Guide to FHWA Funded Wrap-Up Projects
VIII. Broker Selection
- Types of Brokers
The broker or agent is the party that will represent the owner in the insurance market and provide the administrative services during the like of the wrap-up.
The choice of broker is critical to the success of the program. It is the broker's responsibility to translate the project risks into required coverages, assist with wrap-up contract language, develop the underwriting submission, suggest and negotiate options and guide the owner throughout the carrier evaluation and selection process. The broker also must develop the project manuals, review and assist in negotiating contractor bid deductions and manage the contractor enrollment and administration.
Brokers and agents may be local, regional, national or even international in scope. The relative size or number of offices does not necessarily qualify or disqualify a broker as a viable wrap-up broker except where the project profile presents a significant geographical challenge. Many wrap-ups are managed off-site with visits by the servicing team as needed. This is actually quite common since it is not unusual for the owner and the project to be located in different cities. Many wrap-ups are large enough to require housing the broker's servicing team on-site.
If the project is multi-site, the RFP should include a specific servicing plan to evaluate the ability of local brokers to deliver the necessary services.
Although the larger brokers manage many projects, it is also important to consider the importance of a local team (or local agent or broker). Local knowledge of the contracting community and medical provider organizations may offer some advantage.
Although relative size is not necessarily an absolute qualification or disqualification, an owner should consider the market influence or clout generally associated with national and international firms as well as the depth of resources. The RFP should be designed to evaluate the potential benefits of size rather than size itself.
To help ensure that the chosen broker actually is providing services that protect the owner's interests, the broker's contract should require, at a minimum, that the broker submit semi-annual reports on the following program components:
- Claims, including open/closed status, initial and revised reserve amounts, deductible payments, expenses, professional fees
- Carrier evaluations, including financial rating changes, response to inquiries and incidents, problems and resolutions
- Broker activities, including benchmarks met and unmet, renewal goals, DBE participation, outstanding issues
- International Insurance Markets
International insurance markets, especially those in the United Kingdom and France, have long provided excess and specialty wrap-up coverages, that include most all program coverages with the exception of primary workers' compensation.
- Excess Liability
Non-U.S. insurers, including Lloyd's of London syndicates, frequently are used to provide excess coverages, that is limits that kick in after primary limits have been exhausted by claim payments. The attachment point for excess limits is very much dependant on the project and the primary carrier. As a rule of thumb, however, the minimum attachment ranges between $1 million and $5 million. The primary carrier generally also will write the Workers' Compensation coverage and be involved in safety and project management. The non-U.S. insurer can then provide substantial excess limits on a follow-form basis (i.e., terms and conditions the same as the primary insurer's). The policy can be placed either as a wrap-up or as a CCIP, depending on the contractual obligations and assumption of liability between the owner and the prime contractor this could affect the rating.
- Professional Liability
Similar to excess liability coverages, historically there have been significant limits available in the international market for Project Professional exposures and this can be written on a primary basis. The policy form for this coverage is claims made (i.e., the incident giving rise to a covered claim and the actual filing of the claim must occur during the policy period). The policy can be placed either as a wrap-up or as a CCIP, depending on the contractual obligations and assumption of liability between the parties involved this would affect which coverage would most suit the individual project.
There are large limits available in the international insurance market for Builder's risk, both for the project values and machinery, however at this stage the number of players is fairly limited.
In addition to the regional, national and international brokers, most public sector wrap-ups require partnering with a minority or woman owned business. The DBE or WBE are generally smaller, local firms that can offer specialized construction or wrap-up expertise.
- Broker RFP Preparation
There are two generally acknowledged methods of selecting the wrap-up broker: Conceptual and Competitive.
The conceptual competition is designed to evaluate the broker's experience and the scope of services they will provide. The owner chooses a broker based on pre-determined criteria for selection designed to evaluate the broker's ability and based on the fee for service. This type of competition is general open to all brokers with the typical number of respondents ranging from five to ten. The winning broker is then responsible for managing a competition among qualified carriers for the actual insurance coverages. This allows the owner to focus on selecting a broker that can not only manage the administration of the contractors throughout the program but also work with the owner to develop and insurance program that meets their objectives.
The less frequently used competitive competition method is to have a number of brokers enter the insurance market and negotiate actual quotations. The broker adds its fee to the insurance quote and the owner must evaluate the insurance quote, broker fee and the services provided. This method is problematic and difficult to manage for a number of reasons:
- There are a limited number of qualified wrap-up insurance companies.
- The owner has to prepare the underwriter data rather than relying on the skill and experience of the broker.
- The result typically is an "off-the-shelf" program rather than one specifically tailored to the project and the owner's objectives.
- Viable markets may be squandered limiting choices - a case of wrong broker/right market.
- In order to maintain a fair and level playing field, the owner's participation in the marketing and negotiating process is virtually eliminated. The result is likely higher premiums than necessary.
- The selection and evaluation process becomes a series of trade offs rather than a choice of right broker/right market.
- Many markets are reluctant to participate in this type of process, they feel their opportunity is limited and their ability to effectively underwrite the project and the participants is diminished.
- Broker Compensation Options
Broker compensation is the value paid for the wide range of services required to design, market and administer a wrap-up program.
Brokers can be compensated under a number of arrangements:
- Commission - This process includes the compensation in the insurance premium, based either on the carrier's pre-determined commission rates or on specific amounts (usually less than the regular rate) built into the premium. It is determined by premium size, rather than the work performed by the broker. When market prices are low, the compensation is inadequate and when market conditions harden, the commission may be excessive.
- Fee - Wrap-ups are generally brokered and administered on a fee basis. The broker identifies the fee as part of the conceptual broker selection competition. The fee is usually all inclusive based on the Statement of Work in the RFP and the response. Some fee arrangements allow for adjustment based on a number of factors, among them:
- Project duration longer than anticipated (typically the broker continues on a pro-rated monthly fee)
- Number of participants significantly different than estimated requiring added (or reduced) administrative costs.
- Scope of services amended-for example adding on-site full time safety, claims or administrative personnel
- Re-marketing as a result of market conditions (particularly if re-marketing occurs within three to five years of inception)
- Fee with Commission Offsets - This is basically a fee arrangement, but it acknowledges that certain coverages, particularly (higher) excess liability limits are often quoted at a minimum premium per million of coverage. Asking the market to quote "net of commission" generally results in the same minimum premium. Brokers generally obtain these quotes including commission, disclose it and offset the amount against the fee.
- Gainshare or Pay-for-Performance - This approach is used in conjunction with fee compensation. The broker will put part of the fee "at risk" based on achieving specific performance milestones. The milestones can be related to performing certain services, achievement of premium targets, and depending on the extent of safety services provided, the actual loss results.
- Broker Questionnaire
The key information that should be requested of potential brokers includes the following items:
- Descriptions of the people and their experience with similar wrap-ups who will provide day-to-day service on the account.
- A list of wrap-up or construction clients of the people to be assigned to the account, the broker's servicing and other offices.
- Information about the firm's access to specialized or technical expertise in construction related areas.
- How and by whom program administrative functions will be handled.
- The type of documents or manuals recommended as for project contractors.
- Process used to close-down a multi-year program.
- How the DBE participants will be compensated and the level of compensation.
- Compensation basis (commission, fee, hourly rate) and fees for optional services or products.
Office of Program Administration