Does a long-term insurance agreement really offer you the best deal?
The insurance industry has spent the last decade persuading clients to enter long-term agreements (LTAs). Generally, these are for 3 years. But I have to question whether this is to the advantage of clients or their broker?
My view is that long-term agreements benefit insurers and brokers much more than they benefit clients. So, as an industry, are we failing our clients?
I believe we are and these are the reasons why:
- A long-term agreement makes good commercial sense for brokers and insurers. Clients are locked in for the period of the LTA and competitors are unable to tempt them away with a better premium or service offering. This means that brokers and insurers have a clear view of their medium-term, but clients are stuck.
- There is a common misconception that if a 3 year long-term agreement is in place then the client is protected from price increases even in the event of a claim. However, this is normally not the case and is an example of the small print being important.
- We have not seen a 3 year price fix that does not contain a claims proviso since 2008.
- The common agreements we have seen are considered broken if, the claims against premium ratio exceeds 60% even in the case of reserves.
- The insurer puts the premium up and the client gets a nominal ‘5%’ off for their LTA without being able to change supplier or ask for a second opinion
- Incidentally in the current world no increase would be applicable if your claims are below 60% there is no inflation in rates currently
- The discount clients are offered of 5% for a long-term agreement is usually only off a notional base rate outlined by the insurers. So, is it really a genuine discount?
- Ultimately, insurance is about claims performance. With an ever-increasing focus on cost control (or, to use industry parlance – Combined Operating Ratio), insurers are outsourcing and changing their claims processes more than ever.
- This means clients are likely to experience poor levels of claims service. And, it’s particularly galling to have to stick with an insurer that has let you down in this area.
- 3 years is a lifetime in business these days. The right insurer at day one may well be not the right insurer at day 900. What happens if you need to diversify or move into a market segment that has more complex risks? You are you are more likely to receive a less accommodating response from your insurer
- Finally risk improvements – insurers focussing on management and housekeeping to justify low premiums get carte blanche to issue improvements when under an LTA, and clients are stuck with them even if they are costly to implement.
What can you do?
While I would advise against rebroking your insurances annually – this stifles competition and interest in the market – I strongly advise that you protect your freedom to move. Your broker should be confident that they can perform year in year out – not just every 3 years.
Having the ability to switch within any given 12 month period is an unquestionable advantage in negotiating premiums, claims, cover and service.
Why would you compromise that for a mere 5%?