So You're Special? How Sweet!
An agency owner told me the other day, "Chris, you just don't get it. Our situation is unique and you're not seeing we are unique."
First off, just about every agency owner I have ever met has said that. If every agency is special, then no agency is special. Second, I have visited over 1,000 agencies so I am probably in a far better position to judge if an agency is special than someone who has only worked in one or two.
When agency owners say, "My agency is unique" in this context, they are really saying they don't want to hear that they are not performing well as an owner. That was absolutely the case with the owner I quoted above. He was not performing well and was paying a high price. Nevertheless, he still could not bring himself to admit his agency was not special, that my advice was good, and that his lack of management skills was the real issue. In other words, he would not own the situation even though he owned the agency.
I get that. Admitting lack of skill is a huge emotional barrier to overcome, but winners must climb over that hurdle. Are you a winner? Or are you a loser?
From one agency to another, most are not all that unique and where an agency is unique, it usually is not due to a good factor. As I noted above, I have visited over 1,000 agencies and have spoken to thousands more agency owners. I have seen agencies from almost every angle imaginable ranging from trying to find $2 million in missing premiums, serious E&O issues, owners tragically dying, run of the mill operational reviews, carrier relationship improvement projects, educating staff, valuing agencies and so forth. When I began, I worked for a company and one of my first assignments was to manually audit, with paper files, whatever portion of 3,000 agency files I could get through in four days. I am fortunate to have the significant professional certifications to provide services on many levels.
To give you an idea of how agencies are not all that unique, in the ways agency owners like to think they are, this is an interesting fact. Agency rent expense is almost always between 3.5% and 4.2% of commissions no matter where the agency is located. The exceptions almost always involve some kind of rent manipulation between the agency owner and the owner of the building, especially if the two parties are the same person. Sometimes someone has built a Taj Mahal office (not usually a good idea for agencies regardless of where they are located), sometimes they want more income in one entity than another for tax purposes, sometimes they just don’t know what rent to charge.
Nevertheless, my clients in NYC pay rent in that 3.5%-4.2% range. My clients in rural (name the state) pay rent in that range. My personal lines clients pay rent in that range. My commercial clients pay rent in that range.
Another interesting fact is that agencies tend to employ the same number, or more, service staff as producers regardless of whether the producers are successful. Irrespective of whether the agency's producers average $150,000 in commissions or $500,000 in commissions, they tend to employ the same number of staff. That commonality points to bad management.
A few unique situations do exist. If I remember correctly, I have had clients in every state other than Montana. I have clients in other countries too. Geographically a few exceptions exist relative to honesty. I have found that the lack of ethics/honesty are much higher in some very specific locations. If an agency owner from one of those areas tells me their agency is unique, I will make the assumption that they are unique, but not in a good way.
An agency with significant program business is unique relative to main street agencies. Most of the time though, they are not unique relative to other agencies with program business. The exception sometimes, not always, is when the program is with one carrier and that carrier has significant control over the book. The agency may own the book outright or in a de facto manner meaning they may not own it but have 100% control over it. Those are unique situations, but they are easy to understand. Being unique and understanding how your agency is unique are two separate issues.
One of the most unique situations I have ever seen that works in reverse, and thankfully exists almost nowhere in North America today (other than a province or two in Canada) is the combination of state level premium rating committees and forced equalization of premiums. For example, until a few years ago Massachusetts forced all auto premiums to be the same between carriers which is extremely unique. Also, for decades Louisiana had a rating commission that determined whether rates could go up, but actuarial analyses was not always part of their decision-making basis.
The insurance market was skewed in both cases. What I found in Massachusetts was that many agencies made a lot of extra money because they did not need to compete nearly as hard as agencies elsewhere. Carriers did not need to compete. Some agency owners compared their results against their peers elsewhere and concluded they were brilliant because they were outperforming their peers. In reality, they only outperformed their peers because they did not have to compete nearly as hard and neither did their carriers. In this case, the outsiders understood the "uniqueness" far better than the agency owners.
In Louisiana, agents were quite aware of their unique situation and how it hurt the marketplace. Outsiders did not truly understand the impact that the rating commission had and how it kept competition out of the marketplace.
One area of the P&C market that is quite unique is crop insurance. A crop agency does not operate like a regular P&C agency. Almost no similarities exist at any level. A crop agent who says they are unique relative to regular P&C is always correct.
One of the most interesting claims to uniqueness involves accounting. Many agency owners will say they are unique because they really do not need quality financials. For those of you who know anything about finance and accounting, you understand that all businesses should have quality financials and that no exceptions exist. I have found these particular claims of uniqueness to be based on lack of education facilitated by poor accountants.
Every agency is unique in many different ways, but few agencies are as unique or special as their owners think. Often the uniqueness that does exist is not the good kind. To assume or make excuses that an outsider specializing in agencies does not understand their uniqueness, is to make excuses that hard decisions do not really need to be made.
Consider this, if the agency really is so unique that no one could possibly understand their situation and if that is true, the agency is worthless because it means no one else can buy it and run it.
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.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.