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Finding Alternative Approaches To Profits
Most independent agents are finding their profit margins under tremendous pressure. For many, profit margins are actually shrinking. In our assessment, relief is not yet in sight. Competitive pricing of commercial lines is expected to continue. Erosion in personal lines commission rates is expected to accelerate. Economic expansion is projected at only modest rates.
In our work with agencies across the country we have encountered a number of agencies which have successfully maintained, and even enhanced their margins in the present climate. In this article we have been asked to share some of the strategies that are being employed to enhance revenues or to stem the growth of administrative expenses.
Put your Technical Knowledge to Work
Many agencies possess some special technical or production expertise. Unfortunately, very few agencies take steps to capialize on these strengths in the most effective fashion.
What are the technical and sales strengths of your agency? Your expertise in one or more classes of business may be an expansion opportunity. We know of more than one agency that has worked with a carrier to develop a special program in the area of that agency's expertise; we know of others that pursued and obtained the "franchise" rights for existing special programs in their marketing area. What is especially encouraging about this tactic is that agency size takes a back seat to proven technical and sales skills.
The Rhulen Agency is but one example of a successful agency that grew from just these types of activities. Although the name "Rhulen" is widely associated with animal mortality and children's camp risks, few people know that their nationwide wholesale business developed from the local retail agency experience of two brothers who initially sold these coverages to insureds in their area. Having exhausted the local market, they decided to offer their special sales skills, risk knowledge and market access to others who could write similar risks in other geographic areas. The end result? An agency doing over $25 million in commissions.
Two suggestions. First, put your knowledge of your market to work. The Rhulen retail agency was located in a resort area which had a wealth of children's camp risks. Once you have identified several potential niches to expand upon, take the time to determine which possess the greatest overall opportunity for you in your marketing area. Second, don't be too negative about your situation! Many agencies have been given "exclusive rights" to programs because they proved to a carrier that they could access a goodly number of "special" risks. Often the expertise arose simply from personal involvement with and access to special situations such as golf clubs, yacht clubs or private schools. In other cases it grew out of success in a local market with large concentration in a single class of business.
Life Really is Better with Life
Not only are life insurance sales relatively easy but they also have high profit margins and have proven to substantially increase property and casualty renewal rates. For years we have believed that the agency that makes life insurance an integrated part of its regular sales and service activities could generate life insurance commission income equal to 25% of its property and casualty commission income. In recent years, the number of agencies meeting or exceeding this level of life insurance income has dramatically increased.
A Cure for Unprofitable Clients and Services
Agents are beginning to recognize that there is some minimum commission level at which ordinary and customary services cannot be provided if the agency is to generate a profit. As a result, many agencies are increasingly aggressive about simply writing anything that generates a commission, in determining the profitability of accounts and in charging fees for services.
We are also seeing an increase in the number and types of activities and services for which fees are being charged. Increasingly, agencies are imposing service charges on small accounts and for services such as obtaining MVR's, taking photographs or developing special information to support underwriting presentations,_and for processing non-revenue endorsements, to name just a few.
Before beginning to impose fees, make sure you are familar with the laws of your state. Under New York Insurance Law,_Section 2119, the fees charged by an insurance agent, broker or consultant are permitted so long as the "compensation is based upon a written memorandum signed by the party to be charged and specifying or clearly defining the amount or extent of such compensation."
United We Stand
Can you expect to go it alone? Two aspects of small agency ownership tend to automatically limit success. The first is the lack of access to a sufficient number of quality and competitive markets. The second is the cost and the time involved in supporting and managing a "back-office." As a result, more and more agencies are becoming parties to a variety of different joint business arrangements in order to survive and grow.
Clusters have received a lot of press over the last few years. In a cluster, two or more agencies agree to combine their back offices and share their markets. Most frequently, the agencies maintain separate identities. Ownership of accounts are separate as well. However, the back office operations are are merged and their services are "sold" to each participating agency. Working out a fair basis for sharing administrative overhead is often one of the more difficult aspects of a cluster. Some accounts and some lines of business require service far above what would be suggested by their commission income. In the more successful clusters that we are aware of, the management of the back office has been unilaterally delegated to a strong, able manager.
Similar to a formal cluster is a new business arrangement of which we have only read about, called a huddle. Similar to a cluster, the impetus behind the formation of a huddle is for small agency owners to achieve economies of scale. A huddle may be formed in order to get a joint appointment, to form a shell company through which the participants place business, or simply to combine resources to purchase big ticket administrative items to share (i.e. hardware, software).
For the very small and/or "one-man" shops, clusters or huddles may not be feasible options. However, there is an increasing interest among larger to take in one or more independent producers. In these situations, the producer continues to own his own book but "buys" services from the "host" agency. Although commission sharing arrangements are wide ranging, typically 40% to 50% goes to the producer/owner. Billing arrangements are one of the more sensitive areas, as there are occasionally disagreements concerning the identification of the payee. From the perspective of the host agency, particularly one that has taken in several independent producers, defining termination rights and responsibilities is critical. Absent clear provisions regarding termination, the host agency could be vulnerable if several producers pulled their books simultaneously.
The increase in self-insured programs spawned the growth of third party administrators and captive managers. In recent years a number of local and regional agencies perceived an opportunity in offering these services. The increase in the number of TPA's accelerated with the availability of specialized software and the incerase in the number of outside organizations which provide technical review of patient procedure requests and medical bills. In addition to the administration fees generated, there is an additional opportunity to earn commission income on insured benefits. Although a number of agencies developed successful TPA operations catering to self-insured programs we perceive that original pricing has come under severe competition. The TPA activity on its own is now probably only marginally profitable except in the largest and best managed situations.
Some larger agencies, particularly those with extensive casualty underwriting expertise, are offering risk management and captive management services. The sophistication of the risk management services offered varies significantly, from a one-time risk review analysis sold for a one-time fee, to one highly sophisticated agency which does no retail business per se but for its eighty clients functions as the account's risk manager. This agency arranges and conducts regular risk management meetings at the insured's offices and maintains records and reports in the same fashion as would a company's own risk manager.
As a method of developing accounts and enhancing relationships, the risk management services are probably valuable. The ultimate profitability of this approach is more difficult to assess. In the most sophisticated example with which we are familiar, the increased demand for a larger and more experienced professional staff is severely impacting profits.
In a similar vein, the development of captive management services has proved advatageous to a few well staffed agencies with a solid commercial client base. However, the costs and time associated with developing captives or in providing captive management could be similarly prohibitive for even large agencies.
For most agency owners, many if not all of the above alternatives may represent a significant departure from business as usual. To those agents who contemplate taking a new direction, we have one last observation to share. The well managed agencies are the ones that continue to prosper, which suggests that good management and good planning are fundamental elements of success - and critical to the successful implementation of any new strategy.
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