First, my heart is with small agencies and their owners. They have a tough time wearing so many hats. Delegation only works when other people are around to wear the hats. Agencies everywhere are pressured by carriers to write more business but small agencies have limited resources when the owner is the key producer, the HR expert, the IT expert, the accounting expert, and the chief bottle washer.
I appreciate how personal they are with clients. That is important to clients and often it is a key reason the owners are even in the industry. This reason, among others, creates an interesting and often rewarding life for agency owners.
I appreciate small agencies so much, I even made a promise to a mentor twenty-five years ago that as I succeeded, I would not forget my roots by leaving behind small agencies as my practice grew.
Sometimes small agencies are challenging entities with which to work. The situation is commonly this:
Like all small businesses and small accounts, they usually need more help, but will not pay for it. They will not even ask for assistance and often if they are willing to ask and are willing to pay, they do not know for what to ask.
When these small agencies need help due to an E&O claim or another kind of legal situation or they need a valuation of their agency for a sale, merger or estate purposes, their data, their accounting methods, and their contracts are so often missing or so disorganized that simply making sense of their situation is a huge challenge in and of itself. Quite often the situation borders on a fiasco trying to find a time to occur.
Here are some examples specific to accounting:
Their accountant does not know anything about insurance agency accounting. Their ignorance has made a hash of the agency's records by trying to fit the square peg of agency accounting methods and systems into regular accounting methods.
The accountant not knowing agency accounting has encouraged the agency owners to withdraw too much cash causing a working capital shortage or worse, a trust account shortage.
The agency has not maintained their accounting entries. When a valuation or audit is completed, or even when it is time to convert data from one system to another, and the accounting entries are poor to nonexistent, two outcomes are certain:
i. The owner is about to spend a lot of money to fix them.
ii. The owner will look like a fool.
When the data is a mess but the agency owner tells the appraiser, the attorney, the IRS, or the judge: "Just trust me when I tell you what the numbers really are," the silence will be deafening. To many readers, this reads like a ludicrous statement and it is, but this is verbatim what I have heard agency owners say numerous times. Another version is, "Don't pay attention to my financials. They are wrong. Here, I’ll tell you what the right numbers are." I cannot begin to write how many times I have heard agency owners speak some version of these lines. What is even more incredulous is they actually think, firmly believe, the other party is going to trust them! They actually get upset if the other party does not just take their word. They have no idea how bad they appear when they make these statements.
The agency has been creative in how they pay people including ex-owners. This appears when they buy the agency and want to deduct the price by paying the owner to do nothing. That is not exactly acceptable. The same usually goes for making producers independent contractors because your buddy advised it was a good way to save money.
Examples from the E&O world include:
"If I license everyone, it will cost me more and my staff will migrate to bigger agencies paying more." That does not go well in a deposition.
"If I do not have procedures, then the plaintiff cannot accuse me of not following procedures! I win." The agency does not really win because the result is the agency is painted as incompetent.
"We do not input data because it takes too much time." Really?
"We do not check policies because it takes too much time." Seriously?
The Accounting Solution
The solution is to do the work. The reality is that doing the accounting and operating procedures correctly actually saves time in the long run. My estimate, based on the improvements I've seen with my clients, is that approximately a 20% time savings is achieved.
Hire an accountant that knows insurance agency accounting or hire someone to educate your accountant on insurance agency accounting. I have done this successfully many times and for constructive people, it is a blessing. Everyone sleeps better knowing they are doing the job right.
Do not dig your grave deeper. When you learn that you and/or your accountant has been doing the agency's accounting ineptly or fraudulently and someone points this out, do not try to explain the problem away. Absolutely do not attack the messenger. Be constructive.
Spend the time and money to purchase a better agency management system and then learn to use it. Some system’s trainers are not worth $2 and you may have to find third-party trainers. My most successful agencies, in this aspect, almost always use third-party trainers.
The E&O Solution
Develop real procedures. The ROI using good procedures is awesome:
a. Productivity increases capacity with fewer people.
b. Sales increase
Complete a real audit. Fear seems epidemic with small agencies that an audit will put them out of business, not because of the cost, but what the audit will discover. Personally, I think it makes for more sense for the auditor to discover the issues than a plaintiff attorney.
The Contract Solution
Small agencies usually work with small attorneys and many small attorneys are jacks of all trades and masters of none. They generally are not masters of insurance agency contract law.
Agencies of all sizes need legal advice specific to them. If you cannot find a true specialist, let me know because here are some options:
I have trained many attorneys on insurance agency legal needs.
I can refer you to attorneys that specialize in agencies but they likely will be in a different state and you do have to pay.
It is so important to use true legal experts. I have seen generalist attorneys write contracts so the agency did not own their own book of business, the buy/sell agreement valued the agency about 2,000% higher than it should have, the agency violated their own by-laws, the owners had to sell their shares for half of their worth, obvious IRS compliance problems were created, and this is the first paragraph in a 100 page book specific to attorney incompetence.
Go to conferences with more sophisticated agencies. When you go to conventions, hang out with more sophisticated (not just larger because larger does not always mean sophisticated) agencies rather than commiserating with other small agencies. Don't believe everything you hear but dig for details from the best.
Make a mark with insurance companies. Be professional in your submissions. Tell a story. Do not just submit junk or a pile and cause the company to wade through a mess. Some companies open doors for small but professional agencies.
At the time of writing this article, my confession is that small agencies have worn me out. I am tired of fighting with agencies regarding what needs to be done with their accounting, their E&O, their carrier relations, and so forth. Almost always, they do not know what they are doing and many refuse to understand they are in a corner and do not have a choice. This is not fun.
What is fun is working with agencies of any size that are constructive and proactive. Most bigger and better agencies got bigger and better by being more constructive, listening better, and not refusing to act just because the action was difficult emotionally. They surpassed the emotion and their emotional barriers. Doing so greatly advanced their fortunes, both their monetary fortunes and the quality of their lives.
I know that for small agencies, time and money are always short. I do not know how to fix that in the short run but I know how to fix it for the long run and that is take the time to do your accounting, your data, and your procedures correctly now. Bite the bullet. The ROI is high and like the old FRAM oil filter commercial, you can pay now or pay later, but you will pay and if you wait, the cost is likely triple or more what you'll pay now. Is it time to change that filter?
NOTE: The information provided herein 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.