A January 29, 2009 article in NU Online noted that Allstate was cutting 1,000 jobs from its life unit over the next two years. This is just a little more than two years after a page one article in the Wall Street Journal (November 24, 2006) announced Allstate’s great new sales strategy: life insurance.

As I noted in an article I previously wrote regarding Allstate’s life insurance strategy, the odds of success were minimal because P&C producers are rarely good life insurance salespeople and Allstate’s management’s inability to accept this reality and the need to manage life investments different doomed the effort. Allstate’s mistake provides a very big lesson because they violated fundamental strategic planning rules right from the beginning. This lesson can be applied to carrier stability and agency success.

Carrier Stability
The probability of success is limited when carriers expand beyond their core competency. This includes endeavors such as line expansion, becoming an agency themselves while remaining a carrier too (which some are contemplating and others have already quietly implemented), huge market share expansion, and so forth. Most such endeavors ultimately fail because they lie outside the company’s core competency. The odds of success for all companies decline significantly the further the endeavor is away from the company’s core competency. (See Chris Zook’s books Profit from the Core and Beyond the Core for an excellent analysis of this issue.)

Life insurance may not seem far from P&C, but it is another world and people with significant experience working with both recognize the gulf between the two. How many truly competent producers have you ever met that can sell P&C and life insurance with significant success? By "significant" I mean the producer has at least $500,000 in P&C commissions and $200,000 in life commissions annually, maybe not the same year, but the producer can regularly sell that much in either line. Such people are more rare than diamonds and this rarity is what makes it so easy to predict that a P&C carrier’s effort at significant organic life sales will meet limited success. And buying a life insurance company or a life carrier buying a P&C carrier does not count, because anyone with enough cash or access to enough credit, can buy anything. Shopping in general is not a skill. Shopping well is.

How many high quality P&C carriers also have high quality life products? Not many. Some companies will point to how big their sales in both categories are, but that particular metric is meaningless. The key metric for measuring true success is whether the company is organically growing both their P&C premiums and life premiums at a pace that exceeds industry average without underpricing either product, as measured by their combined and operating ratios, while reserving properly. In other words, are both divisions truly winners?

Just think about how a number of life operations have severely injured or placed at risk various carriers’ P&C operations the last few years. I do not believe the problem is life insurance per se, but the issue is life insurance is outside these carriers’ core competency.

The measure of profitable growth should also consider leverage. Credit has been so cheap for so long, and by many measures remains cheap today, that many carriers’ profits and profit growth owe much to the fact that they borrowed huge sums and leveraged themselves to make their operations seem much more profitable than they really were. One form of cheap leverage is insurance premiums, so the possibility distinctly exists that some diversification efforts had little to do with entering new product lines and everything to do with accessing cheap capital.

A similar diversion that has led to disaster for a few small P&C carriers is their effort to write surety business. One such carrier recently had the distinction of being the only surety carrier out of the top 100 with a loss ratio over 100% in that line, where the average is usually around 30%. Surety is clearly outside the core competency of almost all small P&C carriers unless they have a long history of such a specialty. Staying near one’s core competency is critical for success.

Agency Success
These lessons are 100% applicable to agencies. I see many commercial agencies wishing they had a big personal lines book right now, which I completely understand. But to start doing personal lines from virtual scratch does not have a high probability of success because personal lines requires a different core competency than commercial lines. The distance between personal lines and commercial lines is not so far that an agency cannot achieve success if it exerts significant effort, expense, and considerable leadership. Success often alludes commercial agencies though because the different core competencies are usually ignored or misunderstood, which then leads to the mistaken belief that growing personal lines does not require a huge effort and significant expense. This is why so many personal lines departments in commercial agencies are the disregarded stepchildren.

The same is even more true with benefits departments. Too many P&C agency owners believe benefit sales are easy, require little effort, and no special skills or services. They are correct if all they ever hope to achieve is $200,000 - $400,000 in benefit sales. To do better requires producers that specialize and are experts in benefits. Benefit specific value-added services are also required because every agency is selling the same health insurance policy for the same price, so the agency has to differentiate itself somehow.

MMC recently announced an endeavor to expand beyond their core competency. Their plans to expand into much smaller retail commercial accounts is a huge departure. Since they have announced they will initiate this strategy through huge acquisitions, their success should be judged on their true organic growth of the agencies they purchase. The normal measure offered in press releases is that commissions grew by some huge percentage and then in small print they add, "due to x number of acquisitions." The business press does a huge disservice to their readers by inadequately distinguishing organic growth from total growth. Growth due to acquisitions should be totally ignored because anyone can buy business.

The real measure will be whether they grow those acquired books or if the books become wasting assets, as is the case for many consolidators. It will be very interesting to watch MMC and see if they can succeed outside their core competency when the vast majority of such efforts fail.

The key for greater success is to focus on one’s core competency. What is your agency’s core competency? What is your agency’s core market and core client type? What is your agency doing outside its core? Is it truly successful?

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Searchers

I recently watched a great old John Wayne movie, The Searchers. John Wayne, in his character’s 10-year quest to find his niece, had a clear goal and he methodically achieved that goal. The results made for a great movie.

I have known many agency owners that were also searchers, but their stories are not tales of success. Not one of their agencies ever succeeded without massive changes, usually including the addition of new partners. The agencies did not totally fail, but they became stagnant. The agency owners were always trying something new. They were always going to institute a new marketing program, hire a bright new producer, start a target market, or do a merger. Most of the time, they would get fairly far down the road before something would inevitably go wrong.

I remember one that hired a number of good producers and none worked out because all of them saw the owner was inadequately focused and that lack of focus was going to inhibit their success. They saw the owner jumping around from one idea to another all the time. I remember one owner that spent as much time watching the stock tickers every day as he did managing his agency. Managing an agency is a full time job, not a part time job.

Why is being a searcher so poisonous to being a successful agency owner? To be successful in any endeavor, one must be focused and business owners who are searchers are not focused. They are always searching everywhere and anywhere, hoping for salvation to find them. They appear to be searching for a solution, but in reality, they’re hoping to be found.

John Wayne, in his role as a searcher, was very methodical, like a search party. In a search party, each searcher searches a path until they reach a logical end and then begin again if necessary. Agency owners that are searchers rarely search more than a few hundred yards beyond their home turf. They are never going to find anything that close to home.

How do agency owners find focus? The key is to change the goal to enjoying the search. Do not search with the secret hope of being found. Choose to enjoy the search, path by path, to each path’s logical end. Focus on only one path at a time. To find a path, write down all your goals. There is no need to limit them to your top three goals. Write them all down. Then prioritize them, which is probably the most difficult step. If you can’t prioritize them easily because you fear you won’t get to some of them quickly enough, remember, the goal is to enjoy the search, not to be found.

Once you have made your first choice, get to work outlining what resources you need to reach the end of your first journey and then begin mapping your trail. Do not worry about the other items, just focus on this one path. Take each step down that trail without worrying about what you will find. DO NOT get side-tracked. Stick to the trail. DO NOT worry about what you will find. DO NOT worry whether you will be found. My experience has been that agency owners and people have always found what they were looking for as soon as they quit hoping to be found. Be a kid again. Just enjoy the search.

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Lost Opportunities

Putting one’s head in the sand is a real, and sometimes very tempting, strategy. It’s even an effective strategy, if a person’s goal is to slowly die (there’s not a lot of air to breathe down there). However, if the goal is to progress and improve, it is definitely a strategy to avoid. Consider these examples:

Sales Strategies
A few months ago, I saw the best seminar on selling workers’ compensation that I have ever seen. After the seminar, one of the agents in the audience told me he thought it was worthless. Frankly speaking, there is no way that presentation was worthless to anyone wanting to learn to sell Comp better. This agent said he didn’t need to change the way he did things. He found it much easier and safer to stick to his old ways. He was criticizing the presentation because he did not want to face up to the fact that his own approach was clearly out-of-date and was not working sufficiently to keep his clients, much less get new clients.

Company Stability
I recently gave a speech regarding insurance company stability. During the speech, I discussed how A.M. Best’s rating is a solvency rating, not a stability rating and I explained why agents should do business with companies that are very solvent and very stable, not just one or the other.

For example, several companies in the past few months have had their solvency ratings affirmed or only slightly downgraded while simultaneously, their credit ratings have taken significant hits. A solvency rating means that in the belief of the rating agency, a company has the ability to pay claims. It does not mean the company can pay their creditors or agents (hence the downgrades to their credit ratings), or that service is not going to deteriorate (if a company has difficulty paying creditors, one would think that customer service might suffer too).

During a break in my presentation, a visibly upset insurance company executive approached me. His company did not have a credit rating and it did not have a strong A.M. Best Rating, so he took exception to my message that agencies should only do business with companies that are highly solvent and highly stable. His company could not prove either and yet, he believed it was very stable because it had been around forever. He felt I was misleading the audience by insisting on companies meeting both criteria. So I asked which he preferred that I leave out, that companies only need to be stable or only need to be solvent?

His company’s problem is significant but rather than trying to find a workable solution, he wanted to stick his head, and my head, into the sand. The solution is not easy, but running from the problem and hoping agents will stay ignorant of that problem is likely to snowball into a much larger problem.

The Facts are the Facts
Soon after returning from that presentation, an agent argued with me that 100 less 1,000 is not -900. I have been yelled at, cursed at and even fired for arguing that simple math is not open to interpretation. Most of these situations arise because an agency’s accounting is either so bad that no one can honestly conclude what the situation is without a forensic audit or the agency has spent money that does not belong to it (trust money) and will not own up to what they have done.

Even if an agency owner does not know–or does not want to know–their own financial condition, it is not okay to make up the numbers. Some agency owners simply refuse to even read their own financial statements so they do not have to accept reality and then they make up what they want reality to be. This may sound unbelievable to many readers, but in desperate situations, people will do desperate things including burying their head as deep as possible in sand or whatever else is available.

Denial
The issue at the root of each of these situations is denial. Denial is a very common reaction that everyone experiences at some point in their lives. When a person is confronted with such significant facts that they are forced into a fight or flight emotional response, denial is often the result. Denial is a handy reaction, but it isn’t a cure.

When things go wrong in agencies, the faster agency owners can move from wanting to bury their head to accepting their problem for what it is, the more likely the problem can be successfully resolved. The agency owner must take the critical step of seeing the situation for what it is because without admitting the truth, nothing else is possible. Getting people to move forward in these situations is never easy and mollycoddling is never helpful. Being factual but polite sometimes serves the shock necessary to awaken people to the situation at hand. The shock is most often painful, but necessary and brings to mind Shakespeare’s famous line, "I must be cruel, only to be kind: Thus bad begins, and worse remains behind." (Hamlet. Act iii. Sc. 4.)

Putting one’s head in the sand may be the easiest strategy and it may sometimes seem the safest, but what is the true cost of the ease and safety? Suffocation? What opportunities are lost while hiding? The next time you’re faced with a challenge or a change, remember to consider all the opportunities that might be lost while hiding in the sand.

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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. 

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Copyright 1995 - 2009, Chris Burand