IN PRACTICE
The intermediary’s role within this enterprise stems from two essential functions performed by the intermediary: reducing search costs and uncertainty.
Search costs
Intermediaries reduce the search costs to insurance buyers looking for the right coverage and the right insurer for their risks, and they reduce sales and marketing costs to insurance companies in search of insurance buyers.
Intermediaries know the insurance marketplace. They know their clients’ risks; they know the insurers willing to cover those risks; and they know the best way to secure that coverage.
Uncertainty
Insurance purchasers and companies do not have all the information relevant to the placement of a policy, which makes it difficult to negotiate a fair price and the proper terms and conditions of a policy. Purchasers know the risks in need of coverage, but may not know the prevailing conditions of the insurance market. Insurers, on the other hand, may have all the company and market financial information necessary to make a decision, but are not in a position to know enough about the risk and the prospective client.
Intermediaries know the insurance marketplace, they solicit and provide information on insurance purchasers and companies, and they make the information more easily understood to both parties to a transaction.
In the interest of long-term client and insurer relations, brokers have a strong incentive to ensure that all parties have the information they need so as they are able to enter into a mutually beneficial arrangement.
Insurance purchasers and companies may come to a transaction with unequal bargaining power. A small- or medium-sized insured may come to a transaction with significantly less clout than the large insurer with whom they need to do business. An intermediary is often able to balance the equation by leveraging its business volume with carriers, and thereby obtain better terms and conditions for the client.”
Every carrier essentially offers the same promise – to compensate the insured for a loss.
To make that promise meaningful, however, the carrier must have the ability to properly understand and evaluate the risk presented and the capacity and financial solvency required to pay any claims that may result from that risk, as well as a reputation that suggests a willingness to make good on that promise.
There are literally thousands of insurance carriers, from large national carriers that offer a broad range of coverages to small regional carriers that may specialize in a single product line. For most clients, coverage terms must be solicited from and negotiated with the carriers on a case-by-case basis.
Clearly, numbers dictate that this cannot be done with every carrier in the marketplace that has the capacity to insure a given exposure. Clients rely on intermediaries to know a universe of carriers that are well-situated to address their needs and negotiate with selected companies to obtain the most adequate overall insurance value for them.
To do this, the development of a relationship between intermediary and carrier is essential. In order to provide products and services to their clients, intermediaries must have expertise with the risk profiles presented by their clients and the savvy to go to the right place for the right coverage for each risk profile.
The best way for an intermediary to evaluate a carrier’s ability to insure a risk and its capacity to pay claims is by working with that carrier over time. Similarly, a carrier will be in a much better position to understand and evaluate the risk presented if it understands and trusts the intermediary presenting the risk to be insured.
Intermediaries are valued by insureds and insurers as an essential element of the insurance marketplace.
Intermediaries search the insurance marketplace to find and place coverage for their clients’ risks. They also assist clients in the development of alternative risk transfer mechanisms for risks that otherwise would be impossible – or prohibitively expensive – to insure, and they provide services to both insureds and insurers.
In today’s complex insurance marketplace, however, intermediaries have become more than middlemen between insurance companies and insurance buyers.
They bring experience and expertise to the insurance marketplace, using their knowledge of the insurance markets, their familiarity with their clients and clients’ risk, and their access to insurers forged through long-term relationships, to sell and service insurance coverage for costly, and in many cases unique, risks.
Commercial insurance clients are generally professional risk managers. As sophisticated insurance purchasers, they realize that commercial insurance products are not commodities; rather, they are customized risk transfer tools, the price and terms of which are generally negotiated on a case-by-case basis.
Placement of such risks can be a long and difficult process. Sophisticated commercial purchasers rely on their intermediary to fully understand and appreciate their insurance coverage needs and to find the coverages suited to address those needs.