By: Bill Webster, firstname.lastname@example.org
I was recently talking with a CEO about managing HR and Finance in a young business. Our attention turned to getting insurance quotes. She wanted to get more competitive and better retain some of her talent. She recently lost a valuable employee who took a similar position elsewhere because they were offering better benefits.
Her approach was a normal one for her growing business: shop it around with an RFQ.
But if you look a little more into this approach, when applied to insurance quotes, you’ll get more questions than answers. And you’ll find that risk management in your own business will suffer and stagnate, along with creating a negative perception for yourself in the insurance market.
She found what others have found: shopping around with insurance brokers, you can get sometimes different quotes with the same information from the same insurance companies. Why is that?
Insurance, a unique beast
Insurance is risk transfer (of loss). It is an aleatory contract (Latin aleator = gambler), which means there is an exchange of unequal values. For a small premium (aka, annual or monthly expense), the insured person receives a large payout in the event of loss. Also, the contracts are unilateral, which means only one party – the insurer – is legally bound to pay anything. So, the insurance companies are able to set the tone in a pricing conversation. And they converse with the known insurance experts: brokers.
The insurance marketplace is not very diverse
When you request quotes from different brokers, you usually expect to find a “best price” from a variety of insurance companies. The reality is very different. Sure, there are thousands of insurance companies in the world. Yet, most are very specialized and focus on providing specific coverage to specific industries. For most businesses, you’ll find only 3 or 4 insurance companies in the whole world that are able to compete for your business.
What insurance companies want to know to generate your quote
Group health coverage uses underwriting to determine the cost of an insurance policy. It bases this on the company’s male/female ratio, as well as the average age of the group. This is designed by the insurance company to avoid taking on too much risk at too low a price. It also looks at a group’s prior claims’ experience, if any. When there are numerous high-dollar prior claims, the group rate will rise.
How brokers work
A broker will bring you these quotes as a pure premium expectation, no “add-ons” for themselves included. Insurance brokers receive commission from the insurance company for sales, so they have no incentive to send you higher quotes than necessary. If you ask for quotes from UnitedHealthcare, Blue Cross Blue Shield, Oscar Health, etc., you’ll get their rates based on the information you provided them through the broker. And you’ll get approximately the same from Broker A, Broker B and Broker C.
The added broker-value
When you use the RFQ method, you trap your broker in a small box. As a business grows in size and complexity, the number of options you have for insurance coverages increases exponentially. You need to have a risk expert – aka, a broker whom you trust – to be a consultant and advise you on the most cost-effective and tax-friendly risk transfer methods. They’ll act as in-house partners at nearly no cost, because that’s covered by the insurance companies. If they consistently get the message that you treat them as a quote vending machine, they will not want to partner with you. You cannot benefit from their expertise.
You will usually get quotes from a broker. Yet some businesses will get them from a PEO. A PEO is a professional employer organization which will offer you, as a member, group rates which they have negotiated with insurance companies for all members of their organization. The quote will sometimes be lower than what a broker will offer for the same coverage. The overall price of membership in the PEO, though, usually goes beyond the savings acquired in the lower quote. In addition, PEOs tend to parade the inclusion of some workers’ comp, GLI and/or EPLI coverage (check if you need EPLI here). Business owners should read the terms of these included coverages, since they are rarely sufficient for a business’s needs. For more info on PEOs, see this fair Forbes assessment.
In conclusion, an ideal set-up for a small business could look differently for every business. But a few things are common: you’ll want to partner with a broker or an outsourced HR firm like Suitless, who manages relationships with brokers for you. Prices between brokers will usually not vary much, if at all. If you come across a much lower quote, read all of the fine print to see what other fees and costs are involved. Insurance isn’t simple. But a good relationship with a broker can be.