An Eye-Opener
IBM recently released a study that found insurance companies are not
providing the products and services customers want, regardless of how
satisfied the customers claim to be with their current products. This
seems mystifying at first, but think of it this way: the customers are
happy with their Tauruses but they would be happier with a Mustang.
This insight is a valuable opportunity for smart insurance agents,
especially in this soft market. IBM surveyed more than 3,000
policyholders and learned that less than 50% know their carriers have
any new products and even worse, only 43% believe their company tailors
policies to meet their specific needs. Insurance is an easily customized
product. Every policy can be and should be customized to each consumer’s
needs. Yet, only 43% of consumers believe their policies have been
customized and truth be told, I would bet that at least half of that 43%
is mistaken. They think their policy has been customized, but it
probably has not. Getting to choose your policy limits is not
customization.
The absolutely only way coverage can be fully customized is through
the use of coverage checklists. To customize coverage, an agent must sit
with a customer and go through each coverage. I understand this means
possibly having to explain coverages (which is part of a professional
insurance agent’s job the last time I checked). I understand this means
taking more time. I understand this means getting to know your customer.
I understand this means being a professional rather than an amateur, and
I also know a lot of producers prefer the latter because they have
bluntly told me so.
Beyond the fact that the proper use of coverage checklists
significantly decreases E&O exposures and agents that use them properly
sell more insurance, IBM’s study points to four more reasons agencies
need to adapt to customizing each customer’s coverages.
First, this study, like many other studies, found that younger
consumers prefer internet providers versus real insurance agents.
The study stated the reason for this preference is that younger
consumers are more price conscious and tech savvy. This may be, but
another reason is they are more naive and ignorant. They are happy
purchasing insurance this way because they have never been educated
that insurance should be customized to their needs and therefore,
they see all insurance as a commodity, a "one-size-fits-all"
product.
I once calculated that more two million combinations of
homeowners endorsements existed. It is probably more now. How can
insurance be treated like a commodity, a product without
differentiation, when so many combinations of a fairly simple policy
exist? Yet the perception is clear, insurance is a commodity. We
have let it become such a commodity that cavemen and geckos can sell
it. We no longer need humans to sell insurance–unless the human will
customize it. So the ball is in the professional agent’s court. Are
you going to customize coverages as only a human can do or are you
going to sell a common product and compete against a gecko? For
those that choose competing against a gecko, just to update you on
the score, the gecko is winning.
Second, in this soft market, do not get comfortable because you
have, say, a 92% retention rate. Make sure the reason your customers
are happy with you is because they know they are being offered the
best coverages. If they are happy simply because they do not know
something better exists, don’t be surprised if you eventually lose
them. In this marketplace, someone will soon advise them something
better exists by offering better coverages and/or a lower price.
In a soft market, agents must sell more insurance to stay even. A
great way of doing this is offering clients more coverage through
the use of coverage checklists. Provided their business is doing
well or they do not have an ARM, they can now afford to purchase
more insurance and still save a lot of money. They can get the best
of both worlds, but only if the agent acts as a professional and is
not trying to mimic a caveman.
Third, the IBM study strongly recommends carriers invest in
distribution that bypasses insurance agents. You can bet the
carriers are paying attention. It makes sense for carriers to bypass
agents if agents are not going to bring anything tangible and extra
to the sales process. If young people prefer an internet-based
solution, then why use agents if those agents are not going to
thoroughly customize their coverages and educate them why they need
to look beyond price?
- Finally, the IBM study strongly recommends companies create more
direct communication and knowledge of their customers, including
customer direct access to key customer data. The agent should be
doing this already. If companies follow IBM’s advice, the
opportunity to dis-intermediate the agency grows. Again, agent
disintermediation, or the elimination of the middleman, makes sense
if the middleman is not bringing tangible value to the relationship.
And if the agent is not bringing tangibly more value, value the
customer recognizes, the agent does deserve to be eliminated.
This study is worth reading. It is available at
www.us.ibm.com. When you are done reading it, ask
yourself, "What am I doing to truly add value? What am I doing that my
customers need, value, and recognize?" [Back to Top]
Plan Ahead to Improve
Your Agency
No matter how you slice it, a lousy agency is a lousy agency.
I have polled hundreds of agency owners through the years and complied
the following results:
|
Question |
Answer |
|
Which has a higher value?
A) An out-of-trust agency, or
B) The same agency in-trust. |
100% answered "B," the in-trust agency has a
higher value. |
|
Which is worth more?
A) An agency whose producers control all the
business without non compete, non piracy, or trade secret
agreements, or
B) The same agency, but its producers have these
agreements. |
100% answered "B," the agency with proper
producer contracts is worth more. |
|
Which has a higher value?
A) An agency with lousy loss ratios and company
problems, or
B) The same agency with good loss ratios and
good company relationships. |
100% answered "B," the agency with good loss
ratios and good company relations has a higher value. |
|
Which has a higher value?
A) An agency with poor financial data and
significant financial errors, or
B) The same agency with great financial data. |
100% answered "B," the agency with great
financial data has a higher value. |
|
Which is worth more?
A) An agency with E&O problems and/or EPL
problems, or
B) The same agency without these problems. |
100% answered "B," the agency without E&O or EPL
problems is worth more. |
|
Which is worth more?
A) An agency with declining commissions, or
B) The same agency with increasing commissions. |
100% answered "B," the agency with increasing
commissions is worth more. |
|
Which has a higher value?
A) An agency that is more than 100% dependent on
contingencies, or
B) The same agency, but it is profitable even
without contingencies. |
100% answered "B," the agency with profitability
not dependent on contingencies has the higher value. |
These results are pretty compelling. For some reason though, many agency
owners seem to think these issues only apply to other agencies–not
their own. When these owners decide it is time to sell, they think their
agency should command at least an average price, if not a premium price,
regardless of how many of these issues plague their agency.
Sometimes the agency owner just does not have enough knowledge about what
generates a high agency value versus a poor agency value. When they are
shown the difference, they start fixing their agency and eventually earn a
fantastic sales price.
Other times though, the owner just buries their head and then goes
appraiser shopping until they find an appraiser that will give them their
desired price. I assure you, there is almost always an appraiser that will
tell you what you want to hear and you might even find someone willing to
pay the price you want. Then again, your agency may just sit on the market.
After a few failed sales or a few years on the market, reality may
eventually sink in but by then, a lot of time has been wasted, time that
could have been spent increasing their agency’s value and marketability.
In partnership splits and divorces the question of value can get
particularly sticky. At least one party always believes they are getting
shorted, so no matter what the facts are regarding how out of trust the
agency is, how poor the producers’ contract are, how fast commissions are
deteriorating, or whatever the issues are, these parties always refuse to
accept that these issues should impact the agency’s value.
The departing party sometimes argues that the remaining owners can fix
the problems and sell the agency for more money later. But, that is neither
here nor there for today’s valuation. Plus, most of the time, they
contributed and benefitted from the mismanagement in the first place.
These folks often go through considerable litigation, all in an effort to
prove black is white. Rarely, after legal fees and the price of stress, do
they come out ahead. A lousy agency is a lousy agency.
The bottom line is: if you want to make sure your agency really deserves
a premium price, have it valued a few years before you plan to sell so you
can verify its quality and begin improving it if needed. If you think you
and your partner may have significant differences of opinion regarding the
agency’s value, have it valued before any animosity develops. If you
think you may get a divorce in the next few years (I know people are not
supposed to think this way, but most people can see a divorce coming years
in advance), get it valued now to avoid disputes down the road. And most of
all, approach the indication of value as an opportunity to improve.
Everyone, everywhere can always improve something and the result may be a
much higher price tag for your agency down the road.
[Back to Top]
Keep Your Focus!
Company X and Company Y decided to have a canoe race on the Missouri
River. Both teams practiced long and hard to reach their peak
performance before the race. On the big day, Company Y won by a mile.
Both teams agreed upon a rematch for the following year.
Company X, very discouraged and depressed, decided to investigate the
reason for the crushing defeat. A team made up of senior management was
formed to investigate and recommend appropriate action. After lengthy
research, their conclusion was to acquire another canoe team.
After a few weeks of practice with the acquired team, the top rowers
quit. This new development made Company X’s management nervous, so they
immediately acquired two more rowing teams.
Several months of practice passed, the team’s speed progressively
slowed, and more rowers quit. Feeling great pressure to avoid defeat
again, Company X decided to devote greater resources to the cause. Their
first steps was to totally reorganized the structure of the canoe team
to include more steering management. They also set up a tactical team
devoted to acquiring more canoe teams to corner the market on good
rowers.
The next year, Company Y won by two miles.
Humiliated, Company X laid off their entire canoe team and
canceled all capital investments for new equipment. The money saved was
distributed to the Senior Executives as bonuses and the next year's
racing team was outsourced to India.
In our insurance industry, a whole lot of agents and brokers are losing
focus just like Company X. For evidence, just look at the chart below
showing the eight publicly traded brokers’ average growth results. As you
can see, their reported growth is excellent. Even their reported organic
growth is not too bad, but the brokers’ reported organic growth includes
items such as interest income, inter-party transactions and other items not
related actually selling. When these items are excluded and the impact of
premium inflation is removed, their real organic growth attributable to
actually selling is abysmal.
|
|
Broker Average (un-weighted) |
|
2005 |
2006 |
|
Reported Growth |
10.92% |
9.25% |
|
Reported Organic Growth |
1.50% |
4.05% |
|
Less Non-Retail Brokerage Sales Items included
in Reported Organic Growth (such as currency rate exchange
gains, interest income, inter- party transactions, and growth
not related to retail brokerage operations) |
1.42% |
2.46% |
|
Real Organic Growth |
0.08% |
1.59% |
|
Less Industry NPW Growth |
0.18% |
3.10% |
|
Real Organic Growth Attributable to Actual
Selling Activities |
-0.10% |
-1.51% |
These brokers are actually going backwards! They buy agency after agency
so their reported growth rates look impressive. In reality though, much of
the business they are buying is going right out the back door. To keep their
growth up, they buy more agencies. You know the slogan, "If you can’t beat
‘em, buy ‘em!" This is not just a big broker problem either. I regularly see
agents doing the same thing.
Many CEOs of these brokerages see this as their winning strategy. To
quote one broker CEO, "…there’s still 13,000 brokers out there with revenues
between $500,000 and $10 million and accounting for over $20 billion in
total annual revenue. So the punch line is that we still see acquisition
success as very much a core competency of our organization." This CEO is not
alone. This same strategy appears to be shared by at least 30 major brokers
and banks. A back of the envelope calculation shows they expect and possibly
need to purchase at least $500,000,000 in revenues each year for the next
several years.
How can acquisitions be a core competency when collectively every agency
purchased has fewer sales now than the day they were bought? Individual
executives can make out quite well in such circumstances, but companies,
employees (witness two brokers recently announcing layoffs of hundreds of
employees), carriers, and customers are often another story. At some point,
the failure to increase sales will no longer be able to be covered up by
buying more agencies.
Like the parable above in which company Y focused on building a high
quality team, no company succeeds whose focus is acquiring wasting assets,
especially wasting assets that were not wasting before they were acquired.
Companies do not succeed if their goal is to gain market share by doing
serial acquisitions rather than focusing on quality and real profits.
A recent Wharton School study ("The ‘Myth of Market Share’: Can
Focusing Too Much on the Competition Harm Profitability?") concluded
that focusing on market share is counterproductive. The Wharton study found
that in studies from 1938 to 1997, market share goals "negatively correlated
with ROI…" A Knowledge@Wharton interview (January 24, 2007) with the author
of that study noted that Toyota has always been "nonchalant" about gaining
market share and is instead more focused on building good cars and solid
profits. A review of Toyota’s results compared to American auto
manufacturer’s clearly confirms the success of Toyota’s strategy.
A sales organization focused on acquisitions makes little sense because
it dilutes the sales culture (which may be one reason why these brokers have
such poor organic growth). Such a focus is similar to Andrew Fastow’s,
Enron’s CFO’s, goal. He wanted to make the finance department a profit
center. Acquisitions are financial in nature, especially if the acquisitions
are of wasting assets as appears to be the case with most of the brokers’
acquisitions. Furthermore, it appears most of the profit being made is
through stock price arbitrage whereby the broker is buying agencies for
significant prices, but at prices less than the stock market will pay for
the broker’s stock. In other words, they are buying agencies and effectively
reselling them for more money on the stock market. This makes the finance
department a de facto profit center and potentially the most important part
of the organization, not sales or operations. This is what Enron did. Their
finance department drove the company, albeit not always honestly, which is a
real risk when finance is a profit center.
These brokers’ actions provide a tremendous opportunity for smart
agents and brokers to build better agencies, even in a soft market. The
serial acquirers are clearly driving customers to shop their accounts.
Meanwhile, the most successful agencies are able to pick up and profit from
those fleeing accounts because they know that to make more profitable sales,
they must build better services and products.
What is your agency’s core competency? What is your agency’s culture? Do
you have a lot of people rowing or a lot of people steering? Are your people
selling or making financial calculations?
[Back to Top]
NOTE: The information provided in this newsletter is intended for educational and
informational purposes only and it represents only the views of the authors. It is
not a recommendation that a particular course of action be followed. Burand &
Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or
damage which may result from the use of any of this information.
Burand & Associates, LLC is an advocate of agencies which
constructively manage and improve their contingency contracts by learning how to negotiate
and use their contingency contracts more effectively.
We maintain that agents can achieve considerably better results without ever taking actions that are detrimental or
disadvantageous to the insureds. We have never
and would not ever recommend an agent or agency implement a policy or otherwise advocate
increasing its contingency income ahead of the insureds’ interests.
A complete understanding of the subjects covered in this newsletter
may require broader and additional knowledge beyond the information presented. None of the materials in this newsletter should be
construed as offering legal advice, and the specific advice of legal counsel is
recommended before acting on any matter discussed in this newsletter. Regulated individuals/entities should also ensure
that they comply with all applicable laws, rules, and regulations.
If you wish to be removed from this mailing, please e-mail AgencyAdviser@burand-associates.com.
Copyright 2008, Chris Burand |
