assigned different insurers to approach exclusively.
As to why market blocking even exists, I’m not sure so I spoke to several retired or semi-retired insurance company professionals. There were several reasons why management may have decided to implement the decision to only quote to the first broker with a submission.
- It eliminated the possibility of underwriters playing “favorites” with specific firms or agents.
- Different brokers providing conflicting information may receive quotations based on that conflicting information which would result in terms or prices that were different.
- By quoting to only one broker with the first set of information, it reduces the underwriters’ workload.
- If insurers see the same risk year after year, quite often those submissions go to “the bottom of the pile”. Underwriters have long memories.
In any event, it is my recommendation that to eliminate that potential problem the insured should vet their insurance broker/consultant first and let the broker approach the insurers who would be most appropriate to provide terms. Your broker is representing your business and needs to know all the facts to properly assess the risks, prepare the submissions to the insurers and obtain the best in terms and pricing for you. Disclose everything especially previous claims history as misrepresentation of your situation or previous claims history can leave you without insurance when you need it most!