What were they thinking?

There's a country song by Dierks Bentley where a young guy does some really stupid things because of a pretty girl in a tank top and he later laments, "What was I thinking? "

Some insurance companies are going to wake up some day, as will some agents, with the exact same thought. Their enticement won't be a pretty girl in a tank top, but the belief they can somehow make money without working any harder by joining clusters or, from the company's perspective, that the company can somehow make more money by appointing clusters.

Disclaimer: I am not against clusters. When done well, clusters do help agents and companies, but extremely few clusters are designed or run well. Most are bombs trying to find a place to explode because their design is poor and execution is even worse. Most of the participants, though, are thinking, "What's this crazy consultant talking about? This is all working out OK," as they walk crookedly through a minefield without even knowing they're in a minefield. The situation is no different than soldiers unknowingly walking through a minefield and thinking they're safe. The soldiers are anything but safe, and companies and agents in their own minefield are not safe either.

Companies first:
Basic math skills should be a requirement for company people appointing agents and clusters. The fact is that if you take two agencies with $1,000,000 each and they form a cluster that now has $2,000,000, the company is no further ahead. There is no extra top line revenue and expenses are no lower. Yet some companies are encouraging agencies to form clusters so they can pay the agencies more money!

Top company executives are continually paying out more money simply for volume and, even worse, volume of any quality! Yet they won't pay extra for high quality business because "they can't afford it." This makes no sense. In trying to get business today, they are cutting off their nose to spite their face.

Maybe even more significant for the long term (in the event anyone is thinking long term), carriers are selling the devil their soul because some of these clusters are now big enough to throw their weight around. Furthermore, if companies won't pay for high quality business, these entities should seriously consider forming their own insurance companies in which they will place the best business and leave their "partners" with the dregs.

The carriers do not realize it yet, but many have lost the negotiating advantage that size offers. They are no longer truly big enough to tell some of these entities to "take it or leave it." The result is that carriers will not be able to cut costs when they need to as easily as they have in the past. Historically, if they needed to cut costs, they cut agencies' commissions and contingencies without worrying too much about losing a lot of business. Those days are gone even if the carriers don't yet realize it. They are going to be paying these entities a lot of extra money for a long time to come. They've sold their souls.

Now for agencies:
Someday, some agency owners are going to realize they should read contracts before they sign them. In the old days, I would preach that agencies should read their contingency contracts before signing them so they would maximize their negotiating power. Those who didn't simply lost great opportunities to make a lot more money without working any harder. That looks like child's play relative to some of the cluster contracts agents are signing without reading.

With the hugely public Brooke Corp. fiasco that left many agencies destitute, I would hope more agency owners would be sensitive to the need to read contracts before signing them. But I don't think that debacle made a lick of difference. Some of these contracts are so onerous, it might just be easier to promise to give away your first born child. I really don't understand what agents are thinking when they sign these contracts.

Another favorite of mine is the clusters that tell agents, who happen to read the contracts and identify some of the onerous clauses, "Don't worry, that's just legal wording and has nothing to do with how we'll actually run the cluster." Like the old saying goes, "There's a fool born every minute," and the fools in this case are the agents who take the cluster's word. Think about this. What's the purpose of a contract? To define an arrangement and/or a relationship in the event of a dispute. So shouldn't the contract follow the cluster's intentions? Absolutely.

On an operational basis, what is the real value of joining a cluster anyway? "More companies" is the answer 99 percent of agents give. For very small or new agencies, this is a valid reason and some clusters provide a great service for these agencies. But why would an agency with $2,000,000 in revenue need a cluster? More contingencies? That might be possible, but not guaranteed. Agency owners almost universally believe that companies will pay more for volume. However, I possess the largest database of contingency contracts in the U.S. and I confidently attest that a huge proportion of companies do not automatically pay more for volume. It only looks like they do.

Moreover, if agents would do the math, they'd realize that even if they do get more, they pay a price. I've lost count of how many agency owners have not thought this through. From the fees, to the percentage of ownership the cluster gets in the book, to the higher risk factors, to the decreased agency value, a price is paid. Think about this. Let's just assume an agency gets an extra one percentage point annually in contingencies by joining a cluster. But that cluster goes out of business and takes all the agency's business with it, as happened to some of Brooke's agents. What's the value of that extra money? What if the cluster owns 20 percent of the agency? On a $1,000,000 premium book, an extra one percent is $1,000. Let's value that book at 1.5 times commissions and commissions are 13 percent or $130,000. If the cluster owns 20 percent, it owns $26,000 or 26 years of extra commissions.

Think 20 percent is high? Some of these agreements are much greater than 20 percent.

Think about the cluster agreements that effectively prevent an agency from selling to anyone but the cluster and the cluster gets to name the price. This sounds like a captive agency to me that is only differentiated by its ability to write with more than one carrier.

To reiterate, clusters designed and operated well can bring a lot of value to certain agencies and companies, but extremely few are designed well and fewer yet are operated well. And just because something has not gone wrong yet does not mean agencies and companies are not strutting like peacocks oblivious to the minefield through which they're prancing. Many of Brooke's agencies were strutting, too, and they are now dead and buried. Companies, too, have sold their futures for immediate returns (real and imagined), resulting in the number of national, multi-line carriers available to independent agencies decreasing from approximately 17 in 2000 to six today. Ignorance is bliss for many and knowledge is considered evil by many, if for no other reason than knowledge carries responsibility. It's your choice: Ignorance or knowledge.

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Do you know this person?

Most agency owners are also agency managers/executives. But their first love is usually sales (meaning proactively seeking out new clients and asking for their business) or if not sales, it is working with customers, carriers and employees. A great many agency owners are, in the terms of the Kolbe test, Fast Starts with low implementation scores. (Please note: The Kolbe organization provides a great service and I don't pretend to interpret with any depth their tests. I encourage readers to take their tests and learn the details for themselves. My clients who have done so have benefited.)

In my mind, Fast Starts with poor implementation are awful agency managers unless they team with an implementer. This is because they will continually inundate their producers and staff with ideas and strategies, but nothing will ever get executed because they have poor follow-through. Their employees soon tire of the ideas and quit paying attention because they know nothing will come of anything recommended.

The situation is compounded when the agency owner has a short attention span which seems to afflict a large proportion of agency owners since they sometimes can't sit still in meetings longer than 15 minutes, much less stay on topic more than five sweeps of a clock's second hand.

Maybe the worst combination is the person who is a Fast Start, is a poor implementer, has a short attention span and is a micro-manager. Think of how difficult it would be to work in such an environment, even if the person is the nicest guy on earth. At least once a week this manager brings some new great idea that has to be implemented immediately. He or she dwells on the subject for a while, but no one really pays attention because there is no follow-through. By the time only a few steps of the first idea are complete, the manager moves onto another great idea. Then he or she micro-manages every aspect of everyone's job, even though he really does not know what the job involves and will soon move onto some other problem or opportunity. This manager will never let people just do their jobs.

Staff and producers need direction. Direction requires staying a course. Direction requires complete implementation. Direction requires not jumping from one subject to another. Agency staff are generally not Fast Starts. They like to see projects through. Agency owners who are always jumping in and preventing staff from seeing things through are extremely frustrating and cause staff to lose faith. Positive energy is deposited in a black hole, and the agency chases its tail into an abyss.

There are only two solutions. Both require these agency owners to recognize the situation for what it is. This is not an indictment that they're bad people. Those same personality traits are extremely positive traits to possess in other situations and no set of personality traits works in all situations. The key is for these agency owners to decide whether they want to change their behavior to become better executives or hire someone for that job.

I have seen people grow into better executives by corralling their natural tendencies to fit the needs of their people. They have climbed an internal mountain and they have done something few will try and fewer will achieve. Their agencies have greatly succeeded as a result, too. Their people understand the difficulty of their transformation and have great appreciation such effort requires. Such an effort exhibits true leadership.

Most people can't do this on their own. Recent scientific research shows this has little to do with inadequate self-discipline. Rather, adults simply are not equipped to grow in this manner on their own. In fact, the studies show most humans resist achieving such growth. While I am jaded about the true ability of most "personal" coaches, the concept is valid. To overcome these strong personality traits that absolutely limit a huge proportion of agencies from achieving much more material success, these Fast Start micro-managers should hire a good coach, consultant, advisor, or board of advisors to help them help themselves.

The other option is to hire someone to manage the agency in the areas in which their natural tendencies are a hindrance rather than strength. Personally, I believe this is the better solution for many reasons:

• It ties strengths to strengths. People bring so much more energy to tasks they enjoy so it's a win-win for all involved.
• It is a faster solution.
• It requires less personal effort, freeing energy that can be used elsewhere. Now, this option does mean letting the new hire do their job without micro-managing the staff, so some self-discipline is still required. But having that person in that job will also help keep the micro-managing executives in their place.
• There is a great synergy when the right person is hired as an agency manager. Rather than having two people doing two full-time jobs, the agency gets two people doing 2.5 or even 3 jobs without any more effort simply because the teamwork that evolves is so powerful. I am always thrilled to find these situations or to see my clients hire such a person and build such a team.

However, beware of a common failure. It has been my observation that Fast Starts may be inadequately patient. Sometimes they can be seen physically trying to keep themselves from jumping in because development is taking too long (too long may be any time longer than immediate). They have to stay out of the way and let the person and the team do the job. If the Fast Start executive is also a micro-manager, the tendency to jump in is even stronger and more damaging.

Many agency owners will deny these traits even if they possess them. It is their agency and they indeed have the right to ruin it or achieve minimal success. They also have the choice to build themselves and their agency. The first option may be the equivalent of sticking their head in the sand and making their butt available for the kicking. And just because their butt hasn't been kicked yet does not mean it won't be. A lot of agencies that thought they were successful in the good times are just now realizing they were just riding the wave of a great economy and have crashed with that same wave. The second option is taking positive control of the future, becoming a better person and building a healthier agency.

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Magazine Sales versus Insurance Sales

Beyond the fact that both involve sales, what do magazine subscription sales and insurance sales have in common?

1. Publishers and agents/companies both seem to take renewals for granted.
2. Both are offering new customers better prices than renewing customers.

Point two substantiates point one. Why else would businesses think they could offer substantially lower pricing for new customers if to some degree renewals were not being taken for granted? Many agencies go even further in taking renewals for granted by just "renewing as is." No one even talks to the insureds about changes in exposure or their needs.

One reason insurance pricing on new business is less is because both carriers and agencies are just trying to get a foot in the door on new accounts (which they also do by not insisting on the entire account and by not using coverage checklists). I understand this because a person has to start somewhere and an agent does not want to overwhelm prospects by asking for too much. There is a kind of an unwritten rule, "Buy a little from me, get to know me, and when you see I'm OK, buy some more."

I understand all this and I have definitely gone down this path myself. It is a logical, reasonable path, except for two issues:

1. Insurance sales are not magazine sales. Readers do not generally sue magazines for errors and omissions (E&O). By only selling a half loaf of insurance, will the insured have adequate coverage?

2. Follow-up is essential. Even if insuring only half the client's needs (or 80 or 90 percent), the remaining exposure can be huge. This "foot-in-the-door" strategy is predicated upon eventually selling the rest of the account. Unfortunately, far too often, the rest of the account is never sold. It just does not happen. The agency forever remains the proud agent for part of the client's insurance needs.

For example, take a $300 commission account on a commercial policy. There are a LOT of these accounts in the typical agency. If an agency writes a commercial account properly, virtually all commercial accounts are going to have a general liability or a business owners policy (BOP). They are going to need a professional liability policy or umbrella. Then they are going to need at least a workers' compensation policy, an employment practices liability insurance (EPLI) policy and an auto policy. How can that total be less than $500, except for a few exceptional cases or pickup truck contractors (which are mostly masochistic efforts anyway)?

So why does the typical agency have hundreds of these accounts? Agents are in a bind. The sales path of selling a half loaf to get started might make sense on paper, but the follow-up does not exist for getting the rest of the loaf. What should an agency do? Is there a way to only sell half a loaf without creating huge E&O exposures? Absolutely! It is fairly easy, too. Just mandate that coverage checklists always be used with a box checked for any recommended coverages rejected or that the client advises another agency writes. And have the client sign the checklist.

Then implement a formal follow-up procedure to verify the producers do eventually sell the whole loaf. Do not just trust they will do this on their own; it does not usually happen. Create a system of bonuses for selling the whole loaf and penalties for not following through.

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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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