April 2014
Burand's Insurance Agency Adviser
Resources and Information for the P&C Insurance Industry
Volume 19, Number 2

~ For a printable PDF version, click here. ~

In This Issue...

Did you really become an agency owner so you could manage people?

Not many agency owners get into this business so they can manage people. Fewer probably get into business so they can spend the time, energy, frustration, bewilderment, and sometimes depression involved with hiring and developing people successfully. Sometimes, as an owner, you probably just wish people would let you sell insurance and work with your clients.

Read More...


Business Success

Let's first define success. Business success is usually defined as reasonable growth combined with reasonable, sustainable profit margins achieved by taking a reasonable amount of risk.

So what is reasonable? Let's use averages. In a mature industry like insurance in a mature economy like that of the U.S., a mature agency growing five percent annually is growing successfully if its profit margin is reasonable.

Read More...


Negotiate.

Recently I was speaking to a room full of CFOs from some of the largest independent agencies in North America. The subject was negotiating additional compensation from insurance companies. Someone asked about my fees for assisting agencies in negotiating with companies and then someone suggested my pricing should be a percentage of the additional amount negotiated. I responded that the reason I do not charge a percentage is that my experience has been that the vast majority of agency owners, regardless of agency size, do not have the spine required to negotiate enough extra compensation to make it worth my while. I did not receive any disagreements.

Read More...


Why Accepting Cash is a Great Idea

I have been lying awake at night pondering whether it makes sense for agencies to accept cash. My conclusion is that accepting cash has been given a bad rap. Agencies should begin accepting as much cash as possible because the benefits outweigh the costs by tens of dollars.

Read More...


Great vs. Average Employee Poster

Don Phin, of HR That Works, has developed a terrific poster which depicts Great versus Average Employees. This poster is worth sharing with employees. Check it out at:

portal.hrthatworks.com/AnonymousFrom/FOM/GreatEEs.pdf

Solutions!

Chris Burand,
Accredited Business Appraiser
Institute of Business Appraisers

Burand & Associates, LLC

215 S. Victoria Ave., Suite E
Pueblo, CO 81003
p: 719/485-3868
f: 719/485-3895
chris@burand-associates.com

Visit us at:
burand-associates.com

"It should not matter!" the purists insist: The attorney who argues that only her skills should matter to clients. The engineer who lobbies for function over form. They treat style, design and form as trivial--visual hocus pocus.

The purists miss the point. Beauty performs a powerful function: It pleases us. It makes us happier. A grape iMac performs like a beige box--but it makes us smile. It makes our lives better for reasons beyond reason. A consultancy's Class A space with cherry paneling and just-cut flowers increases a clients' fees. But is also makes the client feel better.

In serving your clients, consider this: Can you do anything more important than that? To make your service better, make it more beautiful.

-The Invisible Touch from Business Digest, November 13 2013

"There is no darkness but ignorance."

-William Shakespeare, Twelfth Night


Did you really become an agency owner
so you could manage people?

Not many agency owners get into this business so they can manage people. Fewer probably get into business so they can spend the time, energy, frustration, bewilderment, and sometimes depression involved with hiring and developing people successfully. Sometimes, as an owner, you probably just wish people would let you sell insurance and work with your clients.

Unfortunately, that is not reality. People, and their need to be proactively managed, whether they know it or not, is reality. I am seeing agency owners turn to two options (other than bearing down, gritting their teeth and managing the people). Whether they are good solutions is unknown at this time.

The most common solution I see is agency principals turning to clusters and aggregators. Clearly when properly organized, which few are, these can be great solutions for very small agencies. These organizations provide good solutions to medium size agencies in certain geographic areas with extremely limited property markets too. Other situations exist where these organizations solve key problems too. However, they never solve people problems. They never solve perpetuation problems. In fact, they often magnify an agency's weaknesses, and they create unforeseen problems. For example, they can bankrupt their members. This is especially true since most cluster contracts are horribly written. Sometimes they're horribly written on purpose and sometimes they're horribly written due to incompetence. Either way, what difference does it make? Joining an organization run by less than ethical people or joining an organization run by incompetent people generally has the same result.

So why are so many agents that do not need markets (though they may think they do) or anything these organizations can provide, seeking solace here anyway? For some reason, they find security from management issues even though the management issues can actually increase. People issues do not go away unless the organization is also offering outsourcing of some kind. Then other issues need to be addressed such as quality, E&O, company contracts, and even preference.

Another quasi solution is outsourcing. Done well, outsourcing can alleviate some management responsibilities. Done well means laying off people. No one wants to hear or say this, because it means pain. So the situation is dressed up to conclude no one needs to be laid-off. Instead, they can perform more productive activities with their extra time. But it is reality that few agencies have the production players necessary to write enough new business to grow into the extra capacity outsourcing provides. Outsourcing effectively provides more bodies so if an agency does not need to hire more people, why would it outsource and then keep the same number of people if they don’t have the producers to grow into the extra capacity?

Yet few layoffs occur. Company service centers are effectively outsourcing centers and they've been around a long time. I have studied the productivity of many, many agencies and I've compared the commission per CSR for those using company service centers and those that do not use company service centers. To date, I have not found a material difference. This means the agencies using company service centers are not freeing up extra capacity and then filling it with new sales.

So now the agency owner just has the same number of people, only those people have less to do, which may mean more time to create drama, plus the principal has a new relationship to manage. I am not sure what is gained.

This is not to condemn outsourcing. Outsourcing is a great solution if the people in the agency are managed appropriately. This includes producers. Outsourcing does not alleviate this responsibility.

Two better solutions exist. Both are harder to stomach so each will likely be ignored. The beauty of the first two solutions is that neither requires much effort as witnessed by the fact many agency owners never even read the contracts they're signing. The initial price paid is purely money. The full price paid will not come due for many years. Moreover, sometimes the current frustration is so great that signing a contract that wastes $50,000 annually or eventually costs you your agency ten years from now alleviates your immediate worries, then this may be the winning ticket to a good night's sleep.

Thinking longer term for those readers willing to stomach immediate discomfort for longer term success, think back to the crux of the issue: Managing people or even maybe company relationships or finance are not where you find your life's jollies. Every single person that owns a business is responsible for something they cannot stand to do. These issues are what drain your energy. What if you just outsourced the management of one of these unenjoyable management tasks? This is different from outsourcing the work or joining a cluster to alleviate company relationship management.

For example, I know some excellent accounting outsourcing firms. My clients have had great experience outsourcing accounting responsibility to them. The same goes with HR. The agency owner still makes the ultimate decision. That cannot be subbed out. But the experts and they are experts, do all the hard day-to-day work. The extra benefit is the high quality knowledge, talent, and skills these people provide for what is otherwise, a true part-time job in most agencies. Outsourcing select IT, CFO, and even COO duties can be a great relief.

The price is that the person/firm you hire must develop a good working relationship with the agency owner because real executive responsibilities will be relieved and hence, transferred. This means trust. Moreover, some suggest the highest price is the emotional price of letting go. On one hand, agency principals don't want to manage. On the other, it may seem to them irresponsible to give up these responsibilities. I totally understand the tug-of-war. All I can advise is this is a normal growing pain. Check out the Strategic Coach and similar programs that help entrepreneurs learn how to give up responsibilities. Ultimately, focusing on your personal core strengths and giving up those responsibilities you dislike is essential to achieving more business and personal success.

For medium and larger agencies, hiring full-time high quality, nose to the grindstone COOs and CFOs are key. One reason so many agencies get stuck in the $5-$7 million revenue range is that the principals do not like management, but management has become their predominate daily activity. Their dislike of managing robs them of the energy to enjoy work. The lack of energy then permeates the agency. Agencies require strong positive energy emanating from leadership to grow. Also at the next level, agencies need management with the time, knowledge, skills, and discipline to make an agency run like a well oiled machine. These agencies need someone whose mission is operations or finance.

If you're tired of managing people, finance, IT, or whatever and want to get back to the basics of what you most enjoy doing, and your goal is a long term solution, hire the right expertise. Give them the responsibility and authority to do the job and then let them do it.

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Business Success

Let's first define success. Business success is usually defined as reasonable growth combined with reasonable, sustainable profit margins achieved by taking a reasonable amount of risk.

So what is reasonable? Let's use averages. In a mature industry like insurance in a mature economy like that of the U.S., a mature agency growing five percent annually is growing successfully if its profit margin is reasonable. Adjusting for personal expenses and excessive owner compensation, successful agencies, excluding those lacking legitimate house books of business, will achieve a 20 percent profit margin if they do not take too much or too little risk. The "right" amount risk is difficult to define because no one publishes quality risk rates specific to independent insurance agencies, which is a major issue because the risk taken to achieve profit and growth is crucial to knowing the value of that growth and profit. For example, Wall Street financial firms reported huge growth and profit margins leading up to the financial crisis -- obviously achieved through a strategy of extraordinary risk taking.

How is risk measured? This issue is too often ignored. Several technical means exist to measure risk, but since many readers are not familiar with them, let's simplify the process to a scale of 1-10. The insurance agency business is one of the least risky businesses ever measured. So agencies can take a little more risk. A "5" is quite reasonable. An agency at a "10" likely has little future as does an agency with a risk rate of "1." At the high end, the agency is likely cheating to achieve high profit and/or growth. I have seen this many, many times. On the other hand, a risk rate of 1 means the agency is not taking enough chances to succeed; it is not swinging the bat often enough.

So five percent growth achieved with a 20 percent profit margin and average risk is quite successful by definition. An agency achieving this should be applauded, or at least I would applaud them. Such an agency likely will never make the cover of any magazines because it's not flashy (flashy often means risky). Is this what every agency owner wants? It depends on the price.

The price is often fairly high. For a mature agency to achieve five percent annual growth at a 20 percent profit margin while not taking too much or too little risk requires significant leadership, discipline, accountability, and maybe most important of all, the desire to put results above emotions.

After working with independent agency owners for more than a quarter of a century in one fashion or another, I think it is clear many agency owners believe the price of business success is too high. To continually achieve such results means making rational business decisions rather than emotional decisions. The biggest example I can give is hiring producers. Emotional decision makers will ALWAYS hire someone they like, someone they believe they can control, and/or someone who will make them feel better in some way. A rational business decision results in hiring the person most likely to succeed even if the agency owner does not like the person.

At first this example may seem odd. After all, why hire someone you don't like? What is better: Hire someone you like who can't or won't sell or hire someone you don't like who can sell? Which is better for the business? Which is better emotionally? A right or wrong answer does not exist; there is a choice to be made though.

Contracting with too many companies is another example. On a business basis, most agencies can reduce the number of companies and brokers they represent by at least half. Divorcing 50 percent of one's relationships is emotionally tough. Again, there is no right or wrong answer. Those who have businesses so they can satisfy their emotional needs and for whom building a business is not really the goal can make one choice. Those who really want to build a business can make another choice.

The problem created by having a business to serve emotional needs is the rest of the world does not really care about the owners' emotional needs. I see many agencies bypassed by today's fast (for the insurance industry) changing environment. It is getting more and more difficult to carry dead weight that serves an emotional need but damages the business. Not having rules, goals, or requirements especially for producers so that everyone can feel good about themselves is wonderful for some personalities. For a business, this approach is always a slow cancer. Insurance companies today are truly beginning to wonder whether they can afford to maintain these relationships because the stock market is demanding they grow faster.

I truly feel for agency owners who are in this business because it enables them to feel emotionally better about themselves. They have taken the fork in the road that made them feel best because the price for building a business was too high. Now the price for not building a business is inflating quickly. In some ways, it is unfair because this industry was always so safe that people could live a lifestyle forever. They chose a path that had all the appearances of enabling them to feel quite successful without truly building a business and now the rules of the game are changing quickly.

I see their depression when they go to sell and learn the value of their agency is too low for them to retire. In the old days, this did not happen. They did not really make a wrong decision; they made the right decision for themselves. The world changed and they just did not, and potentially could not keep up. I have seen many agency owners who have succeeded with their good looks, quick smiles, confidence and great storytelling. Now, they are learning that may not be enough. It is hard to learn that the characteristics which helped you achieve your definition of success is no longer sufficient.

These people never wanted business success and now the industry is demanding agencies truly be businesses. What does a person do? Seeking outside assistance is likely the very best option.

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Negotiate.

Recently I was speaking to a room full of CFOs from some of the largest independent agencies in North America. The subject was negotiating additional compensation from insurance companies. Someone asked about my fees for assisting agencies in negotiating with companies and then someone suggested my pricing should be a percentage of the additional amount negotiated. I responded that the reason I do not charge a percentage is that my experience has been that the vast majority of agency owners, regardless of agency size, do not have the spine required to negotiate enough extra compensation to make it worth my while. I did not receive any disagreements.

I have never understood why insurance agency owners have so little confidence when it comes to negotiating with companies. I know my advice, when truly used, is quite effective. One of the most common excuses for not negotiating is that the agency is not big enough. It is funny that I get exactly the same excuse regardless of whether the agency has $1,000,000 with each of its top companies, or $5,000,000, or even sometimes $10,000,000. Actual volume is not the reason. Emotionally, they just can’t bring themselves to truly negotiate.

And the money is just waiting for them. In fact, they are being take advantage of to an extreme. They are subsidizing many other entities by not negotiating for more money. They are subsidizing their competition. How do you like the idea of subsidizing your competition? For example, some brokers and clusters are literally advertising on their websites their "preferred partner companies." This is code for "these companies pay us extra." Some of these entities are smaller than some of the large agencies whose owners will not negotiate for more compensation because they’re afraid they are not big enough!

Not only are they big enough, buy they are also better than many of these entities already being paid extra. They are better because from a company's perspective, there is just one point person with whom to deal, someone who has true control and who can make things happen. The company is not dealing with a dozen different agency owners each with separate agendas. Often the large agencies' loss ratios are better, too, because the fact is that many and maybe even the vast majority of agencies that join clusters are joining purely for volume reasons. Their underwriting is poor and even if it is good, their individual volumes have always been so small that whether they have a good loss ratio or a bad loss ratio is determined by three or four $10,000 claims.

A fascinating aspect about this entire story is the following: the agency owner who is too timid to negotiate for his own agency suddenly grows a spine when part of a cluster. I know agency owners who have tiny agencies, but when building clusters with other tiny agencies they act like teenagers, 10-feet tall and bulletproof when they approach carriers for more money. Collectively, all the agencies combined may barely have a $1,000,000 premium with a company, and yet they are asking for more money -- and sometimes getting it!

Emotionally then, volume is not enough to give agency owners confidence. They need a support team of other agency owners to give them that confidence. No matter how good they are or how strong their book, they are not going to negotiate hard for more money.

I once showed a client how the agency qualified for a company's premier contract and how that contract would pay an additional $200,000. All the owner had to do was ask, and the owner would not ask. He did not have the confidence to ask. It is funny because so many company reps are nervous each time they meet agency owners in these situations because they are always expecting the owner to ask -- and they don't. The fact they don't helps the company pay other agencies more money and the reps cannot really say no in these situations. This means that when they say "yes," they have to find a way to take the money from some other entity. The pie is not getting larger.

Interestingly, the support team cannot usually be partners. I have not seen that partners make any difference. The support group has to be other agency owners and then suddenly, everyone is bulletproof. The price paid for becoming bulletproof enough to negotiate for more compensation is high though. Most of the cluster contracts are poorly written, with little understanding of the liabilities being assumed. Signers must be seriously lucky so that nothing goes wrong. So far, for many, nothing has gone wrong and they are living blissfully.

On the other hand, I wonder what insurance companies are thinking by paying many such entities more money. My favorite example is how two small agencies came together in a cluster because their main company would pay them more if they did. Absolutely NOTHING changed except the coding on the production documents and company contract. The company still had to make the same number of visits, set up the same number of books and IT interfaces, and even produce the same number of pages of production documents. I guess the company did save in the number of contingency checks it cut, but since the company was paying more for this savings, the net was still on the wrong side of the line.

Companies are often paying extra for worse results, too. As noted earlier, most of the clusters have little to no underwriting control and the emphasis on upfront underwriting is diluted because cluster contracts often only pay based on volume, not loss ratios, creating a fate of the commons. Many of the banks and brokers are also playing volume games for different reasons having to do with their valuations and the stock market. Another factor is they paid too much for their acquisitions and now are cutting people so severely, no one has the time to be upfront underwriters. Some companies firmly believe their automated underwriting systems will eliminate or have already eliminated the need for upfront underwriting. So maybe after spending hundreds of millions on these systems, the savings will be so great the companies can still afford to pay more for volume. It seems easier and more profitable to me to just pay good underwriting agencies more money.

My advice for agencies is this: No matter how small your agency is, ask for more money. Make a great case. Be professional. Spell out your advantages and why a company should pay more.

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Why Accepting Cash is a Great Idea

I have been lying awake at night pondering whether it makes sense for agencies to accept cash. My conclusion is that accepting cash has been given a bad rap. Agencies should begin accepting as much cash as possible because the benefits outweigh the costs by tens of dollars.

The rap is that accepting cash increases E&O exposures. This is true. However, if agencies will practice exceptional documentation, a level hardly ever achieved, this exposure can be virtually eliminated. At the very least, give the customer a receipt, have them initial the receipt and then have the money taker initial the receipt, and then make a copy for the agency's file, and scan it to the file. This is the lowest level of additional documentation necessary and it should only take an additional ten minutes per transaction on top of the ten minutes per cash transaction that is industry norm.

The average cash transaction involves commissions of less than $200. The average profit margin on a commission basis per the latest GPS book ranges from -5% to 5%. Let's use 5%. So the agency makes $10 but with the extra processing cost, this decreases approximately 20% to $8. This means the agency has identified a profit center!

Now that we've identified a profit center, let's consider whether enough prospects exist that generate $200 in commission that still pay cash. I can think of three markets:

1) There are farmers in some areas. Their accounts usually generate at least that much.

2) There are people everywhere that for many reasons do not have bank accounts, credit cards, debit cards or access to money orders. I suppose these same people do not ever purchase anything on the internet either. Most of these people, at least based on my experience, do not purchase normal liability limits. So they probably will generate less than $200 commission. Let's say they generate $125 in commission. The agency still makes a profit of approximately $5.

3) Then there are the drug dealers. Drug dealers probably do more cash transactions than any other business and the good news is that they're everywhere. I don’t know what kind of cars they drive or limits they purchase so let's give them the benefit of the doubt and use $200.

Now that we have three possible markets, we must identify how many prospects exist in each market. In rural areas, any agency can usually find 20 farmers that want to pay in cash to whom other agencies have advised cash is unacceptable. This is at least $160 profit for rural areas sliding to $0 for urban agencies.
The market of people without bank accounts, etc., is much, much larger. Depending on your geographic area and marketing program, thousands of possible prospects are available. Let's say the agency can write 2,000 such accounts. That's an additional $10,000 profit.

The market for drug dealers is something I do not know how to estimate. However, since they are dealing drugs, following insurance laws and purchasing homeowners insurance probably is not something with which they are too concerned. Let's assume though you can write 20. This is another $160 profit.

In total then, an agency can make $10,320 profit and gain 2,040 accounts. It is a lot of work, but if it was easy everyone would do it.

Next, let's identify the marketing talking points. "Do business with us because we accept cash!" These talking points are important because I have noticed agencies that accept cash rarely advertise this crucial advantage. It is almost as though only their current clients treasure the opportunity to pay cash. Otherwise, why not advertise for more such customers? Instead of "15 minutes could save you hundreds," you could advertise, "We know you like to pay in cash and we still accept cash so buy your insurance from us!"

You know that will work because dozens of agency owners and probably hundreds of producers have told me they had to accept cash because if they were prohibited from accepting cash, they'd lose the accounts! If they are correct (and hopefully they know their clients well enough to be positively certain they are correct) this means the only reason these customers are doing business with them is because they accept cash. These customers are not doing business with these people because their products are good, their service is good, or their price is reasonable. Otherwise, the clients would not leave just because a change in payment policy was made. So if these producers are correct that they will lose the business if they do not accept cash, then by logic, this means the reason the customers are doing business with them is because they accept cash. Therefore, they are missing a huge opportunity to sell much higher rates and many more coverages because their ability to accept cash is so important, these customers must be willing to pay a premium!

Another missed opportunity is that any agency who captures 100% of a market, in this case 100% of people that treasure paying in cash more than any other factor, is a genius. Capturing 100% of a market is impressive. If it can be done once without any marketing plan or demographic analysis, these people are like the Einstein's of marketing. They are missing the opportunity to use this genius to capture 100% of another market that no one knows exists.

What about those agencies that bought into the myth that accepting cash was unprofitable? It's never easy to admit being wrong so my suggestion is to accept reality. The agencies that accept cash have you beat. So make sure you send clients who treasure paying cash above all else to the agencies that specialize in accepting cash. They have figured out how to spend the extra time required to process cash, between 10 minutes and 20 minutes extra per transaction, without it affecting their efficiency. It must be they have discovered that cash enables them to skip processing steps others consider important. It may be too that they do charge more so as to make accepting cash profitable. Some may be so much more profitable in some other area of the agency they simply subsidize the cash transactions because they know revenue is much more important than profit.

In summary, accepting cash creates significant opportunities with little risks for these innovative agencies.

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Chris Burand is president and owner of Burand & Associates, LLC, a management consulting firm that has been specializing in the property/casualty insurance industry since 1992. Burand is recognized as a leading consultant for agency valuations, helping agents increase profits and reduce the cost of sales. His services include: agency valuations/due diligence, producer compensation plans, expert witness services, E&O carrier approved E&O procedure reviews, and agency operation enhancement reviews. He also provides the acclaimed Contingency Contract Analysis® Service and has the largest database and knowledge of contingency contracts in the insurance industry.

Burand has more than 20 years' experience. He is a featured speaker across the continent at more than 180 conventions and educational programs. He has written for numerous industry publications including Insurance Journal, American Agent & Broker, and National Underwriter. He also publishes Burand's Insurance Agency Adviser for independent insurance agents.

Burand is a member of the Institute of Business Appraisers, a department head for the Independent Insurance Agents and Brokers of America's Virtual University, an instructor for Insurance Journal's Academy of Insurance, and a volunteer counselor for the Small Business Administration's SCORE program.


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.


If you wish to be removed from this mailing, please e-mail AgencyAdviser@burand-associates.com. Copyright 1995 - 2014, Chris Burand