May 2010
Volume 15, Number 3

The National Alliance Producer School

AUSTIN, TX, May 14, 2010 -- On October 10-22, 2010, in Fort Worth, Texas, The National Alliance for Insurance Education & Research will conduct its intensive, two week Producer School especially designed for training new producers and getting them up to speed and productive in record time. The Producer School delivers a rare combination of technical expertise and sales know-how.

The $2,500 fee includes two weeks of school for the producer, sales manager training, two CISR online courses, and 12 follow-up webcasts. Participants may choose between two paths depending on their interests and particular book of business -- either small commercial and personal lines or a strictly commercial focus. Participants of both tracks will come together for select sessions. One of the most useful activities at Producer School is the construction of a Game Book designed to facilitate turning the learning into earning after the School is complete.

All instructors are top industry experts and active, practicing agents who have coached producers to profitability for 10+ years. Students will learn important technical information (with the newest ISO forms used by most carriers). Scholarships are available.

For further information and an application, contact The National Alliance, P.O. Box 27027, Austin, Texas 78755-2027; 800-633-2165; website: www.TheNationalAlliance.com.

The National Alliance, beginning in 1969 with the Certified Insurance Counselors (CIC) Program, has founded four of the most attended designation programs in the country, including Certified Risk Managers (CRM), Certified Insurance Service Representatives (CISR) and Certified School Risk Managers (CSRM). Each of these designations are comprised of five parts, with five examinations leading to the successful completion of the program. Every designee further commits to update their education annually.

Omni-Carriers

What would happen if insurance carriers owned all the agencies?

No, seriously! What would happen if insurance carriers began buying a lot of agencies? This is not a hypothetical question. This has happened to such a large extent in Canada that some there are questioning whether agencies owned by insurance companies should still be called independent. It is happening in the U.S. too. Some insurance carriers have directly and indirectly purchased dozens of agencies. The competition often does not even know what's happening because the company has an agency front the acquisitions. As a result, other carriers actually end up paying their competition commissions and contingencies.

What happens when the seemingly small town, locally owned agency is really financed by a large company with the cash to advertise, the cash to over pay producers (companies continually under price their accounts so why wouldn't they overpay producers?), the ability to steer the best accounts to their own companies, and the ability to take your accounts if you move your accounts from them to another carrier? I know, you own your own accounts, but more than one carrier has found a way to contact your clients. Just look at Chartis's actions in Texas last year. Chartis cancelled many agencies' contracts and then notified all those agencies' clients that they could keep their insurance with Chartis simply by calling an agency that still had a Chartis contract. The notification of course included a list of those agencies the clients should contact. Most readers know of other carriers that keep lists of accounts they lose and share them with other agencies.

Also consider what happens when a particularly nefarious company lets its non-owned agencies spend their money to develop accounts and then through preferred pricing, contract cancellations, or other means moves those accounts to their own agencies. Of course, companies that own their own agencies would never play favorites.

Many agents have asked why companies would even want to own agencies. One reason is they want better control of the accounts. They cannot figure out how to offer better service, better but responsible pricing, or better products. However, in this time of huge company profits, they have the money to buy retention. Another reason is company management likes to do acquisitions. They saw the banks buy lots of agencies so why shouldn't they? There's not a lot more to the story for some executives.

Others have decided that agencies are more profitable than companies and/or they can save a lot of money by owning agencies. Agencies did have much higher than normal profit margins from 2004 to 2008, as did almost every business including insurance companies. Today though, companies are far more profitable than agencies, especially relative to historical norms (assuming they not cheating on reserves). Contingencies, however, are still significant so if a company owns an agency to which it is paying large contingencies, it effectively gets to keep those contingencies. For agencies with big contingencies, this cuts four to seven percentage points off the carrier's expense ratio in those agencies (carriers budget 1.5% to 2.5% for contingencies, so by keeping the biggest contingencies for themselves they decrease their overall expense).

On a financial basis, is this extra savings worth the investment? The retention gain will be temporary because agencies do not move business from one carrier to another for fun. They move the business for competitive reasons. So if a company owns an agency and tries to use that ownership to keep accounts from moving to other carriers within their own agency, another agency is going to eventually take the account unless the carrier finally offers a reason for the account to stay. For determining the value of the investment then, we'll assume retention is a wash.

Investment yields are currently low, so investing in insurance agencies may generate a greater return. For example, let's assume the agency being purchased has a 25% profit margin including contingencies (which should not be double counted as an expense savings since the carrier will get the benefit of those contingencies in their earnings--but in practice, some carriers are likely double counting this factor). Let's assume the price is 1.6 times revenue with 20% down, a five-year loan, 6% interest, an asset acquisition, 0% growth, and a cost of capital of 14%. The net cash flow on this investment is likely negative. The overall investment may still be good if the agency does not waste away too much (which happens frequently). After all, after five years there will still hopefully be an agency generating significant cash.

But if the carrier does not worry about cash flow, which is the case with many buyers, earnings (which are often extremely different from net cash flow) may be immediately significant. The yield on this investment could possibly be better than other investments, depending on how the investment is measured, and whoever does the deal will almost inevitably choose the most favorable metric.

But these assumptions significantly underestimate the risk. As two great books, "Profit from the Core" and "Beyond the Core" by Chris Zook, clearly prove, the farther from its core a business gets, the greater the failure rate. Just one ring beyond the core results in growth initiatives that are considered successful only 27% of the time. Going from being an insurance company to an insurance agency is arguably more than one ring. The odds of success decrease precipitously as a business moves further from that first ring. So the discount rate or risk rate should be much greater than the cost of capital or even the risk rate specific to the agency being purchased. Almost no acquirer ever makes this adjustment because they don't know about it, they don't think about it, or more likely, they are not using their own money. One very recent scandal involving a carrier that had helped an agency purchase a lot of agencies shows just how much more risk is involved.

Let's be generous though and assume a 50% success rate. Even at 50%, this jacks the risk rate from 14% to 21%. This makes the deal very poor, but a firm can still use the earnings to show it was a good deal--until they have to take an impairment charge, but they would probably sell the firm first. So when you see large firms/banks selling agencies, there is a chance they are doing so to avoid or minimize an impairment charge.

But what happens to the other agents? Are they pressured to sell? Are their commissions cut? It is the same situation as when carriers build alternative distribution channels. All these methods are methods for disintermediating the agency and the more agencies collectively commoditize the sale, especially through web portals, the easier they are making it for carriers to disintermediate them. Once a carrier gains enough distributive force, they absolutely can and likely will pressure agents to sell or take significant commission cuts. Agents that survive absolutely will have to change their business model and/or operate at 25% to 50% greater efficiency. As Chris Zook's books mentioned above clearly prove too, greater efficiency is essential to survival.

As these books and many studies show, the more focused a business is, the greater its success. Focused businesses achieve significantly more profitable growth, not just profits and not just growth, but more profitable growth than diversified businesses that dabble all over the place. An insurance company that focuses hard on being the best insurance company (rather than an investment firm or an agency) by providing the best service, products, and rates and then lets its good agents do the rest, creates a partnership that is unparalled.

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Tough Times lead to Bad Press

The publicity debacle committed by several health insurers when they significantly raised rates immediately following the Democrats' loss of a super majority in the Senate probably qualifies as the biggest black eye for the industry this young year. But, we have many others vying for similar recognition.

In one week, the last week of March 2010, I counted at least five agencies and carriers that lost their licenses, were arrested or indicted for fraud, spent their clients' money illegally, faked claims, and/or operated without appropriate licenses. I don't think this particular week stands out. Every week seems to bring about the same number of news stories, and I am sure many more do not make the news. These people make my stomach turn because they make life so much more difficult for honest agents and brokers.

The industry's reputation is being further damaged by the carriers who are buying business. Some have even admitted, quietly, they no longer care about loss ratios--"just give me the business and we'll worry about the loss ratios later." What do you think the headlines will say when the hard market finally hits and rates go up 25%? The federal government has already taken over benefits insurance to some extent. Is the P&C market setting itself up for the same failure?

We can't control what crooked agents do and we clearly can't convince carriers to charge reasonable rates. But we can control our own world and there is a lot we can do to insulate our agencies from the impending public relations fiasco. I believe we can even use the situation to make sales now. Consider these ideas:

• The Wisconsin Insurance Department sent out a memo to the industry a year or so ago encouraging us all to do a better job self-regulating by reporting agencies that file false certificates of insurance. I applaud their action and encourage agents everywhere to do so. Honest agents know better than anyone else which agencies file incorrect certificates.
• Advertise you are properly licensed. I am not sure agents should take this for granted today or allow the public to take it for granted.
• Why not advertise you are honest, you do not spend your clients' money (and you are in trust, of course, or this would be false advertising), you are not committing fraud, you are not forging documents, and so forth. I know this has a negative tone because it suggests not all agents are honest, but that is the truth. Facts are neutral. If you keep one person from buying insurance from a dishonest agent, you will have done a great service.
• Even dishonest entities write some good accounts, so make a list of the best prospects that are currently written by agents you suspect are not totally honest. Then target those prospects. When the situation finally reveals itself, you will already have a warm lead.
• Begin preparing your clients today for rate increases. I'm not sure when rates will begin rising. But I do know that agents who prepare their clients for rate increases far enough in advance have less disruption when rates finally do increase, especially if the market turns particularly hard.

Set yourself apart from the rest of the industry as an honest, knowledgeable, prepared, and professional agency. The tough economy is making life difficult for professional agents, but times will change. Stick to your professionalism and the benefits will be great.

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Death of an Agency Owner

Agency disaster planning needs to cover more than just natural disasters like hurricanes, floods, and tornadoes. An act of terrorism, chemical spill, identity theft, violence in the workplace, and sudden death of an agency owner can be as devastating as any natural disaster. The following story shows one agency that was not fully prepared for the disaster that befell them, but to their credit, they persevered under trying circumstances. This story is intended to underscore the very real need for agencies of all sizes and in all locations to formulate a disaster plan.

Death of an Agency Owner
AS TOLD BY MIKE GRUSHON, CIC, CRM
of Thomas & Grushon, Bellbrook, Ohio
(Reprinted with permission from The National Alliances' Resources, Summer 2009, pp. 32-34.)

Mike Grushon vividly remembers the day it happened. It was Sept. 1, 1982, and he'd been working at his father's insurance agency in Bellbrook, Ohio, for about two years. Still very much learning the ropes at the small agency outside Dayton, Grushon thought nothing of it when his father's 57-year-old partner felt ill that day.

"Mr. Thomas said something he ate at lunch upset his stomach," said Grushon. "He went home and felt better that night. He and his wife even went out to eat with my parents, something they did every night."

Although in seemingly good health, the agency partner died in his sleep. It was a monumental loss for the agency from both a business and a personal perspective. For decades, Charles Thomas and Jim Grushon had been the best of friends. They'd co-founded the agency in 1960, at first running the firm in the evenings when they got home from their day jobs and eventually becoming successful enough to make the insurance firm a full-time enterprise.

The two men bought homes next to each other. The families took joint vacations, and Grushon and Thomas played golf together almost every day during the summer. "The Thomases didn't have any children and they treated my siblings and me like their own," said Mike Grushon. "I can't think of a birthday or a Christmas where they weren't there for the celebration. I still eat lunch with Mrs. Thomas a few times a month."

Grushon's father was devastated by the loss of his close friend. "My father called me about 7:30 in the morning and told me what had happened," said Mike Grushon. "I had to go in and tell the employees (who thought it was going to be another normal day) that Mr. Thomas had died."

At the time of Thomas's death, the agency had no written buy/sell agreement, no contingency plan in force, not even any kind of written agency procedures. "These were old-time handshake people," said Grushon. "He did certain things in the management of the agency, and my dad did certain things, and to this day there are some things we have never found. Mr. Thomas left with a stack of work on his desk. The next day it was all mine and I knew nothing. When this happened, we did not have any idea of the things Mr. Thomas did at the office. There were things he did that we didn't know he did, and there were things that we knew he did but we didn't know how he did them."

The task of telling the employees was even more difficult because the small staff at the Ohio firm was very much a part of the family, too.

"My parents and their partners were all very friendly, personable people," explained Grushon. "One staff member my father had hired out of high school--she and my sister had roomed together before they each got married. That lady is 55 years old and still works for us. My sister eventually joined our firm, too. The staff was close to Mr. Thomas and had worked there for many years."

Although the agency opened the morning of Mr. Thomas's death, no one was able to do any work. "We had a steady train of people coming in, not to do business, but to express their condolences as the word spread through the community."

All those who knew Thomas were shocked that a man so physically active and vibrant could have died so suddenly. "If you'd asked us in the 1970s who was going to have to deal with whose
widow, everybody would have said Jim Grushon was a heart attack waiting to happen, not Mr. Thomas. The idea that a 50-something-year-old man, active and in the midst of good health, could be struck down was something we wouldn't have believed."

When the tragedy hit the firm, Mike Grushon was in his 30s and had served as a minister for many years in another city. Two years prior, his father had encouraged him to return to Bellbrook and join the family business. "I felt a responsibility to my father," Grushon said. "He had raised me and helped put me through school. He said he could use my help. It felt natural to come back. I immediately associated with a small church. I thought that this would make it possible for them to retire. They'd bought a place in Florida."

The two agency partners had brought Mike into the agency the old-fashioned way. "I cleaned out files, answered phones, and did some customer service work. I had made a few life insurance sales, but I was still very inexperienced." Grushon said his father had begun to take him on client visits and let him fill out the papers on renewal applications. "That was back in the days of agency bill. I was not privy to what arrangements people had, how they kept the accounts current paid up. I just got a paycheck."

Mike's younger brother, Jim Jr., who was in his 20s, had been working at the agency for three years and had begun to produce his own business. "We had two offices, and they had put him in one of the offices with a small staff," Mike said. "He had been managing the daily operations for more than a year."

In the days following the death, Jim Jr. continued running the secondary office, and Mike took over the main office, a situation he and his brother thought would be temporary. Only it wasn't. "My father grieved so much that he didn't come into the office for almost a year," said Grushon. "He would come in and try, but with Mr. Thomas's office sitting empty, he had no interest. He remained the owner, but his friend's death changed things for him. My dad disengaged from almost everything."

Mike Grushon and his brother were suddenly in charge of the agency's two locations. While their father would continue as the business's owner and make major decisions, the day-to-day responsibility fell on the brothers.

"I was the least experienced member of the agency and overnight I went from being a co-worker to being in charge," said Grushon.

Fortunately, the young Grushons weren't afraid to ask for help and there were seasoned industry people ready to act as mentors. "Our two major carriers then and now are Grange and Auto Owners," said Grushon. "Both had field men who made a point to come into our agency more frequently. They knew I had not done much commercial work and had renewals coming up. I didn't even know all the terminology. They went over the paperwork with me, and they'd say, 'We have a garage risk we need to go out to. Here are the questions we need to ask and here's why.' They had a vested interest in our agency succeeding, and they made their people more available."

The agency also received help from other agents. Grushon had recently attended his first CIC Institute and met George Haenszel of the Ohio Professional Insurance Agents. "I called George and told him the situation. He said to come to some functions and he'd introduce us to some experienced agents who'd help us with the problems we had. He also told us to get involved in the CIC Program because they would tell us about agency management and the coverages we needed to know how to deal with."

At the time of Thomas's death, the agency had no written buy/sell agreement, no contingency plan in force, not even any kind of written agency procedures.

One of the agents who helped the Grushon brothers was Marv Pearce, Sr., a past president of PIA's national organization. Other Ohio agents closer in age to the Grushons also mentored them. "Rick Myers was in a family agency like ours but had 10 years of experience. These guys stepped in and told us you need to know about this, you need to know about that. One of the first things my brother and I did was buy life insurance for each other and draw up written cross buy/sell agreements even though it wasn't the most affordable thing to do when we were trying to save the business."

Besides trying to keep the agency afloat, the Grushon family had to find a way to transfer the deceased partner's financial interest in the firm to the man's widow. It was hard to determine a fair price, particularly when the agency began losing some clients who'd been very loyal to Thomas.

"Back then one of Mr. Thomas's customers would have never let me know about a policy change like a new car," said Grushon. "They weren't used to dealing with CSRs. They would have insisted on talking to him. We had to do that transfer of loyalty, and people had a confidence level in him because he was older. The world was different then. Customers often had their agent's home phone numbers, and agents would see them in a restaurant and write changes on a napkin. I had more than one napkin handed to me with policy information on it."

After his partner's death, Jim Grushon granted the widow a continuation of her husband's salary for one year to give her time to get past her immediate financial concerns. A formal buyout was negotiated 10 months after the death, and the papers were signed and finalized about a year after that. With no documents or agreements to guide them, setting a value on the agency was a difficult process that strained the relationship between the close-knit parties, particularly once other people began to get involved.

An additional hurdle was funding the buyout. "There was no buy/sell insurance," said Grushon. "We paid Mrs. Thomas out over 15 years and it came out of the cash flow of the agency. It really restricted what we could do."

The agency survived through the brothers' hard work and eventually prospered. Its annual revenue is now just under $1 million, and nine employees work there on either a part-time or full-time basis.

Thirty years later, Mike Grushon says the experience of dealing with the agency partner's death was much more difficult than any natural catastrophe the agency has faced during its many years in business.

"Of all the things we've ever had to deal with, that was the most traumatic and it has probably been the motivation for why we have a business plan and why we do what we do," he said. "And that type of thing we do address. It was not a natural disaster but very much a business disaster. The two tornadoes and the catastrophic hailstorm that hit our area all caused issues, but they didn't cause near the number of challenges as that unplanned death. It was a major accomplishment for my brother and me to manage that transition and grow that agency in the midst of all of that."

Reprinted with permission of The National Alliance for Insurance Education & Research.
Source: The National Alliances' Resources, Summer 2009, pp. 32-34.

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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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