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Creation & Distribution of Commercial Insurance

How is Business Insurance Created and Distributed?

Typically there are a number of individuals and departments involved at Insurance Companies in the process of creating an insurance policy:

1.     Actuarial Department --> mathematically tips the odds in favor of the Insurance Company based on various sources of data;

2.     Legal Department --> legally constrains policy language through its research of previous court cases and changes in the legal environments; Note that most insurance companies use external counsel only to create their business insurance policies.

3.     Underwriting Department --> (a) compares policy wording with others offered in the marketplace; (b) liaises with Brokers for their preference over policy wording that can give them a sales advantage; and (c) adjusts the wording to the appetite of the Insurance Company which is derived from the Claims department;

4.     Claims Department --uses the Insurance Company’s own loss experience and liaises with the Underwriting Department to adjust policy wording accordingly.

Happy man denying insurance coverage

Once consensus is reached amongst all such departments, the new insurance policy is then issued and distributed.

It is simply IMPOSSIBLE for an Off-The-Shelf Insurance Policy to have been tailored for a specific Business.

Distribution of Business Insurance

Depending on the jurisdiction, Insurance Companies distribute their Insurance products through Brokers or Agents and/or directly through online platforms and/or their own employees.

Brokers or Agents receive either direct or indirect compensation in return for their distribution efforts. The most common form of direct compensation to Brokers is Commission. Commissions vary however some can reach > 35% of a given policy premium, and depending on the jurisdiction there may or may not be a requirement for Brokers to disclose such commissions to a Business.

Brokers can be local, regional, or global. Some are more sophisticated than others however all of their business models are based on a common premise: distribution of insurance products designed by Insurers.

Various Brokers market themselves as Consultants however such marketing is vastly flawed for the following reasons:

1.     Consultants have completely different business models than Brokers (based on Analysis as opposed to Distribution). Their Revenue and Cost structures are therefore very different. This is a primary reason why many Brokers do not invest in their analytics and focus primarily on sales.

2.     Independent Consultants are compensated in Fees and not in Commission so that their interests are not aligned with how much a Business spends on Insurance.

3.     There is a direct and substantial conflict of interest if a Broker also acts as Consultant. There is simply nothing stopping a Company that acts as both a Broker and a Consultant to steer its consulting advice so that a Business spends more on Insurance – and just like that the Company can generate both consulting fees on top of hefty commissions.

It is very important for a Business to have an Independent Insurance Consultant assist it in the purchase process of Insurance, which includes advice on the ‘right’ Broker to use.

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