In an environment of globalisation and deregulation, today's brokers are making themselves a more integral part of the insurance transaction than ever before, writes Gary J. Owcar.
With the dawn of a new century looming on the horizon, insurers and brokers with commercial interests abroad confront a new set of challenges. Players in the fast-evolving new global economy can no longer afford to wait for the kind of broad official agreements common to the 1940s. From the International Monetary Fund to the World Bank, that decade gave rise to institutions that promised a stable geopolitical framework for trade.
But many nations today are not waiting for the world's diplomatic referees to define boundaries. Instead, they are ploughing ahead, implementing aggressive programmes of economic development in a business climate rife with uncertainty.
Satisfying this demand represents both the primary challenge and opportunity for the international insurance industry heading into the next century. The days when brokers simply arranged insurance covers on behalf of clients are behind us. Success today requires nothing less than full trade partnership. Brokers must be prepared to help insureds grasp the regulatory, political and cultural peculiarities of different countries. They will also be expected to facilitate the development of new products and services to address risks unique to foreign markets.
Many brokerages have already begun making the psychological transition from sales organisations collecting commissions, to providers of professional services and tailor-made solutions, often on a straight fee basis. Their solutions do not rely entirely upon the purchase of conventional insurance. This sea change clearly takes the broker's role into that of risk assessment, balance sheet protection and the fundamentals of professional risk management. In some instances, the broker is even looked upon as a de facto risk manager by insureds.
In essence, the broker has become the insured's financial business partner, in much the same way that its accountant, banker or investment advisers are. By playing this role, brokers make themselves a more integral part of the insurance transaction as they bring their full knowledge of the market to bear in ways that add value. They also make themselves a more valuable resource in the eyes of clients because their knowledge has the added weight of coming from an objective third party.
In addition to greater credibility, brokers can still offer the long-standing benefit of simplifying the insurance buying process. As a result, smart insurance carriers - rather than feeling threatened that brokers are usurping roles they have traditionally played - have instead seen the value of working hard to help brokers better educate their clients.
"Global" obligations for local brokers
Globalisation is having a dramatic impact on the local broker's role, too. Even if a broker is not a regional or international player, it will be expected to demonstrate a strong knowledge of local market conditions around the world and provide clients with personalised service on-site as their businesses expand regionally and globally.
A Singapore manufacturing company, for example, must be able to work with its broker in Singapore to develop its regional or global insurance programme. This programme would combine coverages provided by domestic carriers with overseas coverages underwritten by the Singapore insurer's international arm or perhaps by local or other international insurers. In this way, the broker makes a complex transaction co-ordinated and efficient. While these transactions are costly and time consuming for brokers and underwriters, they are necessary to satisfy the customers' needs for a co-ordinated approach that assures consistency of coverage by eliminating gaps.
Brokers can also compete more effectively on a global scale by seeking affiliations with international associations or insurance carriers with a fully developed, well-co-ordinated global network. An international insurance carrier can set up the correspondent broker arrangements, issue locally admitted paper, provide quality local service and ensure proper premium collection and commission payouts. Clearly, this demand for multi-country capabilities will continue to increase as companies expand their geographic reach, in response to the globalisation of trade and business.
Another dynamic that affects the broker's role is the need to keep up with changing markets. To do so, brokerages must use their insurance expertise and knowledge of client needs to sort through competing insurance proposals. It may not appear much has changed here. In truth, carriers are constantly consolidating, specialising, innovating and adapting their operations, products and marketing tactics to meet the unique demands of doing business globally.
To negotiate the proper coverage for clients at the best price from the most qualified carrier, brokers need to stay attuned to the industry's every move. For example, a software company distributing its products abroad needs to purchase insurance for electronics errors and omissions not covered under a standard products liability form. Since both losses and defence costs resulting from an electronic error or omission can be hefty, it is critical that brokers recognise coverage gaps and select a carrier that can adequately fill them.
Increasing complexities; increasing expectations
The broker's responsibility to keep current with changing markets, products and loss exposures is becoming increasingly difficult. Is he truly looking for the best products, expertise, and service? Has she even considered the importance of selecting the most financially stable insurance carrier? Or are they both merely focusing on price?
To help clients address today's complex risks and increased exposures, brokers are offering valuable services like risk management consulting, alternative risk financing, loss prevention advice and claim management. No one is suggesting that all brokers must have such a full array of capabilities. But possessing them does make the risk a better one to write from the insurer's perspective. On the flip side, the client's expectation that the broker will have such in-house capabilities is increasing, too.
As mid-sized and smaller commercial customers continue to grow, expand and develop new exposures, they will expect insurance brokers to be able to meet their changing needs. The professional broker must add value to the insurance buying process by raising client expectations for quality. This has pushed the insurance industry to become more innovative and to develop a sense of urgency in offering new or updated products and services for a continually evolving marketplace.
To meet increased expectations the professional broker, regardless of size or geographic reach, should have well-developed long-term strategies and perpetuation plans in place. Regardless of whether the broker is a large corporation with strategic planners or a small operation, planning is critical to the organisation's long-term success and survival. Whether a brokerage subscribes to scenario-based planning, competitive advantage strategies or market positioning strategies, a significant amount of flexibility must be factored to respond rapidly to changing competitive and market conditions. For the small brokerage, preparing for the succession of key managers and the eventual transfer of ownership are important considerations. Planning enables a brokerage to demonstrate its long-term commitment to servicing its customers.
Ethics in an era of deregulation
Deregulation of the financial services sector also will influence the insurance broker's role. To varying degrees, deregulation is occurring in almost all markets around the world. In developed markets like the United States, the debate encompasses state versus federal regulation, while emerging countries like South Korea proceed along an aggressive, published schedule of market deregulation and liberalisation.
Two things have become increasingly clear in the wake of global deregulation. First, regulatory efforts should focus on issues of critical importance to the consumer, such as insurer solvency - and not on protectionist initiatives related to product and price. Second, there needs to be greater regulatory continuity among trading nations. Such continuity would make it much easier to open up markets to foreign participation, both within a given country and through cross-border transactions.
As deregulation progresses, it is up to business to replace legal restrictions with responsible self-regulation. In 1929, Wallace Donham, Dean of the Harvard Business School, argued that if business leaders do not address business ethics, society will do it for them. It did not take long before an ensuing wave of regulation in the United States proved him correct. And, as history has also proved, rapid legal reactions to legitimate crisis often produce cures that are more painful than the illness.
To ensure that the positive trend of deregulation continues unabated, the insurance industry must fully accept its responsibility to lead. For insurers, it may start with financial integrity in the form of good numbers presented fairly and honestly. For brokers, it may begin with integrity of service, which begins with expertise and professionalism in the conduct of business.
Remembering the basic rules
As the insurance game grows in complexity, and expands globally, the need for professional ethics standards grows exponentially. There are, however, some basic rules of conduct which remain constant for insurance brokers:
1. Obey the laws governing business activities in their territories of operation.
2. Avoid errors and omissions (E&O) that could result in a loss to clients or insurers.
3. Maintain ethical standards that go beyond legal compliance and E&O avoidance.
Brokers are recognised as "professionals" in most jurisdictions and thus are legally held to a higher degree of care. In recognition, the typical broker's association's code of conduct in most countries would likely include such tenets as these taken from Australia's broker association code:
1. Always act in the best interest of the client.
2. Provide advice that enables clients to make informed risk and insurance decisions.
3. Give full and accurate information for effective underwriting.
4. Respect the client's confidentiality in relation to all records and information.
5. Ensure the validity and accuracy of all documentation.
6. Make available all relevant documentation.
7. Be professional, efficient and responsive in all dealings.
Failure to abide by these tenets could lead to an inability to comply with local regulations, difficulties with licensing, or several kinds of E&O losses. Lapses in judgement, for instance, could result in failure to place insurance promptly or to secure coverage requested. It could also result in a failure to recommend or update insurance coverages. Other unfortunate possibilities include not properly explaining limits and failing to notify the insured of cancellation, non-renewal or coverage restrictions. Then there is inadvertent cancellation of the insured's coverage or omission to renew to consider - not to mention failure to tell the insured about industry or legislative changes affecting coverage or verbal extensions to non-existent coverage. And, of course, there is clerical error or misunderstanding.
Of course, E&O claims also leave brokers liable to insurance carriers. Insurers may seek restitution from brokers for failing to cancel upon request; failing to revise coverage upon request; exceeding limits of contractual authority; camouflaging imprudent risks; providing incomplete or inaccurate risk information; creating delays in forwarding underwriting information; and failing to act in the best interest of all parties concerned, including misrepresentation and fraud.
Brokers can try to control their errors and omissions exposures by:
1. Identifying and analysing loss exposures faced by the customer.
2. Selecting from a list of alternatives the best apparent technique to transfer risk.
3. Implementing decisions on a timely basis and always monitoring their outcomes.
4. Recognising the limits of their expertise and recommending a specialist when needed.
5. Knowing which coverages are available and the quality and expertise of insurers.
6. Understanding the restrictions placed on their contractual authority.
7. Developing "fail-safe" procedures to ensure follow-up on necessary actions.
8. Remaining current on legal/regulatory changes that affect their customers.
9. Handling all claims with tact and diligence.
10. And most important, recruiting high quality professionals and support staff.
Finally, in the event those prevention steps prove unsuccessful, brokers can take certain defensive measures designed to help fend off E&O claims:
1. Always suggest more than one way to meet the client's needs.
2. Make recommendations based on solving problems.
3. Avoid pushing products that serve the market more than the customer.
4. Document all recommendations and client decisions.
5. And never make decisions for a client. Instead, offer a choice of potential solutions supported by professional advice.
The golden rule of partnership
If the end of the global goal is to forge sound "partnerships" that brings with them a large slice of the multinational business pie, then acting with unassailable integrity must be the golden rule. And how, exactly, should insurance brokers go about abiding by this rule? They can begin by pondering words spoken some 40 years ago, by Hendon Chubb, then chairman of Chubb & Son Inc. He wisely noted that: "While an insurance policy is a legal contract that expresses our minimum responsibility, there are many occasions when equity demands that we recognise a moral obligation beyond the strictly legal terms, and this is always a consideration in our settlements."
Mr Chubb's observation comes from an insurance company executive but has equal value to the brokerage side of the business. It has come to epitomise a standard that must apply to all aspects of our industry's dealings both domestically and worldwide. Brokers and insurers that cultivate cultures which value integrity - and encourage management to address potential causes of unethical behaviour before it manifests itself - are destined to emerge as the market share leaders in the new global economy of the 21st century.
Gary J. Owcar is a managing director and senior vice president of the Western Zone operation for Chubb & Son, a division of Federal Insurance Company, Warren, NJ. This article was adapted from a speech he recently made at the International Insurance Broker's Conference in Singapore.