What Should Boards Know About Insurance Brokers?
Considering how insurance costs typically constitute a sizable chunk of a nonprofit budget, this significant cost is remarkably un-examined. A key part to getting the lowest costs, the best coverage, and the best service is getting the right insurance broker. But what exactly is an insurance broker and what do they do? What should we look for in a broker? How do we find a good one?
To find out we asked Pamela Davis, founder and president of two major nonprofit insurance companies-- Nonprofits' Insurance Alliance of California (NIAC) and Alliance of Nonprofits for Insurance, Risk Retention Group (ANI-RRG).
Blue Avocado: Pamela, to start with: What is a broker, anyway, and how are brokers different from insurance companies?
A: Brokers are professional advisors/consultants who are intermediaries between nonprofits and insurance carriers. This is somewhat similar to the way a financial advisor might work with you to help you understand the type of retirement program that might be best for you, and then recommends investments and savings vehicles.
Brokers work with nonprofits to determine:
* Types of coverage needed (do we need social services professional insurance? Volunteer accident insurance?)
* Coverage limits (should our vehicle liability be set at $1 million? $3 million?)
* Services needed (assistance with personnel policies? Training for volunteer drivers?)
Based on these guidelines, the broker approaches various insurance companies for price quotes, from the all-purpose firms such as Aetna or AIG, to insurance companies that specialize in nonprofits such as NIAC and ANI-RRG. The insurance companies determine the premium (cost) at which they will offer a certain policy, and if selected by the nonprofit, then issue the insurance policy and are responsible for adjusting and paying covered claims.
How does the broker get paid? By the nonprofit?
A: The insurance companies pay the broker on commission. This can lead to a situation where brokers might be tempted to recommend an insurance company or a type of insurance that gives them a bigger commission rather than the company that is best for the nonprofit. For instance, some companies give brokers extra commissions at the end of the year if they establish and then meet a commitment to a level of premiums sold from that insurance company.
I am not sure why it is, but many nonprofits seem to treat insurance brokers differently than they do other independent consultants. For example, how often do you hire a consultant to advise you on an important financial decision and not ask them how much they will be compensated or whether they have any special relationships with the company they are recommending?
So what questions should we ask prospective brokers?
First, the bottom line is that the broker is there to provide a service to you. Don't settle for a broker who doesn't return phone calls promptly, doesn't know nonprofit insurance needs, or who doesn?t treat you with respect. You deserve better. I suggest asking brokers the following questions:
1. How are you compensated for your work with us? What percentage commissions do you receive from the insurance carriers you most commonly work with? (Typically brokers receive commissions of between 10% and 15% on liability and property insurance, and 3% to 7% on workers compensation insurance.) Will there be any additional fees? (Additional fees are uncommon except for special services.)
2. What financial or other incentives can you receive based on which insurance carrier you recommend? (They might not tell you the full truth, but they might tell you about incentives such as vacations to exotic locations from a company if they bring them enough business.)
3. How much experience and knowledge do you have with nonprofit organizations like ours? How would you compare the terms and services of Directors & Officers liability insurance among the insurance companies you most frequently recommend? How do the companies you recommend handle claims made by volunteers? What are the pros and cons of the sexual abuse forms offered? Can you provide us with client references?
4. What kinds of risk management resources can you recommend, either from the insurance company or elsewhere? For example, does the carrier offer free unlimited consultation on employment concerns? Free driver training? Free resources on volunteer liability? (We at NIAC and ANI-RRG offer a good many free services to the nonprofits we insure, but every company offers different resources. Be sure your broker helps you get the most out of whatever insurance company they recommend.)
5. How much do you know about how the insurance carriers handle claims? Can you give us an example of another nonprofit that had a claim that was either covered promptly and fairly, or was covered poorly or with difficulty? When recommending an insurance carrier to us, how strongly do you weight your knowledge about how they handle claims compared with their prices?
What are some common mistakes you see in how nonprofits choose their brokers?
As CEO I hear two complaints all too frequently. First is that the executive director feels stuck with a broker who is a friend of a board member, and may well be a good insurance broker, but who is unfamiliar with the special insurance needs of nonprofits. Second, I hear that a nonprofit is putting up with bad service and poor rates because the broker gives them a donation every year. The question should be the total value of the insurance and services package, including the donation, and in some cases that might be a broker who doesn?t make donations.
How can these mistakes be avoided?
In organizations with sufficient staff to evaluate and monitor a broker's performance, it is often the senior staff who selects the broker and manages the relationship. However, in smaller organizations, or even periodically in larger organizations it's a good idea to have the board or a board committee select the insurance broker (or at least review the selection), so that the executive director doesn?t feel pressured by a board member who has a friend who's a broker. And of course, if there is such a board member, he or she shouldn't be on the committee.
When is a good time to consider changing brokers?
You can change brokers at any time, but typically it is done within 60 days before the annual policy renewal, because the new broker will not get any compensation until the policy renews. Remember that an insurance company will provide a quote to only one broker for you. So if you change brokers but want to stay with the insurer (carrier) you are with, you'll need to sign a Broker of Record letter for the new broker to use. Signing this Broker of Record letter stops your "old" broker from procuring a renewal quote for you from your current insurance company, and allows the new broker to obtain the quote. This is a common misunderstanding. A nonprofit should not sign a Broker of Record letter just because the new broker claims he or she can get a better price from the existing carrier. That is seldom the case. The broker decision should be made on an evaluation of which broker will give your nonprofit the best service throughout the year.
How do I find brokers to interview?
Other nonprofits in your area will be good referrals, and nonprofit associations are also good sources of referrals. We at ANI-RRG and NIAC have lists of brokers who have indicated an interest and demonstrated track record in working with nonprofits. You can phone us and we can recommend brokers for you to consider..
Any other suggestions?
In my 20 years as CEO of NIAC and more recently ANI-RRG, I have had the privilege of meeting many, many professional, caring and thoughtful insurance brokers. They value the work nonprofits do and they work hard to make sure that the nonprofit is with the insurance carrier that is best for them. On the other hand, more times than I like to admit, I've seen insurance decisions being made because of friendships and financial considerations unrelated to what is best for the nonprofit.
In addition to making sure your nonprofit has the right broker to advise you on your insurance purchase, it's important to have the right staff or volunteer work with the broker. Too often the task of procuring insurance is assigned to the administrative person that drew the short straw. That person may not have the time or full knowledge about the nonprofit's operations to provide all the needed information to the broker on a timely basis. Not getting timely, accurate and complete information to your broker can make it harder for your broker to make your best case to the insurance company.
Thank you, Pamela! Any last words?
A: I founded NIAC twenty years ago because I believed--against conventional wisdom--that nonprofits are better insurance risks than for-profits. We've proven that. We are proud not only to serve the nonprofit sector exclusively, but as 501(c)(3) nonprofits ourselves, to be part of the sector. Our boards of directors are elected by our members and our boards are dominated by leaders from our nonprofit members.. Our motto is, "A head for insurance, a heart for nonprofits."
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