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An Open Letter to Carriers

Why not not just give everyone contracts and pay everyone more?


In all seriousness, why not? With exceptions for a couple of national carriers and maybe five prominent regional carriers, it is an open secret that carriers pay networks more and that with most networks, anyone who joins gains to access any carrier available. Therefore, carriers are basically advertising that it is far easier for agencies to join networks to get access to anyone and everyone and get paid more as a result.

Carriers doing this, especially carriers that don't impose conditions and/or are not working with networks that impose quality conditions on their members, are just slitting their own throats. If the carrier would just give individual contracts to everyone with a license rather than forcing them to join a network to get access, the carrier would maintain negotiating leverage. At this point, a substantial portion of carriers have given away their negotiating leverage. If one would think it through, a big carrier has lots of negotiating leverage over lots of little tiny agencies. But, if all those little and even medium sized agencies band together in order to do business with the same carrier, same forms, same everything, then negotiating leverage changes significantly. It really does not have to be this way.


There is the argument that providing one appointment is cheaper than 100 or 500 appointments. That would be true if the carriers were not paying more. They are paying more in two ways. The first is that contingency expense increases because now all those agencies qualify for contingencies when otherwise, they would not. Since carriers have historically budgeted about 2% of premium for contingencies, that figure increases because more premium qualifies.


Carriers end up paying extra because the better networks are superior negotiators as compared to the carriers. One reason they are better negotiators is because leverage has shifted.


While money is saved by not issuing individual appointments, the extra money being paid is almost guaranteed to exceed the savings. I have not seen a carrier do this analysis yet, and there is no reason I should have seen such an analysis, but the math is pretty simple to do.


Where before a carrier could eliminate poor performing agencies fairly easily, now without leverage they cannot. Many agencies join many networks explicitly so they DO NOT HAVE TO PERFORM. They don't have to grow their books, they don’t have to achieve great loss ratios, and they get paid more with less accountability. No wonder it is estimated 80% of agencies will be a member of networks in the near future. Money for nothing...


As carriers you know how much pressure you are under to cut expenses, yet your highest or second highest expense line has increased your cost without much return. I owe it to those few networks that actually deliver accelerated growth and/or expense savings to note those entities are worthy, but most networks do not provide these benefits. One cannot cut enough postage to reduce expenses adequately.


For the most part, the only categories that provide enough expense savings are in compensation to one’s own employees and agencies, and for some carriers reinsurance might be a decent third. For some, but far fewer than I find most carrier and agency people think, marketing might be a factor but this is truly rare.


As a carrier, your goals are pretty simple: You need to generate more organic growth to remain relevant while simultaneously reducing expenses. The two are interconnected because lower expenses enable lower rates and lower rates are quite often correlated with higher growth. A carrier can spend all the money it wants on smart IT systems, but if it does not reduce its compensation expense and/or agency compensation, the net result will not matter. No good reason exists to make the situation more complicated than it currently is.


Every company, like every agency, needs to assess its internal compensation expense and determine if it can do more with fewer employees. A few big name carriers have recently announced large layoffs so we know what they have decided on this point. Each carrier really does have different needs and solutions.


Relative to agency/broker commissions though, the situation is more uniform from the perspective of whether your distributors are generating enough organic growth at a low enough acquisition and servicing price point. Both need to happen simultaneously, and if not, you have the choice of sucking it up and cutting even more employees and services which will only cause agents to complain even more. Or you can disintermediate them which I know many companies are working to do, which will cause agents/brokers to complain loudly. On the other hand, you can change compensation systems and appointments so that distributors do not get paid for nothing. Of course, agents doing nothing but enjoying extra compensation will complain then too.


Uniformly, distributors will complain no matter what you do. A solution does not exist where they will not complain. Therefore, what solution fits your needs the best regardless of how loudly they complain? One way or the other, to remain viable, carriers must get their distributors to generate adequate organic growth at a low enough price point. Otherwise, the future is bleak.


Here is some proof. Two carriers have written $10 billion of net new premium each of the last two years combined. So in two years, these two carriers have grown by more than the entire sales of approximately 890 (out of around 900) carriers. Those 890 carriers have worked, sometimes for 100 years to get to $1 billion or $5 billion or $20 billion and these two carriers have written that much, net new, in two years. They are putting other carriers out of business and they already pay lower commissions. The agents complain but they continue to place more and more business with them!


If you are going to effectively give every agency an appointment and pay every agency extra, just make it every individual agency so you don't lose your leverage. Otherwise, give away the house and cars too. If you are afraid of being spreadsheeted, do you really think you are not being spreadsheeted more effectively when all those agencies have no personal relationship with you since they are writing under a large umbrella?


Also, distinguish those few networks that truly do bring value. I know a few of both kinds and the distinctions are absolutely worth extra money.


This will all require some extra effort and thought, new contracts, and difficult conversations. That's why you get the big bucks. There will be fewer bucks going around if you don't do something different and soon. It is your choice. If you are open to serious analysis and creating true win/win/win solutions, let me know.

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.

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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.

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