 successful competitive bidding process requires careful planning and skillful execution.
If properly managed and undertaken at an opportune time, the bidding process can often produce both premium savings and improved coverage. The seven keys to effectively bidding an insurance program
are:
- Appropriate bidding intervals;
- Broker* selection;
- Comprehensive written specifications;
- Utilization of multiple sources;
- Allocation of carriers;
- Appropriate decision framework; and
- Implementation and review.
* As used in this article, the term "broker" includes agent.
(1) Appropriate Bidding Intervals
There are two pitfalls here - bidding the program too frequently or not bidding it often enough. Bidding the program too often can result in a "shopper's image" that can be counterproductive. When carriers see a particular organization bidding its program too frequently, they are reluctant to provide truly competitive bids and sometimes they decide not to bid at all.
Neither the insurance company (carrier) nor the broker is likely to make a profit if the program "moves" every year or two. In addition, switching the program from carrier to carrier and/or from broker to broker can be expensive and may also be disruptive for the insured.
On the other hand, not bidding the program often enough can cause problems, too. The most obvious is that the pricing may not remain competitive over the long haul if the carrier thinks it has no competition. A carrier that has very competitive pricing one year may not have good pricing five or six years later.
In addition, both the carrier's and the broker's service can deteriorate when an insurance "account" is taken for granted. This is probably the most common complaint McNeary hears from new clients. They often feel taken for granted and they are not sure they are getting the coverage, pricing, and service they desire or deserve. Often they are not.
Taking into consideration both sides of this important issue, McNeary recommends a bidding interval of three to five years on all major components of the insurance program. A choice among three, four, or five years can be determined by personal business philosophy, insurance market conditions, broker service, previous price and coverage negotiations, carrier service, etc.
Other variables include multi-year rate guarantees and early successful renewal negotiations. An existing agreement to renewal at the current pricing might be ample incentive to defer bidding. Likewise, if renewal negotiations are undertaken five or six months prior to renewal a win-win scenario is achievable. If the negotiation result in satisfactory renewal terms and conditions, bidding is not necessary. On the other hand, if these negotiations are not satisfactorily concluded by a predetermined "drop-dead" date, there is still adequate time to bid the program.
(2) Broker Selection
Brokers can be selected simply on the basis of their interest in quoting, geography, contacts, reputation, size, etc. However, other factors such as expertise and available markets are more appropriate criteria. McNeary normally recommends that more than one, but no more than three, brokers be used in this process. More than three brokers can result in a lack of enthusiasm by the competing brokers and sometimes, too few carries to go around.
The bidding process is aimed at providing a competitive test of the insurance market. Brokers have varying strengths in their relationships with individual insurance companies. One broker may have more clout with a particular insurance company the organization wants to quote than another broker. In addition, no one broker is likely to represent all the insurers the organization wants to quote. Ideally, brokers should be selected by the organization with suggestions and input from the organization's insurance consultant.
Broker selection competition is becoming more popular. This process involves using a professionally prepared broker selection Request for Proposals (RFPs). The RFP is sent to any qualified broker that the organization wishes to consider. Then semi-finalists, usually four to six, are selected to make oral presentations. Then two or three brokers are selected to bid the program. (Sometimes only one broker is selected. This has the advantage of ensuring the organization ends up with its first choice as its broker but reduces the competitive component of the bidding process.)
(3) Comprehensive Written Specifications
The necessity for written specifications in any bidding process involving significant dollars is fairly obvious. The organization requesting the proposals should tell the bidders what it wants and needs, rather than the other way around. Furthermore, written specifications ensure that all carriers will quote on the same data, making a valid, "apples-to-apples" proposal comparison much easier.
Another point should be made. The organization's risk manager or an independent consultant should prepare the specifications, not by a broker. Although some brokers may be capable of doing a professional job in preparing clients' insurance specifications, they may sometimes lack the objectivity to maximize an insured's options. Brokers tend to design specifications with the programs they have access to in mind. This can limit their client's opportunity to obtain the best coverage available. In addition, the other brokers are placed at a real or perceived disadvantage when the specifications are prepared by one of the competing brokers.
 continued in part II
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