Reposted from Insurance Journal
They go by many names — networks, alliances, franchises, clusters and aggregators — but all have similar goals. Aggregator groups have been around the insurance industry for more than three decades but in the past few years they have become very popular. What’s more, they may not have peaked yet, according to insiders.
These same experts say the prolonged soft market, the poor economy and pressure from carriers for better results are a few of the reasons the time is right for agency network growth.
Peter van Aartrijk, CEO of Aartrijk, a Fairfax, Va.-based branding firm specializing in the independent agent and broker channel, says the popularity of such networks can be directly attributed to the challenging conditions faced by agencies today, the tough insurance market in particular.
“The economy is a factor, but a bigger factor is the prolonged soft market in the property/casualty business that is simply catching up with more agencies that are not growing organically,” van Aartrijk says. “Commercial lines have been flat for six or seven years running now, depressing commissions and forcing agents to squeeze out revenue anywhere they can.”
Agency networks can provide added compensation to agents in these tough times as often the business produced is more profitable. Also, networked agencies can achieve more incentive compensation from carriers as their agency’s business volume rises as well, van Aartrijk says.
“As a group, agents can easier reach the growing production requirements of carriers, so they can access more carriers,” van Aartrijk says. “They also have some risk management built in — they’re less likely to lose a carrier appointment due to the loss of a big account, or a few big accounts, than if they’re on their own. Agents in groups also can put some more pressure on their carriers to meet unique coverage needs of insureds, which is a nice feature.”
Howard Candage, an insurance management and technical education consultant based in Portland, Maine, agrees the prolonged soft market has contributed to the growth of agency networks in recent years, but he thinks that the increasing pressure from carriers on agencies to beef up sales volume is the real driver of network growth.
Candage says the growing popularity stems from an “the pressure from the companies to get larger.” Candage says. Carriers have restructured their profit sharing programs to reward the larger distribution entities. The thinning of carrier income statements due to the soft market adds the pressure, he says.
The loss of revenue due to lower prices, coupled with shrinkage in the rating base, leaves agents struggling with profitability and looking for partners to keep carriers happy, Candage says. “[T]he shrinkage in those books has made it more difficult to maintain company appointments. Companies have put more pressure on, so everybody seems to be banding together.”
Chris Burand, founder and owner of Burand & Associates LLC based in Pueblo, Colo., an independent agency management consulting firm, understands that independent agents join networks for a variety of reasons but worries that some agencies might be joining under false pretenses.
“Some think that access to more markets will result in their being able to grow faster, which is a dubious assumption,” Burand says. “Some join because they believe they will make more in contingencies, which is true for some but not others.”
Burand also noted that many agencies joining networks today are former or sometimes current captive agents. “They join because it’s usually the only way they can get company contracts.”
Burand predicts that for as long as the market remains soft and agents do not get out and really sell hard, agency networks will continue to grow.
The Right Choice
The time may be right for growth in many agency networks thanks to the soft market and increased pressure from carrier partners, but the decision to join a particular group should be carefully evaluated before agencies make the big move, advisors say.
“Some of these organizations are great for the right agents and the best ones are quite good for the entire industry,” Burand says. “But agents should do thorough and careful due diligence before joining up.”
Burand advises agents to fully read the prospective network’s contract when evaluating whether to join. He says careful consideration should be given to whether the agency network is gaining any level of ownership, whether the agency’s value is diminished in any way, whether errors and omissions (E&O) exposures will increase, when payments will be received, and whether the network is financially stable. “They (agency network) should gladly show anyone that asks for an audited balance sheet that proves the firm is in trust,” Burand says. “The good ones will gladly provide this information.”
Burand says that one problem all agency networks face is that the network-agency contract has to protect multiple entities simultaneously and those entities’ interests are not always aligned and might even conflict in some circumstances.
“It is quite difficult to write a contract that adequately addresses this situation, so most contracts, especially for smaller clusters, simply ignore the problem.”
Van Aartrijk says while some agency networks offer many advantages for members, there can be many pitfalls as well.
“There are business issues, financial issues, legal issues and owners need good advisers and good due diligence,” van Aartrijk says. Before joining, he advises agencies request to see a number of key documents including:
- Operating, business and strategic plans;
- Financial projections and pro forma;
- Audited financial statements for recent years;
- Details of tax issues or lawsuits, if any;
- Non-competes, buy/sell agreements, business succession plans;
- E&O claim history;
- Profile of book of business, including loss ratios and lists of carriers; and
- Technology plans.
“It’s a big decision for agency owners to join the formal groups,” van Aartrijk says.
He says that some of the “more interesting groups” are the smaller ones, sometimes less formal, of which there might be thousands around the country. “Some of them are simply agency owners — in close areas where they aren’t competing with each other — who meet to share opportunities and issues. They are more informal … where they might share a back office support, or technology, and combine volume.”
But in Candage’s opinion, it’s the larger agency networks that seem to be adding value for insurers through more effective distribution. Many of the larger networks invest money back into the group to improve distribution. However, some of “the smaller groups are simply banding together to try to get access to market and enhanced profit sharing,” Candage says.
Burand adds that while he believes some clusters and networks are quite fair, have good contracts, and bring good value to their members, those firms tend to be in the minority in his view.
One agency network that’s seen tremendous growth in recent years is the Iroquois Group based in Olean, N.Y. Laurie Branch, president of Iroquois Group, says agencies have been joining her organization for many different reasons.
“There’s the old-fashioned notion that you join a group for access to markets and some of the smaller shops might originally or initially come to us for that,” Branch says. But, according to Branch, many of the agencies stay because such groups enable an agency to increase its value over the long term. Iroquois member agencies range in size from $4 million to $40 million in revenue.
The group helps agencies increase revenues but also provides them with a network of peers that helps fill a role of trusted advisor. “We can, in that role, help them understand where they might be able to gain efficiencies in their offices so that more falls to the bottom line for them,” Branch says. “In the end, increasing their profitability translates directly into increased agency value.”
The Iroquois Group, founded in 1977, consists of some 1,905 agencies nationwide. Over the last several years, Branch says Iroquois has been growing; a trend she expects to continue. In 2005, the group added 190 member agencies; in 2009 it added 300 agencies and it is on track to exceed that number in 2010.
The majority of Iroquois’ growth stems from states in the Southwest, particularly California, Arizona and New Mexico, Branch says. North Carolina and states in the mid-south are growing as well.
While growing by 300-plus member agencies per year might seem excessive for Iroquois’ meager administrative staff of just 16 employees, Branch says the growth — while at a strong pace for the insurance industry — is manageable.
“We’re growing between 13 to 18 percent per year,” Branch says. “It’s very manageable from an infrastructure standpoint.”
Another agency alliance experiencing tremendous growth is the SIAA based in Portsmouth, N.H. Founded in 1997, SIAA has grown to approximately 3,450 agencies, with some of its biggest gains in the past few years.
Jim Masiello, chairman and CEO of SIAA, says the group adds about seven or eight new agency members per week. In 2008, SIAA added more than 300 agencies, then in 2009 the group added 439 new members. And it’ still growing. “This year, we’re on pace to actually exceed last year,” he says.
SIAA is not just growing in membership numbers. While premium growth may be flat or down for most property/casualty insurers, SIAA’s premium growth is rising.
Masiello says that in 2009, as an example, SIAA grew at about 15.6 percent in premium volume. The average premium growth for SIAA’s strategic partner companies was around 0.02 percent, he says.
“That growth is very significant and that’s why we have the relationship we have with the companies. We’re growing like mad. And as we look at the company’s growth, it’s just been flat. It’s been a soft market,” Masiello adds.
A large chunk of SIAA’s growth comes from captive agencies looking to go independent.
“Now, where we’re having a lot of success, a lot of interest, is with direct writers and captives that are leaving the companies that they’re with and becoming independent agents,” Masiello says. “Over 1,400 of our members have come from that area.” In 2009, SIAA added 294 new agencies from the direct and captive markets.
“These folks have built a book. They’re employees. They can sell one product. It’s with a company that holds them captive, if you will. And they see a lot of opportunities to write more business if they had additional markets in which to place that business,” Masiello explains.
“When they join SIAA, they become big, instantly. They have access. We get them companies. We provide them with placement assistance. They get their own top tier commissions. They run their own business. They become independent businesspeople. That’s what motivates the captive, the direct writer, is access to competitive markets and the ability to build their own business and be in control of their own destiny.”
But Masiello warns that becoming a member of SIAA is not for everyone — captive or independent agencies. “We’re interested in quality. We don’t care about the quantity. We want the right agents, and whatever that ends up being, that’s what we become.”
Lea Ann Hawk, vice president of Client Services, for Keystone Insurers Group based in Northumberland, Pa., agrees that quality outweighs quantity when it comes to selecting member agencies. Keystone currently has 213 member agencies, and added 29 new agencies in 2009 alone. Hawk says the agency franchise is on track to add close to 30 new agencies in 2010 but says Keystone is tied more to quality growth versus quantity growth.
New members come to Keystone not for aggregation but more to find partners who might help agency owners run their businesses more effectively in a really tough time, Hawk says.
“As a group, we really strategize and work together to try and determine ways in which we can really increase business in a soft market,” Hawk says. “The biggest piece for our partners is their collaboration with each other.”
As an example, Hawks says a member agency less versed in the inner working of a really large commercial account might lean on another Keystone member with more experience in that area.
As a group, Keystone also invests in ways to help member agencies succeed. “We’ve been doing a great deal in relation to our sales for development group that works with them (members) on sales training, techniques in terms of culture change around shaping change in culture in your agency to more of a sales orientation,” she said.
Keystone’s specialty programs are also helpful to members. “We typically work with associations for exclusive contracts and really work to help them (members) develop leads and write business in a soft market.”
Keystone agencies, which range in size from $5 million to $40 million in gross written premium, operate in six states, including Pennsylvania, North Carolina, Virginia, Indiana, Ohio, and, most recently, Tennessee. While Keystone may look westward in the future, right now Hawk says the group plans to travel up and down the East Coast and a little more into the Midwest.
Hawk believes agency networks, franchises, and other agency groups like Keystone will be the “way to go” for independent agencies in the future.
“I think what our partners find and the reason why we continue to grow is that you have independent agents who’ve spent many years working on things where they couldn’t discuss them with someone else, or get help or work through issues,” Hawk says. “Being a part of a group like ours allows them the opportunity to really be able to access other folks’ intelligence and a way of doing business that might help that particular agent.”
The power of more in the end is what attracts agency partners, Hawk says. “In the group they are stronger,” she adds. “It’s the way to go.”