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The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Virtual Insurance Agency

The Next Generation of Insurance Agencies

No one needs to be told that the insurance agency business has changed in the last ten years. Chances are very good that every reader knows at least one independent agent who has "packed it in" and retired, merged or sold due to the ever-increasing business pressures applied to small and medium sized agencies.

CLUSTERS

Fifteen years ago Agency Consulting Group initiated its first Cluster Group. The concept was right for small agents whose main goal was to consolidate for better (and more) markets. We have assisted in the creation of many more clusters during the past fifteen years and we noticed an interesting trend. Either the agent/owners segmented the cluster's administrative and management workload efficiently or they spent much of their productive time arguing over how the Cluster was supposed to operate. Many of the successful clusters eventually merged into single entities to enjoy all of the benefits of a larger firm.

On the other hand, most of the Clusters in which owners managed by committee either disbanded or are still limping along without great success. And our research reflected another strange trend. The growth of the individual agencies within the clusters studied did not change radically from their historic growth prior to the cluster. This tells us that the benefit of better and more markets did not substantially improve the cluster members abilities to generate more business. Something else was getting in the way.

Eighteen months ago we began gathering data regarding the cause of this problem. The goal of every cluster was to provide improved growth potential for the members. The historical performance of the clusters, however, indicated that the owners, already bogged down in administrative and management tasks, were simply adding more of the same problems in the administration of the cluster.

Complicating this issue were carriers' ever increasing premium demands that were not supportable by the clusters because each agent directed the marketing of his own business.

Finally, as the never-ending soft market continues, rates remain depressed, commissions and contingencies have been reduced and internal costs continue to rise. These issues were the ingredients that resulted in an acceleration of agency mergers, sales and (early) agent retirement. It simply isn't "fun" anymore.

Our research also uncovered a very constructive frustration among many agents interviewed. They still want to sell insurance, but cannot break away from the other duties of ownership. They also feel that they do not have enough leverage with their carriers to compete on accounts (because they do not have large premium volumes with the carriers) even though many agents remain very profitable for the companies. The frustration level is constructive because it means these agents have not given up. Those agents selling their businesses have simply given up on the industry.

THE PROBLEM

The results of our research are as follows -- many of these results are self-evident:

1. Independent agents don't spend enough time actually marketing and selling insurance. During the last ten years, the agents feel that their administrative and management time (including marketing and underwriting issues with carriers) has increased by 50%.

2. Agents feel that they can not provide the growth required by the carriers in their office -- but they also feel they don't have enough carriers to provide the right products to their customer base.

3. A general feeling exists that the carriers have transferred much time consuming processing effort to the agent to lower the carrier's costs. Automation seems to have become an expensive way to handle even more work than before. It was supposed to relieve the agents of administrative burdens to permit more efficient sales and marketing efforts.

4. Marketing competitively to various carriers is becoming more difficult, expensive and time consuming -- both for the agents and for the companies. Our questions to agents and companies alike points to marketing redundancy as a major time user for the agents (often done by the producer, himself) and a major cost for the carriers (who have to quote 10-20 accounts to close one).

5. A vast majority of independent insurance agents have never received training in the art of SALES. The concentration on price simply reflects the fact that most agents have little else to sell when products are similar.

6. The decline of the independent agency system appears to be a "Self-Fulfilling Prophecy." We are no longer seeing large numbers of younger people entering agencies with an eye on perpetuation. If we cannot recruit the next generation, we are dooming our own to be the last generation.

7. Many small and medium size agencies are reaching a critical level of profitability. Decreasing commissions and contingencies, combined with low insurance rates and increased operating costs have turned the boom years of the mid-eighties into "bust" years in the mid-nineties. A great majority of agencies accept that their values have declined and, when they can no longer make a profit in the business, they will have to merge or sell.

THE CONCLUSIONS

When we mixed all of the ingredients identified as parts of "The Problem" in the industry, a set of criteria arose as the most logical to permit the insurance agency industry to survive and even to thrive -- by changing its form and paradigms according to the changed insurance economy.

First, we recognized that the major strength of the insurance agency system were its knowledgeable (and head-strong) insurance agency owners. They are true entrepreneurs, willing to take risks, but desiring an appropriate reward for their efforts. Whatever the answer, the agents must be permitted to remain independent in the operation of their businesses. They must be able to take the responsibility and the rewards for their efforts.

Second, the insurance companies have put the handwriting on the wall -- the agency system will either become a true, efficient sales arm -- or it will be replaced. The carriers do not have to say it -- they demonstrate this intention with their actions. BUT WHAT'S WRONG WITH THAT?? It obviously works for the direct writers -- they've been "eating our cake" for 30 years! The carriers are simply trying to protect themselves against further erosion.

Third, while insurance agents have, for two hundred years, been technically trained, they have only sporadically and casually adopted true sales and marketing training. Agents must learn the modern, efficient ways of marketing themselves and must be taught sales skills. The best agents have always been the natural salespeople. However, sales is a learned skill and that skill can be taught (and managed) in a standardized, disciplined fashion. This will tilt the "playing field" back toward the independent agents because they still have the edge over the competition in product knowledge.

Fourth, we must recruit, train and manage our successors. The agency business can be a profitable and satisfying career, but we must convince our children and other talented youngsters to join our ranks.

Finally, we cannot continue to expend the same amounts in the operation of our insurance agencies and expect to earn a profit from the business. We must find economies of scale.

THE ANSWER -- THE VIRTUAL INSURANCE AGENCY (VIA)

The VIA is, in fact, a merger of many small and medium sized independent agencies into one large and professionally managed corporation. The owners of the originating agencies will become the owners of the VIA. No agency will control the VIA. The VIA owners will vote for a Board of Directors who will oversee the strategic development of the company. Professionals will be hired to manage the operation. Each owner will fully control his/her own Profit Center (formerly his/her agency) and will continue to operate it under the same trade name and in the manner that is most comfortable to that owner/Profit Center Manager.

The initial function of the VIA will be to analyze the VIA's marketplace through its marketing research efforts (already in place) and create marketing plans for each market segment chosen for penetration. The goal of the VIA is to penetrate 100% of the selected market segments in the VIA's geographic area.

Since the VIA will bring many agents into one corporation, it will have the clout of between $50 and $100 Million of premiums from day one. The VIA will "Partner" with the carriers who desire to pursue the VIA's marketplace and will commit substantial premium levels to each carrier each year. In return, the carriers will be asked to provide competitive products and rates. The primary change in commitment in both directions will be written commitments with rewards (and penalties) if the production is not generated by the VIA -OR- if the carrier does not accept a high proportion of the submissions that meet the carrier's underwriting criteria. In other words, both the VIA and the carriers will stop "spinning their wheels." Since the VIA will be the centralized marketing arm, it will assure the carriers of completed submissions that adhere to their underwriting guidelines.

Besides the market analysis and market plan responsibilities of the VIA, it will offer sales training to all members to teach insurance experts how to sell against the competition.

One key VIA difference from clusters is the centralized, professional, general management of the company. As in any other corporation, the VIA will be directed by an elected Board. However, the operations of the company will be the responsibility of a Chief Operating Officer and dedicated professionals who are not part of the VIA's component agencies. The profit centers will be responsible for sales and service. The VIA will be responsible for marketing, finance, automation and administrative activities. However, each VIA will be somewhat different because the centralized functions of the VIA will be decided by its owners and is expected to change as the corporation matures.

The size of the VIA will permit it to accomplish many tasks that the originating agencies were never able to afford as small businesses. Active recruitment and sales training are examples. Each VIA will determine a success level for new producers that will permit them to purchase stock in the corporation. Since only stockholders will be permitted to assume control of Profit Centers, this will be a driving force for young professionals. Once owners, they will be eligible to assume management of Profit Centers as the Profit Center managers retire (sell their stock). While this promotion does not guarantee the new owners more stock, it will certainly develop more personal income, thereby making further stock purchases more easily achieved.

Dedicated systems management will replace agency owners and producers who have had to learn and manage complex computer systems (taking more time away from the sales efforts that pay the bills). Each VIA will, eventually, centralize the acquisition, training, auditing and management of automated systems.

IN CONCLUSION

The handwriting is on the wall! Change or disappear. The VIA is an alternative to selling or merging an agency. But it is not for everyone.

Many agents have explained that they have had good careers and would rather sell their agencies and retire than change. Once the VIA's have become operational around the country they will be ready buyers of agencies whose owners do not want to become Profit Center Managers.

Other agents have realized that their skills are in administration and management. The VIA is probably not for them. The insurance agency industry is driven from two directions, its suppliers and its customers. Its customers want knowledgeable, efficient agents (and carriers) with fair prices and good products. Its suppliers want a sales arm who can select risks that will not harm the carrier's loss ratio. Agents will soon find that they can not "manage" or "administer" growth -- they must SELL INSURANCE (and retain the customers) in order to grow and profit. Hopefully, many of the agents comfortable in administration and management will re-learn the sales skills that made them (or their predecessors) successful in the first place.

Member: American Arbitration Association

Charter Member: Quality Insurance Congress