PLEASE NOTE: 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.

CERTIFIED RISK MANAGERS
INTERNATIONAL ONLINE CLASSROOM

AUSTIN, TX  (March 31, 2011) -- The National Alliance for Insurance Education & Research announced today that its first Certified Risk Managers International Online Classroom course will be open to all insurance and risk management professionals.

The initial offering will be Principles of Risk Management on August 22-October 2, 2011. This online classroom is a unique 5-week, blended learning course featuring a weekly webinar, readings, quizzes, and "discussion postings." The National Alliance is a pioneer and an early adopter of the unique distance learning format of providing blended learning for risk management. Designation candidates will take a proctored final exam at the end of the course. The course is approved in most states for CE credit and update requirements for National Alliance designations can be met by attending.

Control of Risk will be launched online on November 7-December 11, and the three remaining CRM courses will be available in 2012. Participants will experience the same high quality and standards as the Certified Risk Managers classroom courses - including the expert faculty - with the convenience of the web!

For more information, visit www.TheNationalAlliance.com.

CSR Profile--Reference Book Now in 4th Edition

AUSTIN, TX (May 2, 2011) -- The National Alliance Research Academy has published its 4th Edition of CSR Profile, completing its trilogy profile series for 2011. Also included in the series are Growth & Performance Standards (GPS), 2010-2011, and Producer Profile: Compensation, Production, and Responsibilities.

CSR Profile is the industry's preeminent source for current information on insurance customer service representatives and other service positions. A survey of over 1900 CSRs, account managers and account executives from agencies across the country reveals the latest findings and trends. Here is just a sampling:

•  For commercial lines service positions, the most frequently used job title is "account manager", with 44% of the survey participants claiming the title. Only 16% classify themselves as customer service representatives or CSRs.
• 69% of commercial lines CSRs started working in the insurance industry by chance.
• 48% of commercial lines CSRs chose "dealing with stress" as the business skill they needed the most improvement with.
• The most frustrating aspects of CSRs' jobs included: time management (33%), dealing with difficult clients (30%), and keeping up with policy forms and changes (30%).
• Average annual total compensation (including salary, bonus, and commission) is $53,600 for commercial lines CSRs.
• The average annual commercial lines servicing volume is $2,917,000 (in premium dollars), whereas the median value is $1,950,000.

CSR Profile is not just for account managers; it is an independent reference for agency owners that will be a useful decision making tool for months to come. Copies of CSR Profile may be ordered through www.TheNationalAlliance.com at The Academy Bookstore.

The Academy is a non-profit organization funded entirely through publication sales and affiliation dues, and serves as the research and development arm of The National Alliance for Insurance Education & Research. Research grants are made possible through the annual dues of National Alliance members and The Academy's Research Associates. For further information, contact The National Alliance, P.O. Box 27027, Austin, Texas 78755-2027; 800-633-2165; website: www.TheNationalAlliance.com

The Double-Edged Sword

Is it possible for an insurance company to be too good to its agents?

Consider, for example, a company that is consistently so competitive that each of its agencies grows materially every year (as long as the agency makes at least a decent effort). The carrier's agencies really do not have to build their own competitive advantages. They do not have to develop quality producers. They do not have to work that hard to build their books of business. Of course, to them it will seem like they are working hard, but relative to how hard other agencies are working, they have life easy.

I've probably painted a panacea for many readers. But what happens when that company quits being the cheapest on a consistent basis? What happens to the agencies? They could be in a situation epitomized by the biblical saying, "Give a man a fish and feed him for the day. Teach a man to fish and feed him for a lifetime." In other words, has the company been giving its agencies a fish a day so that the agencies have never learned to feed themselves? They think they know how to fish, but what happens if they lose their number one carrier that has always offered significant competitive advantages? Does the agency really know how to fish?

Similarly, I've met many producers who thought they were great producers because they had $1,000,000 commission books. But they had $1,000,000 books mostly because their agency had an exclusive program that was incredibly competitively priced. Until they had to generate $1,000,000 commission on their own, without a huge company competitive advantage, they had no clue how much harder it is to build a $1,000,000 book of general business. They did not really know how to fish. They did not really know how to sell.

A large number of agencies are now realizing they don't know how to sell. For decades in some cases, they have represented companies that provided huge competitive advantages, but the market is so soft today, those advantages have eroded. Those are the smart agencies. Many other agencies still won't admit they don't know how to sell. Instead, their perspective is they just need a carrier to be competitive like ABC Company was a few years ago. As long as they stay in denial, success will avoid them.

What happens when those contingencies dry up due to a catastrophe, a change in company underwriting, a change in the contingency contract, or a change in law? The 2010 Growth and Performance Standards, by the National Alliance Research Academy, shows that without contingencies, most agencies have almost no profit. So while everyone knows agencies should not depend on contingencies, clearly most do.

What happens when the contingencies dry up? Will a highly profitable agency that suddenly starts losing money because its contingencies dried-up know how to manage effectively?

My experience is that the cultural changes required to turn an inefficient agency into an efficient business are often beyond the ability of such agencies' management. It is difficult to put the genie back in the bottle once an agency has become used to spending money without worrying about how it is going to pay the bills. Sometimes the result is significant disputes among owners because some owners no longer have the drive to sell while others may, and yet their compensation agreements do not address how the various efforts should be rewarded. When times were good, everyone was happy to share the spoils.

Finally, consider these situations from a company's point of view. Do companies benefit by providing large contingencies and competitive advantages of such greatness that their agencies do not really have to work? I believe a few companies are now realizing the negative side of these situations. This may be why some companies that previously jealously protected their agencies are now appointing new agencies near the agencies that brought them to the dance. Those original agencies grew content and forgot how to truly sell. They became too dependent on their key carrier. Now in this soft market, that carrier is looking to those agencies to sell without the company's huge historic competitive advantage and the agencies don't know how to sell. The company is in a horrible position of having to change its relationship with its close agency partners while the agencies are in a position of having to sell, one way or another, or fail.

A specific example of this occurred many years ago a when company offered rich contingencies and low rates to agents who would give the company all their standard business. Many agency owners grew rich. But one day, that company quit the market entirely. Some of those agencies were sold or went bankrupt soon thereafter. They had ceased to have the skills to take care of themselves.

Would it have been better for the agencies to have worked hard all along to ensure their own skills and independence so that regardless of the situation, they would be capable of thriving? Charles Kingsley, a British Anglican clergyman, said it well: "Being forced to work, and forced to do your best, will breed in you temperance and self-control, diligence and strength of will, cheerfulness and content, and a hundred virtues which the idle will never know."

Think about your situation today. Have you grown too dependent on any of your carriers? Have you grown too dependent on your contingencies for a profit?

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So, you think you own your carrier contracts
and ex-dates?

Who owns your carrier contracts? Every agency owner I've ever met has assured me they own their carrier contracts. Yet I have only seen a couple of agencies memorialize their ownership in writing in their employment contracts. Likewise, most agency owners are very confident they own their accounts, until they learn the hard way that they don't.

Account and carrier contract ownership may seem trivial, until it isn't.

Clusters
Most obviously, carrier contract ownership is questionable in clusters. When agents join a cluster, it makes sense that they cannot continue owning their own contracts, so most good cluster contracts clearly state the cluster owns the company contracts. (Some carriers today are so desperate for business, they are allowing agents within clusters to keep their contracts while simultaneously giving the agents credit for the total sum of their joint books. This is really an unintelligent strategy since they end up paying more money and saving nothing on expenses.) Even though many cluster contracts do not address this important issue adequately, the company contracts are in the cluster's name so it has to be assumed that the cluster owns the contracts.

So what is the impact of not owning your own company contracts? To start, to whom can you sell your agency if you do not own your own company contracts? No one that does not already posses the right contracts is going to pay full price if they know they are going to lose material sums of business because they can't get the company contracts that go with the book they are buying. So the pool of potential buyers shrinks. Additionally, the cluster may have first right of refusal (hopefully the cluster agreement addresses buy/sell issues explicitly and in detail), which further restricts the pool of potential buyers.

Most often, when the pool of potential buyers shrinks, so too does the agency's potential price. Of course, if the agency has used the cluster adequately to grow its business, the extra growth will hopefully offset the decrease in value. If this is not the case in your situation, then you may lose a considerable sum when it is time to sell.

Producers
What happens when a great producer leaves to form his or her own agency or joins another agency? Company contracts can't be assigned by the agency without the company's approval, so there is nothing legally stopping a producer from getting a company's contract. I have heard or seen producers talking to companies about taking their employer's company contract and setting up a new shop. Companies are desperate today and old relationships only go so far. The right language in a producer contract can greatly help prevent such a situation.

Producers may also effectively own their ex-dates, even if they have a non-compete. Obviously they can claim their ex-dates if a judge tosses the non-compete, but even if the non-compete is upheld, if the producer is better than the agency and the producer leaves, the agency is not going to keep all those accounts. The accounts will either find the producer at his or her new agency or find a new agency. The contract may say the agency owns the ex-dates, but the reality is that ownership does not always automatically and completely translate into control and value.

Companies
Companies taking your contracts and/or your accounts pose a significant threat. Clearly, they have the right, in most cases, to end a relationship. This is spelled out in most company contracts. Do they have the right to pull your contract and give it to your strongest competitor? Sure they do. Most often, they don't take the contract, they just dilute the value of your contract by giving a contract to your competition.

But what happens when they take your accounts too? Many company contracts are not nearly as strong as agents like to believe regarding account ownership and competition. A number of companies keep track of accounts they lose with one agency and give that information to other agencies. Recently, a very large company cancelled many agents' contracts and then sent a letter to all their insureds telling them they could keep their policies with the company if they simply contacted ABC Insurance Agency near their location. The carrier advised that it was not stealing their ex-agents' clients. It was simply notifying those insureds of their options.

Company Service Centers
Companies now service tens of millions of dollars of agencies' business through their service centers. I haven't seen any clauses in the service center contracts giving companies any special rights to this business. However, reality and contracts often diverge. If an agency has a large book being serviced by a carrier's service center, what happens when that carrier pulls its contract? What happens if that carrier's rates rise so high the agency has to move the business?

Sure, you own the book, but what are you going to do with it? Do you have the staff to take the business back in-house? Do you have another carrier that will roll the business to its service center?

Trust Premiums
Many agencies today are out-of-trust. In other words, they have spent the money their insureds have deposited with them, money that was supposed to be forwarded to the carriers. Simultaneously, most agencies are current on their company payables, but for those out of trust, this is simply because they have collected enough money early (or failed to return credits promptly) from other customers to pay the account current today. It's a robbing Peter to pay Paul scenario.

Most company contracts stipulate that if an agency can't make its account current payment, the company gets ownership of the specific book. The company has the right to sell the book, keep the money it is owed, and give the defaulting agency the difference. So does an agency really own its accounts and its company contracts if the agency is out of trust? From a practical perspective, no. The only reason it appears the agency does is that its companies do not know the agency is out of trust. This is like Madoff saying he was in good standing, which he was, but only because the Securities and Exchange Commission (SEC) was blind.

Given these real issues, do you truly own and control your contracts?

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Irresponsibly Low Rates?

In the news recently, a number of insurance carrier executives have questioned the ability of certain other carriers to honestly and fairly write business at such low rates. In private conversations, carrier executives and marketing representatives are even more blunt, "How can they write business at such low rates and still make money? We can't so they must be pricing below cost!"

This perspective has several important implications.

First, stating that certain companies are buying business through irresponsible pricing verges on accusing insurance commissioners of not doing their job. Most everyone in the industry knows that at least one of the targeted companies eliciting these responses is one or more of the companies that received federal bailouts. The insurance commissioners of America told every citizen in the darkest days of the crises that these insurance companies were totally financially secure. In fact, an insurance agency was reprimanded and fined in one state for suggesting otherwise in an advertisement. It is interesting that insurance company executives are not being slapped on the wrist, too, since some of their comments have been very public. Maybe this is because it is not as easy to slap a big company executive on the wrist as it is to fine a small town agency owner. Or maybe it is because lately the talk has only been of irresponsibly low pricing and not financial instability.

Everyone in the insurance industry for any length of time knows that continued irresponsible pricing eventually leads to financial instability, so the two are connected. If irresponsible pricing is real, financial instability will surely follow. If these same executives are correct, then we have a significant stability issue coming in the foreseeable future, and the insurance departments and rating agencies should be working overtime to address this issue.

Second, remember the old rule of thumb that it takes at least a 10 percent price difference to move a client? If this measure holds true and if these companies are irresponsibly under-pricing the market by margins adequate to make a difference, then are these companies that are complaining also irresponsibly under-pricing? If not, they must be losing considerable business. I've not heard about this happening. So if it is not happening, they must be matching prices or at least coming close.

Given this scenario, one of two things must result. Either all these companies are under-pricing --much as occurred in the late 1990s until 2001 -- and the resulting instability that will occur will be significant, or these companies have an ability to write business at much lower rates than previously known and this means great deals for consumers and a much longer soft market.

A final point to ponder is that perhaps the companies that raise doubts about other carriers' low pricing are being presumptuous. They appear to assume that all carriers are the same or they presume they are the best of the bunch without any analysis. It is as though they believe that since they can only achieve a 101 percent combined ratio while growing 0 percent, no one else could do better.

Just like any other industry, certain carriers are better because their management is better. After analyzing dozens and dozens of carriers' operations, I'd say there might be a half dozen carriers that are considerably better underwriters than all others. These few continually stand out as achieving better results and they seem to do so honestly. Some spend more than the norm, but the extra money spent results in lower loss ratios. Some spend less than the norm, but the savings more than offset their often higher loss ratios.

The very best underwriting carriers have found ways to greatly increase the quality of their services to the point where they do not have to pay extra internally or to their agents for low loss ratios and higher growth. They are simply smarter and better managed than the rest. These companies can charge lower rates, rates that might be irresponsibly low for other carriers to charge.

There are also a few carriers that have so much investment income they can indeed under-price the competition significantly and still make a fine profit. Of course, this may go unnoticed because the carriers and the insurance press rarely publish anything other than combined ratios, which totally ignore investment income. (As a note: pay attention to the operating ratio. It is a far more important metric.)

Many of the insurance companies leading the charge against irresponsible pricing had record or near-record investment income in 2008 - 2010. Some of the worst underwriting companies rely extensively or, in some cases, exclusively on investments for profits and in extreme cases, for survival. So could bad investment income forecasts be a motivating factor in some of their complaints? If they have to compete head-to-head on underwriting only, might they lose?

So perhaps the complaining companies are really admitting they are not as smart as the competition. Might they really be admitting other companies have better leaders? No, of course not. What they are really saying is that insurance departments are not doing their jobs.

If pricing is really that irrational, then the national players must be losing a ton of business, which I haven't seen anyone announce. So prices cannot be that irrational or these companies are themselves following irrational trends, or they are de facto admitting they lack competitive advantages other than high investment income, which I am sure all would deny.

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Protests Speak Loudly (of the speaker's problems)

When the results of my analysis of a firm suggest financial stability issues, the firm's executives very often protest my analysis. I use to worry that I was at fault; that I had made a mistake. So, I would go through my analysis looking for any mistakes, but I rarely found any. The executives though would continue to protest and often, their protests became loud, sometimes even profane and threatening.

At first, I didn't know what to make of these situations. Maybe it was a case of deciding to agree to disagree. Maybe I did not have all the necessary facts. At times I wondered if I needed to be more suave. Experience has shown that most often, though, the real problem is that I exposed a raw nerve and such a response usually indicates deeper and more serious issues.

Carriers
The carriers that have been the most upset with my carrier stability analysis have always been weak carriers and/or carriers for sale (albeit the fact they were for sale had not been made public). For example, years ago, I advised many agencies that an otherwise good carrier had lost its A.M. Best rating on one of its subsidiaries. When the carrier learned about my statement, my phone immediately rang and I thought the carrier executives were going to come through the phone lines to strangle me. They threatened every kind of suit possible. I pointed out that if any statement I made was wrong, I would retract it and announce my mistake to the world. They could not find any mistake. I then offered them an opportunity to clarify what happened and I would distribute their clarification to all of my clients. The executives of the company would not write their response. Shortly thereafter, they were sold.

Similarly, when a company recently protested a statement I made (which, interestingly, they misunderstood because my comment realted to a different company), their reaction caused me to research them in more detail. I found they clearly could not survive without significant improvement and/or an equity infusion. Otherwise, without great improvements, they are slowly going to go broke. Without their protests, I never would have discovered their dire situation.

Other carriers want their agents to believe an A.M. Best rating is indicative of pure stability. Per A.M. Best's reports, their rating is a claim paying rating: "The objective of Best's rating system is to provide an opinion of an insurer's financial strength and ability to meet ongoing obligations to policy holders." It is not indicative of a bright future or that a sale is not imminent or that the company needs to be reorganized to survive. There is more than a few insurance companies that have serious operational issues while, according to their A.M. Best rating, have sufficient ability to meet ongoing obligations to policy holders. These companies do not want agencies to understand the difference, and in fact, most of their employees probably do not understand the difference.

From an agent's perspective, representing companies with high A.M. Best ratings is better than representing companies with low ratings. Isn't it better though to represent companies that possess high A.M. Best ratings and have stable operating results versus high A.M. Best ratings and a poor future?

There is even an important E&O angle to this point. Many companies have extremely similar names such as ABC Insurance Company versus ABC Insurance Companies or ABC Casualty versus ABC Insurance, etc. Sometimes this is a coincidence or the result of an historical footnote such as back in the day when the P&C industry had what was popularly known as the little Aetna and the big Aetna. They were totally separate companies with the same basic name. From an agent's perspective, it is critical the agency put the exact and correct name of the appropriate insurance company on their applications. If they happen to use a generic name or the name of a similarly named company that does not have an adequate A.M. Best rating on an application, and that company happens to go insolvent or is already insolvent (indeed, there are some insolvent companies that have names extremely similar to the names of operating companies), the agency may discover it does not have E&O coverage for that account.

Brokers
Through the years, I have assisted in the sale of many agencies. I always feel it is part of my responsibility to research the buyers unless the seller is getting all their money up-front. On many occasions, the buyers were clearly not financially stable. Their balance sheets were like Swiss cheese. Some buyers have acknowledged the issues, but others have not hesitated to tell me how incompetent, idiotic and just plain embarrassing I am to the industry.

In every case where the executives protested the most, their firms were the weakest. One famously flamed out, which was unfortunate for the many agents that were not my clients and whose advisors did not research the buyer's balance sheet. Others are just biding their time hoping to sell out before they too fail.

The ones that protest the most are usually the ones that are most scared of anyone learning of the severity of their problems. In fact, in several cases, the protests were so strong that I simply gave up arguing the point and gave them an option such as paying cash, giving a promissory note or just making the down payment with a cashier's check. For any strong company, these conditions would be simple to make and yet none would do it.

The buyers that acknowledged their problems to me are not guaranteed to make it, but knowing they are dealing pro-actively with their issues suggests their likelihood of survival is better.

Agents
I have dealt with many agencies that were bankrupt in all but court filings. It is always interesting to me when an agency that can barely make payroll yells, screams, and tells me my valuation is really nothing more than a guess. They have always been advised that agencies are always worth at least 1.5 times commissions and the fact they have spent hundreds of thousands of dollars of trust monies should not be counted against them. Maybe Madoff made the same argument.

These people are not dumb. They are often naive. But most often, they are so scared, they absolutely cannot think straight. All they know is they are in trouble. They are grasping at straws and making ridiculous claims of value. They might even admit that any other agency might be worthless, but the facts don't apply in their case. I feel for these people, but those that protest reality too much are the ones that always have the most difficulty surviving. By trying to bull their way through the situation, they never address the real problem. They try to shoot the messenger. I've learned that the more they protest low valuations in these situations, the worse the situation usually is and the less fixable it is.

Many agencies, brokers and companies are having tough times today. But denial and shooting the messenger are not solutions. Protesting too much sends a signal the firm may be hiding even bigger problems, making me, and others, look even harder. More important, protesting too much takes the focus away from actually fixing the problems because accepting reality is the first step toward a cure. So if you find yourself vehemently protesting a weakness someone else has identified, before screaming, bullying and threatening, my recommendation is to take a deep breath and consider whether they have a point.

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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.

If you wish to be removed from this mailing, please e-mail AgencyAdviser@burand-associates.com. Copyright 1995 - 2011, Chris Burand