Eliminate wasteful spending on inflated insurance contracts and broker kick-backs
Virtually all insurers require the use of a broker for a school board to procure a price quote and coverage details. These brokers are often compensated by the insurance company, creating a conflict of interest when the broker should be working on behalf of the municipality to obtain the most appropriate coverage. Furthermore, the compensation given to the brokers is often reflected in higher costs to the municipality. The Best Price Insurance resolution would require brokers to be compensated solely by the school board, creating a more transparent and competitive market for these services. This will ensure that municipalities are able to get the best coverage available to them for the best price possible.
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POLICY MEMO Re: Best Price Insurance Contracting Reform
By: The Citizens Campaign Law and Policy Task Force
Problem: One of the most substantial and growing costs for public entities, like any other employer, is the cost of health, drug and other insurance coverages. Premium increases in virtually all coverages, and especially health insurance, have been rising at an alarming rate above inflation. In addition to health coverage for employees and retirees, public entities need to obtain various insurance coverages to protect against the highly specialized risks they are exposed to:
General liability insurance
Workers Compensation Insurance
Law Enforcement/Police and prison liability insurance
Property insurance
Construction Programs (project-wide wrap-up insurance for the entity and its contractors)
At present, public entities have four options:
buy insurance from the insurance markets through a broker, agent or producer;
establish and fund a self -insurance program, hiring private consulting firms (risk managers, third party administrators, benefits consultants, actuaries, and the like) to estimate projected claims and administer claims, and brokers to procure excess coverage for catastrophic (less frequent but large) claims;
join a joint insurance fund of other like public entities that self-insures the participating public entities, which typically is run by a small dedicated staff using private consulting firms to administer the program, and brokers to procure excess coverage; and/or
with respect to health and prescription drug coverage, public entities may choose to join the State Health Benefits Plan (SHBP), a self-insured fund administered by the State that insures most State employees and retirees. The State procures the services of a private company (currently Horizon BCBS) to administer most aspects of the SHBP program via a competitive Request for Proposals (RFP) process.
Public entities often find it desirable to use a combination of these strategies to satisfy their various insurance needs. For example, they may buy insurance for certain risks, they may self-insure other risks directly or through a joint insurance fund, and they may obtain health insurance via the SHBP. To obtain insurance or to set up a self-insurance program, the public entity must access the insurance market for primary or excess insurance through third party intermediaries: insurance brokers and consultants. That is, New Jersey insurance regulations generally require the use of a broker or licensed producer to sell insurance coverage. Virtually all insurers require the use of brokers and agents to procure a price quote and coverage details.
Presently, there is no direct writing of insurance by carriers, (e.g., an equivalent to Geico or Progressive in the auto and homeowners insurance markets, which maintain licensed producers on their staff, avoiding the need to pay third party brokers a commission and thus saving consumers that additional expense). This means a public entity cannot call an insurer directly to get a price quote and avoid the additional cost of a broker. A public entity must use a State-licensed insurance broker, agent or producer to get a price quote and to bind insurance coverage. There is nothing inherently evil in requiring the use of such intermediaries; procuring insurance is sufficiently complex that the State requires the licensing of those who advise buyers on the costs and virtues of competing insurance products. As a consequence, public entities must hire an insurance broker to obtain quotes for coverage from the insurance markets. The problem is that these brokers today are typically compensated by the payment of commissions and fees by the insurers, rather than the public entity to whom their loyalty should run. This poses the risk of conflicting loyalties for the broker advising the public entity which insurance to procure, especially when the broker’s compensation will increase as premium costs rise. Worse still, public entities generally do not know how much their brokers and other consultants are being paid by the insurers and how much the brokers’ services are adding to their premium cost.
Presently, the procurement of insurance coverage, as well as insurance broker and other insurance consultant services, is exempt from requirements of public bidding under N.J.S.A. 40A:11-5(a)(ii) and (m), as an “extraordinary unspecifiable service.” Contracts resulting from such a selection may be made for a period of up to three years. N.J.S.A. 40A:11-15(6). As a result, brokers, insurers, and other insurance consultants can be selected without any competitive process whatsoever. Though some New Jersey public entities may use competitive processes to select their brokers, consultants, and insurers, competition is not required by law, and we have observed that informal practices vary greatly from town to town. Though many public entities nevertheless do advertise but don’t require a minute of 3 proposals when they seek to hire a broker or other insurance consultant, more often than not the selection is made at the annual reorganization meeting of the public entity each January with little or very abbreviated notice of the opportunity or the availability of an RFP, giving potential competitors little or no opportunity to offer better or cheaper coverages or services. The opportunity for favoritism, corruption and abuse are obvious. Significantly, in most cases the broker and other insurance consultants may receive all or most of their compensation for their services for a public entity via commissions or other forms of compensation paid by the insurance company ultimately selected by the public entity, rather than being compensated by the public entity itself. And in addition to traditional commissions, insurers have other methods of compensating brokers for securing their clients’ business, such as processing fees, incentives and bonuses. Commission rates vary by the type of insurance and the size of the premium. In virtually all cases, the amount of the commission an insurer pays a broker is a highly guarded trade secret neither is inclined to disclose publicly. Experience demonstrates that when an insurer or a broker perceives their business at risk, they do have the ability to lower the cost of insurance to the public entity. This is often accomplished when a broker agrees to accept a lower commission or other compensation from the insurer, allowing the insurer to reduce the premium charged to the public entity.
The Citizens Campaign believes a system in which the broker’s compensation rises as premium costs charged by insurers rise, and relies on those insurers to pay those incentives, establishes all the wrong incentives. For example, a broker whose commission rises as the premiums rise has little incentive to hold the line on premium increases during annual renewal processes. If a broker makes more by recommending one insurer that pays it a higher commission than others, the public entity cannot be confident it is receiving fair and impartial guidance from its broker as to whether it is purchasing the best and most cost-effective insurance available. And as noted above, to the extent a broker relies on insurers, and not the public entity, to pay for its services, an inherent conflict in the broker’s loyalties to insurers and public entities arises, even for the most conscientious broker.
Solution: To lower the cost of all insurance coverages, but especially in the runaway field of health insurance, public entities must as a matter of formal policy and practice require competition among brokers and insurers for their business. With a little diligence, both insurance and insurance broker services can be competitively contracted — if the public entity chooses to do so and plans ahead. Accordingly, The Citizens Campaign recommends that public entities enact ordinances and policies requiring staff to use the competitive contracting process, N.J.S.A. 40A:11-4.1 or its equivalent, to select their insurance providers and professionals.
Essential provisions for an insurance procurement ordinance include: Require that all insurance consulting services and insurance coverages be competitively procured based on a publicly advertised request for proposals that defines the entity’s insurance current and projected requirements, and that obtains at least three proposals for consideration. Require that the availability of such RFPs be advertised at least two and no more than four months in advance of the proposal date on the entity’s 1) website, 2) its newspapers of record, and 3) statewide newspapers, to allow the broadest field of proposers ample notice of opportunities and time to compete meaningfully for insurance or insurance consulting services. Require that all proposers be provided the same information on which to base their proposals, and prohibiting the sharing of information with one proposer to the exclusion of others, to assure a level playing field and avoid favoritism. Require that proposals by insurers and insurance consultants be submitted at least one month before commencing services, to allow the public entity and the public ample time to review and consider same. Assess JIF and SHBP Options: In any procurement for insurance coverage, the public entity shall consider available JIF and SHBP options for coverage, and offer such JIFs and/or the SHBP a meaningful opportunity to quote the requested coverage. Any such quotation shall be included in the evaluation of options and in the ultimate selection of insurance coverage. Require that public entities establish and disclose their award criteria (i.e., scoring system) before proposals are received and fully document the reasons for selecting a particular broker or insurer by requiring the use of the competitive contracting process authorized by the Local Public Contracts Law. Under this process, a selection committee reviews the competing proposals according to previously disclosed award criteria and recommends to the governing body the insurer, broker or consultant providing the best value to the entity, price and other factors considered. The selection recommendation is required to provide a detailed explanation of the proposed award adequate to allow the governing body and public to understand the respective costs and benefits of each proposal, including JIF and SHBP options, and the reason(s) for selecting a particular proposal over others received.
In addition to requiring full and fair competition, it is equally essential public entities change the current compensation system to better align their brokers’ interests with the public entity’s interests in reducing premiums and ancillary costs, by:
Paying their brokers and other insurance consultants directly for their services.
Prohibiting insurers from paying, and their brokers and other insurance consultants from receiving, commissions and other forms of compensation for securing or servicing business from a public entity.
Requiring appropriate certifications from all insurers and insurance consultants at contract inception and periodically thereafter certifying under penalty of law, loss of contract, and disgorgement of compensation, that no compensation has been paid by an insurer to the broker or other insurance consultant on account of securing or servicing a public entity’s insurance business. This prohibition, certification and disclosure approach is easy to understand, comply with, and enforce.
Finally, The Citizens Campaign strongly recommends that public entities adopt a flat, fixed fee approach to compensating its brokers and other insurance consultants so that its cost for such services are known up front. However, we recognize that some services may be more appropriately charged on an hourly or other basis, and public entities should retain the flexibility to select their preferred compensation model in their RFP documents.
The key to holding insurance costs down is to subject both insurance policies and insurance consultants to meaningful and periodic competition, and to eliminate conflicting incentives and interests. This proposal helps public entities hold their insurance costs down by requiring a periodic and transparent competitive contracting process to select insurance coverages, brokers, and consultants.
The Citizens Campaign has asked experts in the fields of insurance and procurement to develop a model ordinance and resolution incorporating these key provisions for consideration by municipalities and school boards. Either can be readily adapted for use by other types of public entities, like municipal and county authorities, such as parking, housing, improvement and similar authorities.
“BEST PRICE INSURANCE CONTRACTING” A Model Resolution For School Boards
WHEREAS, the Public School Contracts Law, N.J.S.A. 18A:18A-1 et seq. provides that insurance, including health insurance, property and casualty insurance, and workers compensation, is not subject to the bidding requirements of that law, N.J.S.A. 18A:18A-5; and
WHEREAS, the (Board of Education) finds that open competition for the School District’s insurance business would assure that the lowest available pricing for the School District’s insurance needs would be obtained; and
WHEREAS, the (Board of Education) finds that open competition for its insurance and insurance consulting business will assure that the lowest available pricing for its insurance needs can be obtained; and
WHEREAS, the Local Public Contracts Law authorizes local contracting units to require the use of competitive contracting practices to procure specified goods and services otherwise exempt from bidding by virtue of N.J.S.A. 18:18A-5; and
WHEREAS, the (Board of Education) finds that requiring its insurance consultants be compensated solely by (Board of Education) and not by commissions or fees, direct or indirect, paid by insurance carriers or other organizations providing insurance alternatives, and prohibiting any third party from paying any commission or fee to such consultants for securing business with (Board of Education), will ensure the fidelity and loyalty of such consultants to (Board of Education), and eliminate or reduce conflicting loyalties such consultants might otherwise have to any third parties;
NOW, THEREFORE, BE IT RESOLVED by the (Board of Education) that it shall be the policy of the Board of Education to:
1. For purposes of this Resolution, the term “insurance” shall include the purchase of insurance coverages, alternatives to insurance such as self-insurance programs, as well as participation in a joint self-insurance fund, risk management program or related services provided by a contracting unit insurance group, or participation in an insurance fund established by a local unit pursuant to N.J.S.A. 40A:10-6, or a joint insurance fund established pursuant to N.J.S.A. 40A:10-36 et seq. The term “insurance consulting services” shall include all services associated with procuring, evaluating and administering insurance, including but not limited to brokerage, risk management or administrative services, and claims processing or administration services, including such services provided by a contracting unit insurance group, or an insurance fund established by a local unit pursuant to N.J.S.A. 40A:10-6, or a joint insurance fund established pursuant to N.J.S.A. 40A:10-36 et seq.
2. Prior to entering into any contract to obtain insurance or insurance consulting services, the Board shall secure full and open competition among insurers, and insurance consulting service providers, for the Board’s business. The Board is hereby authorized, and directed, to use the competitive contracting process set forth in N.J.S.A. 18:18A-4.3, -4.4 and -4.5, to secure such competition, except to the extent this Resolution requires additional measures to better ensure maximum competition and fairness to all interested parties. “BEST PRICE INSURANCE CONTRACTING” A Model Resolution For School Boards
3. This open competition shall provide that at least 60, but not more than 120 days prior to the contract commencement date, the Board shall advertise in the newspapers authorized to print legal notices for the Municipality, and in a newspaper circulated in at least 5 counties in the State, and on the Board’s website, a “Request for Proposals” to provide insurance and insurance consulting services. The notice shall advise the reader that details of the Board’s insurance requirement are available from the Municipal Clerk on request and shall include the phone number of the Clerk.
4. The request for proposals shall be designed and drafted by the Administrator or Manager, or his designee, and shall set forth such detailed information as may be required for all proposers to understand and possess equal information concerning the Board’s insurance or insurance consulting service needs, including the current terms of, and fees or premiums paid for, such coverages or services, current coverages, loss experience and anticipated or desirable needs with respect to the relevant coverages or services sought. All request for proposal information, including claims, expense and loss data, shall be made available to all proposers in both written and electronic format.
5. Responses to the request for proposal shall be submitted to the Board at least 30 days prior to the anticipated commencement of the contract.
6. At no time during the proposal solicitation process shall any official or employee of the Board, or any officer, employee or representative of any provider of insurance consulting services to the Board, convey information, including price, to any potential proposer which could confer an unfair advantage upon that proposer over any other potential proposer.
7. A provider of insurance consulting services to the Board shall be compensated for its services to or on behalf of the Board solely by the Board. Compensation shall be set on a fixed fee or hourly basis, or on such other common and readily comparable basis applicable to all proposers and set forth in the request for proposal documents, provided that compensation shall not be determined as a percentage of premium costs.
8. No provider of insurance or of insurance consulting services to the Board shall pay to any insurance consulting service provider to the Board, or to any other third party, any form of compensation including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, in consideration of obtaining the Board’s insurance or insurance consulting business.
9. No provider of insurance consulting services to the Board shall accept any form of compensation including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, from any provider of insurance, other insurance service provider, or any other third party, in consideration of obtaining or servicing the Board’s insurance or insurance consulting business.
10. Any person or entity proposing to provide insurance or insurance consulting services to the Board shall certify in its proposal that it shall neither pay nor accept any form of compensation including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, in consideration of obtaining or servicing the Board’s insurance or insurance consulting business from any party other than the Board.
11. Any person or entity selected to provide insurance or insurance consulting services to the Board shall certify at least annually and prior to any renewal of its contract, that it has not paid nor accepted any form of compensation including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, in consideration of obtaining or servicing the Board’s insurance or insurance consulting business from any party other than the Board.
12. Any provider of insurance consulting service that assists the Board in soliciting, evaluating, or selecting any provider of insurance or other insurance consulting services to the Board shall disclose to the Board the aggregate compensation, including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, it has received in each of the prior three years from each provider of insurance or insurance consulting services solicited or evaluated by the Board. Such disclosure shall be made as soon as practicable, but in no event later than the date of the evaluation report recommending an award by the governing body.
13. The request for proposals for any insurance or insurance consulting services for the Board shall clearly establish the compensation restrictions and the certification and disclosure requirements established by this Resolution as mandatory, nonwaivable terms, the violation of which shall be grounds for (i) terminating any contract resulting therefrom, and (ii) requiring the insurer or insurance service provider to disgorge to the public entity any compensation including but not limited to commissions, fees, incentives, bonuses, rebates or any other thing of value, paid or received in violation of this Resolution, and a commensurate reduction in premiums to be paid by the public entity for the affected coverage(s) in the future.
14. Whenever soliciting quotations for insurance coverage, the Administrator or Manager or his designee shall obtain at least three quotations and shall submit the request for proposals to at least one joint insurance fund, and with respect to health insurance, to the State Health Benefits Plan, at the same time it is published, and shall determine if the SHBP and/or joint insurance fund can provide the same or similar coverages. The evaluation report shall include an analysis and discussion of the availability, terms and price of comparable coverage from such joint insurance fund and the SHBP as part of its award recommendation.