The use of reverse auctions has significantly reduced the costs of many commodities that corporations purchase. The “art” of spend management and Group Purchasing Organizations (GPO’s) using reverse auctions is becoming common among private equity firms. The principal focus of spend management is on goods and commodities. The successful application of reverse auctions to such corporate service “spend” categories as legal, accounting and insurance is relatively limited. A few large corporations have experimented with the use of reverse auctions for legal services.
An article in Broker Reviews titled, “Reverse Auction takes Competition Online: Strategy Can Halve Insurance Costs” explained this process in greater detail. It said, “The process is designed to encourage numerous brokers- a dozen or more – to bid for an insurance buyer’s business. The buyer could limit the bidding to a single coverage or open it up to the entire insurance program. A bid would account for a broker’s fees and the insurance premium the broker promises to deliver.”
The article later said, “the winning bid could be half of the opening maximum cost that buyer posted.”
Successful application of reverse auctions to sophisticated corporate services such as law and insurance require significant changes in the procurement process. For instance, the unique and complex property/casualty insurance risks of large corporations require the skillful structuring of numerous underwriters. There are relatively few insurance brokerage organizations qualified to structure and “place” property /casualty insurance. In addition, the skills of these organizations may be limited geographically or by type of insurance and industry.
However, one large private equity firm has realized significant cost savings in the procurement of property casualty insurance for the past three years through skillful adaptation of electronic reverse auction techniques. The lessons learned from this effort predicate the creation of a firm, The iXchange, an organization dedicated to the use of reverse and other electronic auctions in the property casualty insurance sector. It is not an insurance exchange; rather, it facilitates the electronic reverse auction process using strategies and proprietary protocols for firms that host reverse auctions, which were developed and used successfully by a large private equity firm.