After Your Homework: The Steps to Consider, Break out and Validate Broker Fees
By CAROLYN M. SNOW, director, insurance risk management, with Humana Inc. in Louisville, Ky.
After your broker-fee homework, it is time to have an "invest conversation" with your broker(s). An invest conversation is described in The Communication Catalyst by Mickey Connolly and Richard Rianoshek as a bridge between potential and performance. It turns optimistic agreements into realistic alignments by allocating time, money and talent to achieve a purpose.
Some questions that might be helpful to gain alignment in this conversation include:
1. How much time do they spend on our account other than direct client contact?
2. What other resources outside the account team do they offer?
3. How much commission do they receive by line of business?
4. Are there any additional fees or commission tied to the account?
5. Are there areas where we need to improve information quality and flow?
To get directly to the topic of fees--and exactly what fees need to be set at--some other things to consider include:
1. What is the quality of service? Are calls returned in a reasonable time frame? Is the service handled at the right level within the brokerage firm? Is the information complete? Do we feel that our account is well represented to the carriers? Are we included in meetings with underwriters, either by phone or in person? Are the reports and other data presented in a professional manner that we can provide to our senior management? Is our information treated in a confidential manner? Do we have access to subject matter experts for all lines of business? Is the service forthcoming or do we have to prompt for basic things? Do we get an annual stewardship report?
2. What is the quantity of service? How much time is really devoted to our account
3. What is amount of compensation they currently receive by commissions and other fees? Information needed to be used as one component, but not total measurement, in setting fee
4. What is the unit quantity we want to measure against? Percentage of revenue? Units of products manufactured?
Additionally, fees should also be broken out by line of business (property, workers' compensation, directors' and officers'), as well as by type of service provided (loss control, captive management).
Once you come up with a ballpark figure for a fee, validate it with the following questions:
1. Does it make sense in that it truly represents the service provided?
2. Is it fair to both parties?
3. Is it in writing?
4. Are there specific service and performance standards?
5. Are the standards measurable?
6. How do other risk managers set their fee? What methods and guidelines do they use?
February 20, 2009
Copyright 2009© LRP Publications