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Fixed Fee Company Checklist
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What is fixed fee?
  
Most promotions come with a degree of financial risk, some higher than others. Not all promotions require risk management, but all promotions need to have the risk identified and assessed.

The Promoter should consider how they might limit the company’s financial exposure in the event that the cost of redemptions might exceed the available budget. The Promoter has three options:

  • The Promoter may simply “self insure” i.e. accept all costs of consumer redemption to whatever level and manage the logistics of consumer redemption.
  • The Promoter may buy limited levels of over-redemption insurance.
  • The Promoter may choose the fixed fee option which covers the cost of all redemptions to whatever level and all logistics to deliver the “reward” to consumers.

The fixed fee company will help the promoter assess likely consumer redemption rates in any given promotional activity.

Having agreed a fee for a promotion, the fixed fee company will also manage the promotion and the fixed fee will usually cover ALL costs involved as a result of consumer participation.   The promoter should be told exactly what the campaign will cost upfront, irrespective of the level of consumer redemptions.  If the promotion over-redeems, the promoter should subsequently suffer no financial costs in excess of the agreed fee.

Fixed fee offers a promoter the option to limit their company’s financial exposure when choosing to run a promotional campaign that involves consumer engagement.
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Does ‘fixed fee’ mean that a promotion is insured?

Not automatically. Not every fixed fee contract is underwritten by insurance. A fixed fee is a commercial contract between the provider and the client or agency. It is not regulated by the Financial Services Authority, whereas insurance products are regulated. VAT (reclaimable at 17.5% from 1st January 2010) is charged on fixed fee contracts; Insurance Premium Tax (non-reclaimable at 5%) is charged on insurance products.

Having assessed the risk element of a promotion, the fixed fee company will decide whether to provide protection under their own contract, or to re-insure a promotion. The only caveat to this is if the promoter insists on re-insurance as part of the fixed fee contract.
A fixed fee company may seek reinsurance for a number of reasons:

  • the nature of the risk (e.g. new technology being used that a fixed fee company has little or no experience in)
  • historical redemption data
  • simply the quantum of the risk
  • at the promoters request.
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How do I know which fixed fee company to select?

Selecting the most appropriate fixed fee company is essential, as it is with any supplier. The ISP suggests you check the following:

  • The financial stability of the fixed fee company

If your promotion seriously exceeds the advised redemption rates, you need assurance that the fixed fee company concerned can withstand the excess expenditure or has over redemption insurance in place.
Ask for a set of company accounts and balance sheet. The company’s net assets should also form part of the company accounts. It is also useful to check the last 3 to 5 years trading history as a guide to consistent financial stability. If these are not available, check the company’s credit rating (through Dunn and Bradstreet). You might want to get your Financial Director to review the information above and advise accordingly.

  • Does the fixed fee company have sufficient historical data/experience of your type of promotion?

In order to assess risk and quote the resultant fixed fee, the company should have suitable experience/ a historical database of your type of promotion. Having gone through all the details of your promotion, ask for examples of similar promotions the company has worked on.
If the company concerned has little experience of your type of promotion (it may be that a new and previously unused mechanic is being introduced), re-insurance should be discussed.

  • Under what circumstances should you request reinsurance, and what should you check for?

As aforementioned, not all fixed fee contracts have to be underwritten. However, if a fixed fee company has little experience of your type of promotion, or has relatively low net assets in comparison to the risk, you should insist on reinsurance. Request a copy of the insurance placement document as part of the fixed fee contract.
If the fixed fee company purchases insurance, the policy should be in the joint names of the promoter and the fixed fee company.

  • Should the fixed fee company put your money in to a trust account?

The fixed fee company should ONLY use your money to meet their liability for YOUR specific promotion. You are quite within your rights to ask the fixed fee company to set up a trust account to protect your money. However, if the company has already qualified under the criteria above, a trust account may not be required.

  • Should you check out the credentials of the directors/owners?

All directors and/or owners should be required to pass some form of fit and proper test. Check their background and experience.

  • What about the competence levels of the people you are dealing with who may not be the directors?

Fixed fee is essentially a risk management service and companies should be required to demonstrate that their staff receive appropriate training and have the competence required to do their job.

  • What information do you need to give to a fixed fee company in order to receive the best risk assessment?

Typical questions that you may need to provide to the fixed fee company are as follows:

  • the product to be promoted
  • the promotion’s mechanics, objectives, communication methods, any restrictions, availability, commencement and closing dates, redemptions dates for both consumers and retailers (if appropriate)
  • Supporting media activities and any research data backing up the media plan
  • Costs and details of how these costs are made up
  • Anticipated response rates
  • Insurance requirements and previous claims, or historical redemption data (if appropriate). The inclusion of previous history of similar campaigns is very important as it will be seen as a ‘Material Fact’ by a fixed fee or insurance provider. In a case of over redemption, non-disclosure of information at the proposal stage may invalidate the contract. Insurers will typically use a Loss Adjuster for investigating claims.
  • Information on any suppliers (e.g. Agency, consultancy, handling house).

Work on the premise that the more information you can provide, the better the risk assessment will be.

The information above is issued by the ISP and is provided as a checklist to help you select the best fixed fee partner for your promotion. The ISP does not issue specific recommendations on fixed fee companies and is not responsible for your final choice of provider.
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