Transparency key for brokers to retain customer confidence, keep their brand positive

Prospective insurance clients are becoming more sophisticated, carriers and brokers need to provide full disclosure to their clients and one misstep can ruin your brand, suggests Bob Dempsey, president and chief operating officer of the Guarantee Company of North America.

In a presentation May 15, Dempsey suggested a “black box” approach to underwriting will not go over well with some clients.

“They want to know just exactly how you come to your conclusion, so as an underwriter you have to be far more transparent about how you underwrite, what your discounts are, what your exclusions are, how you ultimately end up at the rate that you are giving out to your agents or brokers,” he said.

Dempsey made his comments during a breakfast event hosted by the Insurance Institute of Canada at its Toronto office. His presentation, dubbed “Innovating and Winning in a World of Change,” focused on what is changing and what is not in the insurance industry.

One thing that is changing is the sophistication not only of insurance professionals and their employers, but their clients as well.

“Today’s client is far far far more intelligent with and has access to more information than they’ve ever had before,” Dempsey said. “If you’re not sophisticated in how you respond to those questions and challenges, you are going to look like you don’t have their trust in your answers. If you stumble and bumble, that’s not a sophisticated approach. That’s not the image you want to portray.”

To illustrate the importance of transparency for brokers, he referred to action taken in 2004 by the New York state government against several brokers and carriers over contingent commissions. The state’s attorney general at the time, Eliot Spitzer, announced in 2005 the authorities had reached settlements with several major brokers who agreed to pay restitution.

Those included Marsh & McLennan Companies Inc., which agreed in early 2005 to provide US$850 million in restitution to some of its policyholders, to limit its brokerage compensation to a single fee or commission at the time of placement and to a ban on contingent commissions (which was later lifted).

Two months later, Aon Corp. made a similar settlement, agreeing to pay $190 million towards a fund to be paid to clients who retained Aon to place, renew, consult on or service insurance where such placement resulted in contingent commissions or overrides from carriers.

“Brokers in this room, you have to be very concerned about being transparent to your clients,” Dempsey said during his presentation. “Look what Mr. Spitzer did to Aon and Marsh about their commission levels. So it’s not just transparency of the underwriting community, it’s transparency of the brokerage community as well and that all comes to the sophistication of your clients because they now know what questions to ask. Sometimes when you give them answers they are shocked, especially the answers related to commissions.”

Demspey also emphasized the importance of brands.

“How many of you think brand is advertising, brochures, panels and speaking engagements?” he asked the audience. “Well, it’s not. Brand is the delivery of service. It’s your reputation of how you respond and how you react every time you get an opportunity to respond or react.”

To illustrate what can happen to one’s brand, he referred to the Supreme Court of Canada’s decision in 2002 against Pilot Insurance Company when the carrier was sued by Daphne Whiten over its handling of her claim arising from a fire that destroyed her house in 1994.

Court records indicate that both the local fire chief and an engineer retailed by Pilot said the fire was accidental, the adjuster initially assigned to the claim (and later removed from the case) recommended the claim be paid and the Insurance Crime Prevention Bureau, which was asked by Pilot to investigate, recommended the claim be paid.

But Pilot’s defence in the trial was based on allegations of arson and the carrier was found to have breached its obligation of good faith. In 1996, the jury awarded Whiten $1 million in punitive damages, plus $227,500 plus interest for replacement of the structure and contents. The $1 million punitive damage award was reduced by the Ontario Court of Appeal in 1998 to $100,000 but then restored four years later by the highest court in the land.

“Pilot Insurance Company was likely the go-to insurance brand” for every broker before the Whiten case, Dempsey said Wednesday.

“I am going to suggest that the pilot’s brand took a slight dip at that time and even some of the bigger companies have skeletons in their closet that has impacted that brand. We work long and hard to create our brand and you can collapse it in one occurrence.”