The reason for our continued price competition is simple. Our industry has done a very poor job of differentiation outside of the commodity. Therefore, as carriers and brokers, we have focused on the price of the product, not the ultimate impact to the end users–our clients. Likewise, our clients have always focused primarily on the price of the insurance program as a measurement of appropriate representation.

I fully understand the impact of the current hard market on price competition. Frankly, there isnt much competition. Thats the point. In the historical insurance cycles, somebody always loses. Right now, our clients are the losers.

This is not the basis of long-term relationships based upon trust or value. A groundswell of client discord is building that may demonize our industry for years to come.

How did this happen?

It is very simple. As an industry, we have never given our clients a basis by which to judge us, other than price or coverage. We have missed the pointthat clients are demanding tangible value outside of the commodity. Because of this oversight, we have constantly fallen back to the same benchmarks that are comfortable and easy for us. This leads to a continuation of the “lose/lose” industry cycle.

There is only one answer to our dilemma. We need to be able to demonstrate our value to clients. How? By showing our clients the impact we can make on their balance sheets by impacting their costs. The vehicle we must use is Total Cost of Risk, or TCOR.

TCOR is a concept that has grown out of the risk management arena. For years, astute risk mangers have understood the interaction of insurance price with all other aspects of their programs financial impact. The insurance was simply a vehicle for financing a risk, while other services (i.e. loss control, claims management and information) had the ability to impact costs. Therefore, when determining a broker or carrier value, performance is judged by the ability to deliver resource capabilities that will reduce costs.

In order for TCOR to be successfully integrated inside our industry, there are several shifts that must occur. All three sides of the relationship–brokers, clients and carriers–must embrace these shifts.

Broker shifts.

Brokers that serve the middle and upper middle market must learn how to impact costs in many ways. This impact should take the form of resource capabilities that can be translated to reduce costs on the buyers income and expense report. The final results must be quantified and benchmarked against the costs a buyer would have absorbed without the resource utilization.

This requires a complete understanding of a buyers business operation and all of the ways they encounter expense for risk. The successful agency or brokerage must build a sales and client strategy that focuses on the delivery of the TCOR value proposition.

Carrier shifts.

As an industry, we have become inwardly focused on loss costs, reinsurance and expense ratios. These factors have led us into a feeding frenzy on both sides of the cycle. Either prices cant go up quickly enough or drop fast enough.

We have forgotten our impact on the end user and made it all about us.

Carriers have a tremendous depth of resources that needs to be valued and delivered to our buyers. The delivery of these resource capabilities, coupled with a brokerage community that understands how to utilize them and demonstrate their impact, is the only answer to stability.

This allows a carrier to create profits and long-term clients by leveraging existing resources.

Client shifts.

Clients must shift their expectations.

One of the major catalysts for the constant price competition is the expectation we have created in our clients. For decades, the property-casualty industry has directed buyers to judge us primarily on our cost of insurance or risk financing.

Many of our clients are beginning to find this methodology primitive in light of rapidly escalating prices. When these clients are approached from a position of TCOR, they are extremely receptive. It speaks to their specific concerns.

It is time that our entire industry adopt this model of TCOR. It is the only way that we can survive in the long term. It serves all constituents: carriers, brokers and clients.

By using a TCOR model in the middle market, we are able to establish value and differentiate ourselves.

Rob Ekern is President of C.R. Ekern & Company, a Phoenix-based consulting firm that works with agents and brokers nationwide. He can be reached at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 11, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.