The Value of A Bird's-Eye View

The economic downturn and soft market have exposed the fact that many agencies are not adequately aware of how well their own agencies are performing. Too often they think they are doing really well only to learn they are looking at the wrong measures. For example, I completed a valuation for a well managed agency but the value was low because its balance sheet was upside down. Unfortunately, the owners did not understand the importance of the balance sheet and their prior consultant had never explained it either. They were very successful with the parts of the agency they were pro-actively managing. They just didn't have an adequately comprehensive view.

The only way to get that comprehensive perspective is by hiring a qualified outsider. Trying to figure it out by only talking to other agency owners or fellow state association members is inadequate for many reasons. They may be a good source of ideas and possible solutions, but those ideas don't always transfer directly from one agency to another. Sometimes the ideas are taken out of context or the correlation between action and result is not understood. One of my goals with all my clients is to help them better understand the correlation between their actions and their results. Why invest money in ideas that have no impact?

Additionally, most agency owners do not have a high level of financial or statistical education. This is also true of the consultant hired by the agency with the upside down balance sheet. No matter how much you want to believe that agency management is simply a matter of putting an agency's own figures next to some benchmark figures, the reality is it's not that simple. Sure, you can deny reality, but doing so will not give you the right solution. And sure, you can hope for simple solutions, but very often the answer to a simple question is not a simple answer.

An agency owner once advised me that my solutions were too complex, but he was mistaken. It was not that my solutions were too complex; the reality was that the correct solutions were complex. A lot of people reject the best solutions simply because they do not completely understand them without considerable effort.

This agency owner, like many agency owners, also loved to micromanage. Since he couldn't micromanage what he couldn't understand, he refused to implement the right solution. He also had another reason for rejecting complex solutions. Complex solutions require proactively managing many moving parts and, while he was a micromanager, he did not like to micromanage a lot of moving parts. I understand this. He's not wrong for not wanting to manage many moving parts, but that does not decrease the value of doing so.

One of the key reasons many agencies grow to a point and then stop growing is because much more management is required than the owners desire and/or have time to do. Yet they will not hire people who will do it well nor will they hire a qualified outsider to help them.

Some people don't want to hire help because they're too cheap. Some people don't want to hire help because they are micromanagers. Some people know they need assistance but fail to hire help because they don't want to deal with the issues the outsider will identify. Some people feel they're a failure if they hire help because they've been brought up to do everything themselves.

Whatever the reason, the world of insurance agencies is simply too complex today for owners to do it all by themselves. Moving forward requires assistance from competent people. Moreover, the solution likely requires activities most agency owners don't enjoy and life is too short for people to be constantly doing things they don't enjoy. Most agencies will prosper by hiring outside experts to help them improve their agencies because this forces a simultaneous risk and commitment. I have found agency owners who are willing to take simultaneous risks and commitments are more successful than those who aren't.

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The Future of Small and Medium Agencies

According to the new Agency Universe Study by the Independent Insurance Agents and Brokers of America (IIABA), approximately 4,000 new agencies were created from 2008 to 2010. One thing I know about new agencies is that they are extremely hungry. Another thing I know is that many of these agencies are not like past start-ups. They have the experience, tools and companies the traditional start-up agencies never possessed. They may be small, but they are numerous. So even if they only generate $250,000 commission each and grow by 10 percent, that's $25,000 times 4,000 which is $100,000,000 of new commissions in a year. These agents don't care if it's a soft market because they are new and they have nothing to replace. They are just ravenously hungry.

At the same time, large agencies are imposing huge production requirements on their producers this year. They are requiring producers to build their books by $25,000 to $200,000 net new commission each. Think about that for just a second. A large agency will easily have 20 validated producers and sometimes more than 100 producers. Just take 20 producers, each with a $50,000 net new production requirement. That means the agency is planning on growing by $1,000,000. This is commissions--not premiums. Rates are still soft and exposures are still decreasing in some lines, plus normal attrition is 10 percent. So to grow by $50,000 each, they are going to have to write $75,000 to $100,000 of new business, at a minimum. This means each of these large agencies is demanding their producers write at least $2,000,000 of new commissions in 2011. Considering only the top 100 agencies, that is $200,000,000 of new commissions.

Where are these agencies going to get $200,000,000 new commission? They are planning on getting it from small and medium size agencies and from a few large agencies/brokers that are clearly asleep. Even if they are only 50 percent successful, this is still $100,000,000 of new commission. The economy is not growing enough to supply it and we all know the market is not hard enough to supply it.

What are small and medium sized established agencies doing to stop the loss of business? My experience, sadly, is that too many are doing nothing. I have been told by some that they don't need to do anything because their accounts will never leave them. They are the hometown agency and have written those accounts for a long time. No extra effort is required. In other words, they are sitting ducks for the better agencies.

Others think they are doing something, when really they are just hiding behind meaningless actions. Such actions include the continual introduction of new ideas, new strategies, new tools, and pretty new proposals. This is all pointless unless the agency's producers produce! The Achilles' heel of small and medium size agencies is the absence of producer accountability. Sure, they are measured on production, but measurement does not equal accountability. To have accountability, there must be consequences and the only consequence for not producing in most agencies of this size is a smaller paycheck. And in some agencies, the producers still do not even take a pay cut. That is no way to run a successful agency.

I do not believe that a large proportion of owners of agencies this size are truly committed to running a successful agency. They are merely interested in running a successful agency. The difference is critical. When an owner is merely interested in running a successful agency, management does not have producer accountability. When an owner is committed, accountability and consequences are known and evident to all. No one hides behind the excuse, "I'm accountable because if the agency doesn't do well, I don't do well."

I am fascinated by how far interested but not committed agency owners will go to prove they are committed when they really are just interested. They will spend tens of thousands of dollars on consultants, marketing, advertising, and even hiring new producers. They will spend tens of thousands on advisors who will tell them what they want to hear. And they use that as confirmation they are committed, but there are never consequences if goals and commitments are not achieved.

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"Looking for Love in All the Wrong Places"

This is kind of a funny title for an article about insurance agency management. The song by this title dealt with the pointlessness and even degrading search for love in bars, dives and honky tonks. While drinking and selling insurance go hand-in-hand in some peoples' minds and while much important business is sometimes conducted in bars, this article is not really about finding love in such places. This article is about agency owners seeking love of a different nature. It is about the constant reassurance that many agency owners seek.

These seekers of reassurance often go looking for situations where people will tell them they're good executives. Some will ask company people repeatedly for their opinion of how good they are. (This is almost certainly a safe bet because it's not usually in the company's best interest to be acutely critical.) Others will find friends, advisors and employees that will give them the answers they want to hear.

Possibly the most dangerous scenario is when an agency owner asks everyone and sometimes anyone for their opinion. Asking lots of people, most of whom have extremely limited knowledge of the agency's operations, for their opinion cannot be characterized as seeking insight. It is seeking reassurance. A person needs the facts before rendering a competent opinion. The person asking for the opinion is placing the other person in a position where they feel a need to respond and yet, the questioner has not given the other party enough information.

A great example I have seen many times is the agency owner that asks someone, "Is 10% growth good in this market?" First, they already know the answer and just want to hear someone say, "YES!" Second, they fail to tell the other party they are out of trust or that they spent trust money to achieve that growth or they grew by foregoing commissions or they got a windfall deal or they are paying for the growth by cutting corners on renewals.

Many agency owners are looking for love in all the wrong places and because so many companies, attorneys, accountants and consultants are desperate for business and employees are possibly concerned about keeping their jobs, don't expect totally honest answers even if the other party has all the facts. Many people will bias their answers to avoid confrontation so they can keep the relationship or at the least, just to avoid dealing with the unpleasant reaction of upsetting someone.

If you find yourself looking for love in all the wrong places, stop for the sake of your agency! Look yourself in the mirror and ask if you can handle the truth.

If you can, get competent counsel from someone who cares less about your ego and more about your agency. Your agency will grow healthier and eventually, you will grow more secure and confident. The need for one night stands and the immediate gratification of hearing someone tell you how great you are will disappear. The confidence gained by knowing you can take constructive criticism will launch your agency into another stratosphere of success. Your future is up to you. Will you keep looking for love in all the wrong places or are you tough enough to handle the truth?

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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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