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Fad or Fantasy? Clusters in their many forms have captured the interest of agents, companies, associations and even a few promoters. Clearly, the recent increase in interest in clusters and the growth in their numbers suggests the existence of some real advantages for participants. Clusters are not for all agents and there are some drawbacks about which agents should be aware. First, what is a cluster? A research study issued by the PIA in late 1995 offered the following definition: 'A cluster at its core is a single entity joining two or more agencies by formal agreement in a focused, collective, market-power on behalf of their collective benefit, while allowing participating cluster members independence for all activities related to their agency and business status.' This definition highlights important characteristics for clusters: a formal agreement, enhanced market-power, collective benefits and continued independence.
Since most clusters are formed privately to solve common problems or achieve common goals of independent insurance agents, one finds as many organization structures, forms and arrangements as there are problems to solve and goals to achieve.
Clusters come in many shapes, sizes and forms. No one shape, size or form can or should fit all agents nor is any one shape, size or form an imperative for success.
Clusters can and should take on many forms and structures. When agents come together to create a cluster, they attempt to establish a structure that suits their individual objectives or desires. This is what makes the cluster concept attractive to many agents. On the other hand, it is a 'loosey-goosey' approach that has limited the success of many clusters, led to the downfall of others, and given rise to disappointment of more than a few agents.
In our experience, the odds for success or failure are determined early. The issue is not How to form a cluster nor What form the cluster should take, rather the issue is Why do you want to cluster? If the right agents answer why they want to form a cluster and each responds in very personal and specific terms, then the answers to how and what are more easily resolved, accepted and ultimately supported.
Why cluster? The purpose of any cluster should be to enable an independent agent to make more money, that is more money annually in terms of increased income and more money ultimately in terms of a larger book of business. A good agent achieves these goals by selling more business. A good cluster enables the good agent to do this not just by affording access to an increased number of markets, competitive products and services, but by providing more time in which to sell. Most cluster discussions and the sales pitches of the promoters center on the issue of providing increased markets, products and services. In the long run, this focus limits individual and collective success.
Many agents are bogged down in the daily administration of the agency and, even with increased markets, are still limited in the time they have available for selling. If an agent recognizes this, then he/she will recognize that the good cluster will relieve the agent of some of the burdens of daily administration without undue interference with the desire to run one's own business.
By seeing this point clearly, an agent entering or forming a cluster will of necessity be prepared to support an organization that provides him/her with the most time to sell and that reduces or eliminates the burden of everyday administration and personnel matters. Most cluster discussions never come to fruition because the prospective members are unwilling to let go of daily control of certain aspects of their shop and cede day-to-day management to someone who will be given the authority to run some part, if not all of, the servicing end of the business.
Though the desire to have access to increased markets, products and services is the catalyst for most clusters, a good cluster should deliver significant other benefits and assurances. Among these are:
•opportunity to continue to do business under one's name;
•continued ownership of one's expirations;
•centralization of some or all of the back-office activities in order to increase the amount of time that can be spent selling;
•a fair sharing of revenues, profits and expenses (Not all books of business are equally profitable. Analysis should support the distribution of gross commissions and overhead equitably with a result that the member agent is better off than had he/she continued to do business independent of the cluster.);
•a contractual perpetuation plan that offers an option to sell expirations upon retirement, death or disability at a competitive market value and the assurance that the cluster can and will respond;
•access to an increased professional staff; and
•state-of-the-art automation that will enhance customer service, facilitate the sales process, and reduce administrative burdens at all levels.
As good as all this seems, in our view clusters are not for everyone nor should a cluster accept all interested applicants. First and foremost, a cluster that supports agents who simply wish to preserve their book of business is destined for failure. As growth stagnates, so too will market support. As agents retire, the financial and servicing burden on the survivors becomes onerous. On the other hand, many agents simply don't want to concentrate on the solicitation of new business or emotionally can't reduce their involvement in day-to-day administration. In such instances, both clusters and individual agents should proceed with caution if at all.
Agents investigating clusters should be sure that for the investment they are about to make, they will receive more than the promise of access to some additional markets. In the event they are unhappy with the arrangement, they must be able to get out without penalty and with minimum disruption to their business. Above all, agents should be sure that the other agents and their books of business reflect the qualities one considers important.
In summary, two significant advantages should attach to the cluster relationship. First, an agent should be able to make more money because a well managed cluster should allow him/her to spend more time selling and be able to support that increased sales effort with access to more and stronger markets and a back office staffed with people with a higher level of underwriting and marketing skills. Second, a well conceived cluster should assure the agent of a fair basis for selling his/her agency at retirement or upon death or disability. There are many less tangible but important considerations. For example, the agent should be assured of continued ownership of the expirations or of being able to conduct business in his/her own name. Likewise, an agent should have access to a staff of professionally competent people and be able to withdraw without severe penalty.
Few will challenge the statement that the independent agency system is going to be under increasing competitive pressure, whether as a result of a lack of markets an inability or unwillingness to invest in necessary automation and staffing or simply the advent of new and aggressive forces. Increasingly, we believe, clusters, in whatever form, will provide an answer for many of the survivors. Effectively organized, good agents participating in good clusters will find both their annual incomes and the value of their expirations increasing.
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