What do you gain? Do you lose control of your business?
The primary gain in clustering is the additional carriers available to approved cluster members.
If your book of business is profitable from a loss ratio standpoint a cluster will get you more contingency even if your book of business would not be large enough to otherwise qualify for contingency contracts.
A cluster’s combined premium with each carrier protects you against loss ratio impact of single large losses that would otherwise destroy your loss ratio for the year.
In a REAL cluster (as opposed to some conglomerators or agency groups controlled by a single or a few agents) you retain full control over your agency. There may be a notice period but there is no financial penalty for leaving clusters.
Advanced Clusters and Virtual Insurance Agencies (VIA) directly save their members money to their bottom lines by sharing functions like automation, accounting and even service and claims personnel.
Background
The clustering concept, like many organizational and technical advances in business, was originated several generations ago to offer participating agencies more markets than they could support on their own. Most clusters during the early years were comprised of small agencies each of whom felt the intense pressure by their carriers for growth and intense pressure from clients for all the markets that could be accessed to satisfy the client’s coverage needs. The host agencies permitted specific other agencies to place business through the host agency’s carrier appointments. This helped the agencies that needed alternative carriers and helped the host agency support the growth requirements of their represented companies.
Unfortunately, carriers historically equated placement of coverage not sourced from their appointed agents as brokered business and frowned upon the practice because of the perception of negative selection, allowing for potentially less than optimal risks to be placed with the agency’s carriers. Carriers were uncomfortable accepting business from producers whose histories they didn’t know and who were not a part of the carrier’s appointed agency force. Meanwhile the agency assuming the risk would give some or all of the commission to the originating producer, yielding the ownership of the account to the originating producer while the losses from that account affected the host agency’s (and carriers’) loss ratios.
Underwriters in the “olden days” were a suspicious lot and preferred NOT to accept brokered business even to the point of forbidding the acceptance of brokered business by its appointed agents.
Over time the growth needs of the carriers superseded the caution of its underwriters and their voracious need for ever-larger premium bases to support carriers allowed for “known” producers to be permitted to place business within some of the primary insurance companies, giving rise to the concept of CLUSTERING of agencies on behalf of certain carriers.
Many carriers will now entertain business from cluster agencies as long as each of the cluster agencies pass the litmus test for agency appointment by the carrier with the exception of minimum premium placement (the volume of the entire cluster sufficing to satisfy the carrier’s appetite). If they do not pass muster the carrier restricts placement availability for those cluster members.
CLUSTERS VS. VIA’s (Virtual Insurance Agencies)
The set of appointment requirements has become one of the primary differences between Clustering and the mega-mergers known as the Virtual Insurance Agency (VIA) concept in which several agencies band together formally into a single entity owned commonly by its participating agencies with each location managed, named and operated individually. For a variety of reasons carriers are more prone to readily accept many producers within a single owned organization than a conglomerate of individually owned agencies placing business to the same carrier. The rate of failures of merged agencies is much lower than the failure of some agents to gain acceptance from a carrier within a cluster.
The carriers retain the choice of which cluster agencies will be permitted to place business through the Company. But the keystone of the VIA concept is the joining together of a number of agencies into a common Company owned jointly by the participants. All participating agents continue to manage, grow and profit from their particular agency entity and, often, each VIA agency remains separate and marketing under their own “brand”. The managing owners run their own shops and make their living from their own productivity.
As in any single commonly owned agency all licensed employees of the VIA are normally permitted to use any carrier appointed for the agency. This means if the VIA is comprised of several agencies, ALL producers from those component agencies, by virtue of the common ownership of all agencies by the VIA, are permitted to use any Company who has approved the entity for appointment – just like any agency that has purchased producers, books of business and locations.
Like anything else in the insurance industry exceptions to this rule exist. Some carriers are very loyal and simultaneously provincial in their risk acceptance habits. If an agency is appointed in a town or local territory and another agency representing that carrier moves to that town or buys another agency in that town, some carriers will try to prohibit acceptance of risks from the newly competing agency. However, this is already an unusual underwriting behavior and becoming more an exception for Companies that understand the need for steady growth as well as risk selection to keep profitable.
Another benefit of clustering is the common use of facilities, equipment, and vendors. It is not unusual for a cluster to share automation, agency management systems, accountants, lawyers and consultants. Some clusters and VIA’s have shared facilities and staffing to become more efficient and return greater profits to their owners. Moreso in VIAs than in Clusters true mergers are not unusual in the second and third generation of owners when all business is managed by the same staff and the former agency owners become producers and managers of the entire operation instead of only their books of business.
Clustering is beneficial for smaller agencies whose books of business do not justify the number of carrier appointments that the agencies need when they are placing their clients.
Clustering is also very beneficial to agents who are in semi-retirement mode or who cannot afford to sell their agencies or stop working because the sale would not provide sufficient income to sustain the retired agents.
Clustering is an excellent way for new agents and those wanting to own “their piece of the rock” to test their wings. Joining a group who already has carrier presence and service staff allows for maximum sales time for the “Young Turks” who want to build a book of business for themselves.
Clustering is not a good idea for agents who have had loss ratio problems (the cluster will analyze your historical book of business and will likely decline association) or who are in decline in their business retention.
If you would like to talk about Clustering or the Virtual Insurance Agency concept please call Al Diamond at 856 779 2430 (al@agencyconsulting.com ).