Broker a deal

Cover up: Lack of adequate insurance is chronic in Australia

Three-quarters of insurance policies sales to Australian businesses are made through brokers. So it’s a rare business that tries to go it alone – and, brokers say, it’s a brave business too.

“Insurance is one of the most complex products that a business has to deal with,” says Martin McAvenna, general manager of A & I Member Services, which represents 120 insurance brokers.

“Insurance companies all have slight or major differences in terms of the underlying offer. Insurance policies are contracts, they have terms and conditions and they don’t insure everything. An insurance broker’s task is to understand the risks that a business is exposed to and how to deal with them,” he says.

If business people don’t feel up to reading and comparing the dozen pages of terms and conditions in a liability insurance policy, a broker will do it for them. While they’re doing that, they’ll also check out the other types of insurance that every business needs, including car, property and workers’ compensation insurance plus extras such as business disruption and loss of profits.

However, brokers come at a cost – paid either out of the customer’s wallet or through commissions. Depending on the complexity of the customer’s business and their insurance needs, fees range from 10 per cent to 30 per cent of the annual premium. Also, because insurance policies are always an annual contract, those fees have to be paid in full every year.

Many brokers work on a commission basis instead, with commissions typically of a similar magnitude to fees. Large companies tend to pay fees while the smaller ones tend to go on commissions. Brokers are obliged to disclose what they are being paid by insurance firms.

Although commissions are being stamped out in the financial planning industry, an absence of scandals means there are no similar moves afoot in insurance broking. Brokers are adamant the commissions do not raise a conflict of interest because they face strict legal obligations to always act in clients’ interests.

Typically brokers visit clients to familiarise themselves with businesses and their risks. Then they draw up a description of the insurance needs, show this around to various insurers and make a recommendation.

An advantage of using brokers is that they have access to markets which the general public lacks, a broker who runs Marsh’s middle-market business in New South Wales, Robert Lasovski, says.

“Specialist agencies might have a scheme for a certain industry or overseas markets might be more competitive. In most cases a broker is able to get a better price and better cover,” he says. He recalls a case where finding insurance for a manufacturer of car parts in Australia involved discussions with 27 insurers around the world.

Brokers also handle claims and good ones fight for their clients when there is a dispute.

“The broker is the steward on behalf of the insured,” McAvenna says. “When a business is being renewed and the insurance company is seeking a price increase, the broker might say ‘I don’t think it’s justifiable putting it up’.”

Underinsurance is a chronic problem in Australia, largely because people underestimate the cost of replacing any damaged possessions. However, working out values is a bridge too far for brokers – they will help, but ultimately the client has to decide what possessions are worth.

Robert Scott is the managing director of Wesfarmers Insurance, which houses Australia’s fifth-largest insurer and has the fourth-largest network of insurance brokers. He sees the issue of using brokers from two perspectives. One part of his business makes money for broking insurance. The other part, which writes the policies, has to pay them commissions and fees to bring in clients.

Scott’s insurance business would arguably be better off if it could attract clients directly. Nonetheless Scott believes using a broker makes sense.

“The question we ask is: ‘Is the broker adding value to justify their fee or commission?’ In the vast majority of cases the answer is overwhelming ‘yes’.

“Commercial insurance can be confusing and complicated,” he says. “By way of example, how do you know the best way to structure your business interruption insurance? Not many people understand that. So would you feel more comfortable getting advice from the underwriter [insurer] or someone who’s independent and working on your behalf to get you the appropriate cover and a good price?”

BRW

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