Off with your head: how risk managers, faced with premium increases, secure their broker relationship in tough times - agent/broker focus

Like many of his colleagues watching professional liability premiums increase by triple-digit percentages, the risk manager of a Midwestern Fortune 250 company was in an uncomfortable position this spring. He had to tell his chief financial officer that the company's insurance budget was about to be blown to pieces as the premium for the directors' and officers' liability policy shot up by 500 percent.

To make matters worse, the risk manager told his boss of the heart-stopping increase only a day before the policy renewal date.

"After a week or so, the CFO pulled the risk manager aside and said he did not like getting bad news at the last minute," says Randy Nornes, managing director at AON Risk Services, an arm of the global brokerage firm AON Corp. "The CFO went on to say, 'You decide whether you resign or you fire your broker.' "Not surprisingly, the firm ended up with a new insurance broker.

It doesn't take a rocket scientist or an insurance expert to know that the risk manager and the broker didn't do their jobs very well. While perhaps extreme, the firing shows how essential a smooth running relationship is if risk managers and brokers are going to satisfy their ultimate clients: a corporation's top executives and its board of directors.

"Teamwork is the best possible thing," says Ben Schull, senior vice president, risk management and consulting at Near North National Group, a brokerage firm based in Chicago. "Some individuals think they can do it by themselves, but it takes talented, knowledgeable individuals on both sides."

As in any professional relationship, communication between the risk manager and the broker is key, especially in a tough corporate insurance market where some liability lines are still experiencing double- and triple-digit premium hikes. "It's a very important relationship and the risk manager and the broker protect each other if one or the other misses something," says Robert Meder, vice president at brokerage Kaye Insurance Associates, in New York. "Part of each person's job is to keep the other informed."

Experts say that when the relationship works, as it does most of the time, the risk manager and the broker complement each other. Each professional brings his own strengths and know-how to the table to make sure that senior managers and board members achieve their goal of obtaining the most comprehensive protection for a company's property and future liabilities at the best price.

Ideally, the risk manager brings an intimate knowledge of the company and its risks. The broker, meanwhile, offers extensive knowledge of the insurance marketplace that risk managers don't have the time or resources to monitor--everything from new insurance products to premium prices to an insurance carrier's shifting financial status. A certain level of friendly tension in the risk manager-broker relationship can even be beneficial if it prevents both partners in the insurance-buying process from becoming complacent.

"A little bit of tension can be productive ... a risk manager can keep a broker on their toes," says Wayne Salen, director of risk management at Home Quality Management Inc. in Palm Beach Gardens, Fla. He adds that an insurance broker in turn can help a corporate risk manager from approaching his job and risk management techniques in the same way year in and year out.

Yet one irritant Salen sometimes faces is when he works with a broker who wants to control his access to the insurance carriers. "That creates serious friction for me ... I need direct, unencumbered access to the insurers," Salen says. "It's not my intention to circumvent anyone, but no one represents my company better than me ... and I can best convey the risks of my company to an insurer."

Experts agree that it's unusual for a risk manager or a broker to try and cut the other professional out of the negotiations and head directly for the office or private telephone line of the chief financial officer.

"The quickest way to get a risk manager upset is to go around them," says Lance J. Ewing, executive director of risk management at Park Place Entertainment Corp. in Las Vegas. Ewing adds that brokers rarely try such end runs around their risk managers, and any cases are a result of individual personalities rather than any industry trend.

And on the other side of the table, the easiest way for a risk manager to alienate his or her broker is to shop around for a new broker each year in an attempt to shave some dollars off the broker's fee.

"It's very disruptive and you (the risk manager) can get a bad reputation ... that you're just running beauty contests," says Ewing, who also is president of the Risk and Insurance Management Society Inc. in New York City. "Especially in a hard market, a positive relationship comes to fruition ... you want to stay with your broker."

But most times the relationships work well and the old adage that "two heads are better than one" usually proves correct.

Schull, at Near North, remembers a risk manager whose senior management didn't keep him apprised of a recent company acquisition. The broker saved the day before any insurance policy was executed by reading about the acquisition in a news release posted, of all places, on the corporation's Web site.

"You would have hoped senior management would have shared that information with their risk manager," adds Schull. "But it just shows the importance of networking on the risk manager's part and having his fingers in every part of his own organization. And a good broker will have several places to get his information from and bring the risk manager into the loop."

Presentation Crucial

The manner in which information--especially if it's negative--is presented to senior management is crucial to the success of the risk manager/broker team. Providing lop executives and board members with benchmark data on insurance rates and coverage for companies in the same, and even other industries, can make a big difference in how the information is accepted.

"If you have to give bad news that your premium on a policy is going up by 500 percent, then you want to have benchmark data that shows where other tales are to show you're not alone," says Michael Liebowitz, director of risk management and safety at Bridgeport Hospital and Health Care Services Inc. in Bridgeport, Conn.

And the risk manager should present the information so board members unfamiliar with the intricacies of the insurance marketplace can easily understand the issues.

"Some companies are starting to hire risk managers and place them above their current risk managers because the new people do a better job of presenting the material," says Nornes. "The issues are becoming more complicated and senior management wants risk managers who can explain it all."

Equally important is providing top-level management with timely information about the insurance marketplace. "You want full disclosure and you want it way ahead of time ... about where the market is heading," adds Liebowitz, who is also vice president for member and chapter services at RIMS.

Liebowitz, who has worked with Bridgeport Hospital for 15 years and within the health care industry for 17 years, says he starts handing his senior executives insurance information five to six months before a policy's renewal date.

"You don't want to set yourself up for failure," he adds. "You and your broker have to work together as a finely tuned machine. Neither of us can do it well by ourselves."

Adds Nornes from AON: "Both risk managers and brokers need to know they're in this together ... especially in this tough trading environment. If not, there's going to be a conflict."

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