All in the risk

Risk management may be one of the most talked-about areas of business, but talk is cheap. What practical help do small and mid-market companies actually get from their insurance advisers and providers?

Given the number and variety of brokers across the market, it is undoubtedly the case that, for some, risk management is more a tactical weapon than an intrinsic part of their offering. For a small minority, it may not be a concern. However, for an increasing proportion of the broker population, risk management is increasing in importance.

So why are more firms embracing the benefits of providing risk management advice? And why are insurance companies increasingly being judged on their ability and willingness to work with brokers to refine and improve the quality of risk management provision?

A principal reason is that broking is moving steadily from being an industry to becoming a profession. The serious players no longer consider insurance to be a price-driven commodity. These larger firms regard themselves as more than mere 'quote farmers', whose task is limited to hawking a piece of business around the market place in search of the least expensive deal.

Professional brokers want to provide a service where the placing of insurance cover is only one part of a wider package. This is because, through the provision of a high-quality service, it is possible to establish and develop a secure relationship with the client - one that has a better chance of surviving the annual 'duck shoot' of policy renewal.

If the policyholder knows their broker has invested time and effort into understanding the business, the way it works and the pressures it faces to provide carefully tailored and relevant insurance advice, then they are less likely to switch allegiance without a very compelling reason for doing so.

Risk management aids persistency. It also increases the options open to brokers in terms of remuneration. If advice is being given, a fee may be charged. This moves the relationship away from the crude reliance on commission, at the same time protecting the broker from the fluctuations associated with roller-coaster premiums.

Accountants and solicitors charge for their advice - why should professional advice from insurance brokers be any different?

Another issue is what insurers can do to help brokers. This principally must be an ability to work in close partnership with the broker. Sometimes that will mean being able to perform on site, in front of the client to persuade the buyer that risk management is about bottom-line improvement as much as it is about claims reduction and loss prevention.

The insurer's contribution should start with the way in which the surveyor deals with the client. The approach should be practical, with a deep appreciation of the particular issues and pressures faced by that business, in that industry and at that time.

The insurer, working with the broker, should ensure there is a pre-survey meeting to establish the framework of the case. Insurer and broker should collaborate on a risk assessment and produce a post-survey review that sets out necessary actions and establishes a timescale to suit all parties.

The insurer can also supply additional risk management benefits. For example, business continuity planning advice can help companies plan for disaster and ensure they are not compromised by emergency. The internet is an ideal way to disseminate such information and provide a forum for policyholders to construct their own detailed plans.

Insurers are also ideally placed to help brokers offer a wide range of advice and assistance on areas such as legislation, regulation, taxation and training. They can also use their buying power to secure valuable employee benefits such as confidential counselling and legal advice.

It is worth considering risk management as a means to justify fee charging by brokers. Good risk management advice can lead to the policyholder needing to buy less insurance. Equally, a successful risk management programme should result in the policyholder experiencing less down time and less disruption from insured events. Remuneration via fees is a way in which the broker can be rewarded for introducing these benefits.

Regulatory perspective

There is also the regulatory perspective to be considered. The Financial Services Authority expects brokers to provide an efficient service that addresses the client's needs. Can this be done simply by choosing the lowest premium? What about the extent and quality of cover? What about the accuracy and timeliness of documentation?

It is not difficult to envisage a situation in which a policyholder felt justified in complaining to the regulator because their insurance protection was inadequate or flawed. It will be an unsatisfactory defence to say the arrangement was put in place without a detailed analysis of individual needs on the basis of cost considerations - unless, of course, the client insisted on having the lowest price possible.

But, as discussed, would such a client be desirable to professional brokers?

One of the difficulties facing brokers is mustering the resources to provide a fully fledged risk management service. It should be carefully noted that risk management is about much more than suggesting that a sprinkler system be installed and extra locks fitted. While such practical measures are vitally important, they are only a part of the process that will make the insured entity safer, more secure, wholly compliant and generally more efficient.

Thus, the risk manager must be fully aware of the full range of threats - physical, intellectual and financial, and a range of legislation and regulations relevant to the specific instance must be comprehended. Risk managers must also be able to construct a recovery programme that will keep the business viable if disaster strikes.

Clearly, it is not always practical for a broking operation to have such a breadth of expertise in-house. But this is where the relationship with broker-oriented, risk management-aware insurance companies comes to the fore. The policyholder is much better served if the broker and insurer are working in partnership.

Embracing a professional approach extends beyond a commitment to risk management. There is a need to review the entire relationship with the client and ensure it is on a firm footing. This is equally true of potential clients whose experience of the insurance process may not include the provision of sophisticated advice.

For example, how do you broach the subject of reducing the amount of insurance to be bought? How do you set about persuading someone to increase their deductible from £250 to £10,000, or even more? How do you persuade them to invest in structural improvements when they have never experienced the problem you are trying to anticipate?

These things can only be accomplished if the client knows from the outset that the broker is not trading in a commodity but is providing valuable individual advice and is working with an insurance company of similar orientation. Such an approach requires the insurance process to be re-engineered. After all, the standard approach to insurance has changed little over the last century. Many contracts are still arranged and purchased in advance of the detailed documents covering contractual terms, conditions and warranties. Surveys are completed once the policyholder is on cover, which effectively means the policy is bought 'blind', leading to tensions when additional conditions are imposed, physical improvements are required or the insured sees the actual wordings.

The solution, then, is to alter the process so that the bulk of the risk assessment is done in advance of policy inception. Not only can the risk within the business be assessed in advance, but terms and conditions can be agreed and documentation can be delivered before cover starts, so that the client knows exactly what they are paying for. The approach is transparent and there are no hidden surprises. Everybody knows what is expected of them, when and how much it is all going to cost.

Working in advance of the inception or renewal deadline is an innately professional approach. No company would look to appoint an accountant after the submission deadline for its report and accounts had passed.

No company would enter into a contracted commercial relationship and then ask a solicitor to give the documentation a once over. Why should insurance professionals be any different?

If the relationship between the client and the broker/insurer partnership is secure - indeed, if it has matured into a three-way partnership - then the provision of advice will take place within a long-term perspective.

The insurance providers will be happy to devote time and resources throughout the life of the policy, rather than limit their activity to the crucial weeks either side of renewal.

Professionals understand that insurance is organic - it lives, breathes and grows with the needs of the policyholder. As the client's risk profile changes, such as increased payroll, new stock or premises, the broker and insurer must be willing and able to react swiftly and appropriately.

Claims management is an integral part of the risk management process.

The approach to handling claims - assessing the client's requirements, agreeing protocols with the insurer's claims management team in advance of the policy coming into force - further enhances the insurer and broker's commitment to loss reduction and prevention.

Consistency

Professionalism is also about consistency - and that means consistency of approach, quality and price. Brokers should be helping clients to see insurance as part of the overall risk management process and not merely rely on insurance to meet legal obligations and provide a safety net in the event of inadequate maintenance or lack of care.

They should also be realistic about the false economy of buying inexpensive insurance - or at least amenable to hearing the arguments for managing their own risks. A finance director will be looking ahead over a period of three to five years. Will they, therefore, not appreciate a long-term approach that offers to stabilise insurance costs, rather than the market pitching them from one extreme to the other every 12 months?

In a regulated market, levels of professionalism will come under close scrutiny and pressure will mount for standards to be raised. Shoddy service, as manifest by late or incomplete documentation, will simply not be acceptable.

The quality of advice and support will be placed under close scrutiny as never before.

Brokers need to decide how they are going to handle these pressures and which insurance partners are best placed to assist them. And they need to do so well in advance of becoming compliant.