June 2014
Burand's Insurance Agency Adviser
Resources and Information for the P&C Insurance Industry
Volume 19, Number 3

~ For a printable PDF version, click here. ~

In This Issue...

Choices When Selling Your Agency

When you are considering selling your agency, you will be well served if you consider the following:

1. If you hire a business broker or a consultant using a business broker type contract, consider:

a) The contract is negotiable. A high probability exists that this is the only time you have worked with a business broker, it may be kind of intimidating. They are just people that usually want some deal at a lower price than no deal at all, just like producers.

Read More...


Crisis Sparks Success

Through two decades of consulting with agencies, I have consistently witnessed crises precipitating significant agency success. Whether the crises was a natural catastrophe like a flood resulting in many E&O claims or near bankruptcy due to poor management or a key producer leaving with a large proportion of an agency's income, the crises, to use a common phrase, put the fear of God into the agency's principals. They then made the improvements virtually overnight.

Read More...


Reputation versus Advertising

The top insurance companies are building their reputation by spending approximately $5 billion in annual advertising. When an agency owner is running an agency generating $1 million dollars total revenue and competing against $5 billion in advertising expense, or $1,000,000 vs. $5,000,000,000, a person might feel very, very small. There are only approximately 30 P&C insurance companies that even generate $5 billion in net premiums written annually and the U.S. has approximately 900 P&C insurance companies so everyone likely feels small. You are not alone.

Read More...


Record Retention

First -- I do not know all the incredibly important details required to build an adequate record retention program. I do know what I don't know and that is crucially important.

Second -- The guidelines you have seen are likely wrong. I don't know what is right, but I know what is wrong. Generic guidelines are wrong simply because they are generic. Generic solutions are always wrong.

Third -- Agency owners need an excellent attorney that specializes in record retention. Again, I don't always know the right attorney but I know the wrong ones and the wrong ones are ones that have not studied the minute details of record retention law, regulation, process, and contract law specific to record retention.

Read More...

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

At what price do customers shop?

Please take a moment to participate in an online survey. Simply answer the question, "In your experience, at what price increase will a small commercial account begin to shop or ask you to shop?"

Please click here to complete the survey.

I will publish the results in the next newsletter.

Reminder:

In response to the article in April's newsletter, "Why Accepting Cash is Great Idea," Bob Pettinicchi, Executive Vice President of InsurBanc, brought to my attention an important reminder: Agents have an obligation to comply with the Patriot Act, in particular OFAC (the Department of Treasury's Office of Foreign Assets Control), BSA (Bank Secrecy Act) and AML (Anti-Money Laundering).

Want to increase profits without making more sales?

Our Contingency Contract Analysis® Service is the way to do it!

Contingency contracts vary tremendously in quality, payout, and the types of business of they reward. These differences provide agents with a great opportunity to increase their profits by using each contract strategically and negotiating for more compensation.

Every Contingency Contract Analysis® report is packed with valuable, straightforward information that can be used to increase your pure profits.

Contact us today at chris@burand-associates.com to learn more.


National Alliance

The Academy Publishes 10th Edition of
Growth and Performance Standards Study

AUSTIN, TX, May 13, 2014 -- The National Alliance Research Academy has published its newly revised 10th edition of Growth and Performance Standards (GPS). The 2014 edition is written specifically for those who want to compare their insurance agency to other agencies of a similar size and location, with respect to income and expense averages, productivity measures, and balance sheet ratios. This allows them to discover how the best performing agencies are doing, and gauge the results of agencies in different size categories. Through the use of the companion CD, agencies may compare their own numbers, compute variances, and improve results.

The study is an impressive book at 238 pages, and just a few of the findings indicate the breadth and depth of the inquiry:

  • The annual revenue growth rate for participating agencies was 7%.
  • The account retention rate was 89% for commercial lines and 90% for personal lines.
  • Pre-tax profit was 9% of total agency revenues.
  • Revenues per person were $118,000.
  • Spread, the difference between revenues per person and compensation per person, was $39,000.
  • Commission per CSR was $272,000 for commercial lines and $173,000 for personal lines.

According to William J. Hold, CRM, CISR, Director of The Academy, "The GPS study represents current agency trends. Much of the value is in faithfully representing agency response to times of uncertainty and readjustment. Agencies around the country use the study to establish benchmarks for their own responses and progress."

Readers will find the CD a useful companion for comparing their own numbers to trends in the industry.  Growth and Performance Standards (GPS) combines 238 pages of precise current data with practical tools for its use. Price: $75. There is also an eBook version available for $65.

Certified Personal Risk Manager - The Newest Designation Program of The National Alliance

AUSTIN, TX (May 5, 2014)--The National Alliance for Insurance Education & Research, in collaboration with the Council for Insuring Private Clients (CIPC), announces the development of the Certified Personal Risk Manager (CPRM) Program. CPRM is the newest designation program of The National Alliance with a purpose of training the insurance and risk management communities to better serve the high net worth and affluent client base. The program will contain a unique combination of risk management, technical information, and account development.

The National Alliance, based in Austin, TX, with its 45 year history of experience and leadership in insurance and risk management education and designation programs, is most qualified to provide comprehensive, relevant and practical training. The development and support of the program includes leading carriers such as AIG, Fireman's Fund, Ironshore, Lexington, and Lloyds Underwriters - Hiscox, Britt, and Amtrust, along with top agencies and brokers writing high net worth and affluent clients.

The five major areas of emphasis will include personal risk management, insurance coverage differences, evaluation and protection of the lifestyle, the practical application, and management of the business of high net worth and affluent clients. The initial CPRM courses will be presented in early October 2014 and will provide two distinct benefits to the participants. First, an exceptional opportunity to exchange ideas and practices specific to this client community; secondly, the formalized presentation of practical and relevant educational materials in conjunction with earning the CPRM designation.

Dr. William T.  Hold, President and Co-Founder of The National Alliance and Beverly Messer, Senior Vice President, Academic Development, will introduce the CPRM designation program at the CIPC conference in Dallas on June 4, 2014.  Dr. Hold stated, "The CPRM Program represents an exciting new national development in professional insurance and risk management education."

The National Alliance for Insurance Education & Research is known for insurance and risk management education and designation programs such as Certified Insurance Counselor (CIC), Certified Risk Manager (CRM), Certified Insurance Service Representative (CISR), and Certified School Risk Manager (CSRM). The company advances the industry quality by providing insurance and risk management professionals of every experience level with integrated, practical continuing education, timely research and designation opportunities. For additional information, visit The National Alliance website: www.TheNationalAlliance.com, or call 800-633-2165.

The Council for Insuring Private Clients and High Net Worth Individuals (CIPC) was founded by MarketScout to provide a venue where agents and insurers may come together on how to better serve their private clients.


The Academy is a non-profit organization funded entirely through publication sales and affiliation dues, and serves as the research and development arm of The National Alliance for Insurance Education & Research. Research grants are made possible through the annual dues of National Alliance members and The Academy's Research Associates. For further information, contact The National Alliance, P.O. Box 27027, Austin, Texas 78755-2027; 800-633-2165; website: www.TheNationalAlliance.com.


Choices When Selling Your Agency

When you are considering selling your agency, you will be well served if you consider the following:

1. If you hire a business broker or a consultant using a business broker type contract, consider:

a) The contract is negotiable. A high probability exists that this is the only time you have worked with a business broker, it may be kind of intimidating. They are just people that usually want some deal at a lower price than no deal at all, just like producers.

b) Some contracts contain extremely disadvantageous provisions. At first, you may assume these provisions are uniform, but they are not. Not all brokers include such one-sided language. You might consider negotiating these points or choosing another broker.

c) Consider hiring someone in addition to the broker to assist you. This is indeed possibly an additional expense (depending on who is paying the broker). A person just working for you, especially if you have not sold an agency previously, can assist you, protect you and advise upon those matters the broker is not obligated to disclose.

d) Consider where the broker's bread is buttered. You are selling so you can never be a repeat client.

2. Consider the valuation definition used. Most agency owners do not know different definitions of value exist. Depending on the situation, laws may dictate which definition must be used such as the sale to family members or the determination of value in a divorce or sometimes, when determining the value for a minority shareholder. Consider then your situation and make sure you are using the appropriate definition of value.

3. Consider what you are selling. Are you selling assets or stock? The value of assets is typically different than the value of stock. Typically when a person sells their agency to family or employees, they sell the stock. Stock is usually, though not always, valued less than assets. But the seller usually gets to walk away from most liabilities and often gets a better tax rate.

Assets are usually sold when selling to an outside party. These buyers almost never want your known or unknown liabilities and they want the preferred tax treatment so they pay more. Whether you get more though depends on the deal specifics. Consider tax ramifications if applicable, the cost of a tail E&O policy, and possibly the cost of other liabilities that could saddle you.

4. Consider what you want for your employees or if maximizing your sales price is more important. Depending on your choice, you will likely choose very different buyers all else being equal.

5. Consider what you want your legacy to be. If you want to maximize your value, the buyer likely will have to take on more debt or at the least, manage expenses much more closely to achieve their required ROI. Nothing is wrong with this result if you are ok with it. However, if you want the buyers to have the flexibility to grow the agency more quickly or allow some people to maybe keep their jobs or not be pushed so hard, then you might not want to drive too hard of a bargain.

6. Ask what you want out of your business broker or consultant. Make sure you have adequately explained what you want them to do. If you want a lot of consultation, hire the kind of consultant that will truly provide the advice to you. If you do not want advice and you just want to sell the agency quickly, then a good business broker might be a better choice.

7. Depending on your goals, if you want good advice a good consultant will challenge your thoughts about value. At first this can be frustrating but by working out problems, issues, challenges and warts with the consultant, you are working in a safe environment. It is far better to work out these problems and weaknesses with someone you are paying than the buyer. Any one that watches reality shows where people are always buying items knows the routine. The buyer always points out all the problems thereby causing the seller to believe their price is too high. Would it not be better to fix those weaknesses in your agency first and then second, for those items that cannot be fixed, at least have worked out a strategy with someone you are paying before going to market?

Most agency owners only sell one agency per lifetime. Most buyers buy many agencies. Who has the natural advantage? Take the time to tip the scale in your favor and you will likely reap the rewards.

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Crisis Sparks Success

Through two decades of consulting with agencies, I have consistently witnessed crises precipitating significant agency success. Whether the crises was a natural catastrophe like a flood resulting in many E&O claims or near bankruptcy due to poor management or a key producer leaving with a large proportion of an agency's income, the crises, to use a common phrase, put the fear of God into the agency's principals. They then made the improvements virtually overnight.

Those improvements varied but good examples include managing the agency's financials correctly, not treating the agency as a personal bank account, and running the agency as a business rather than running it as an agency. Other examples include firing deadweight, causing people to actually follow procedures, and mandating proper producer contracts.

When all the improvements were completed, the conclusions have been nearly uniform. The principals have all said something to the effect of, "It was hard work but it was good work and I'm only sorry we did not do it earlier. I am sorry a crisis was required to force me to do what I should have done on my own. It would have been much easier to do without the pressure the crisis created. But at least it is done and I’m not going to wait for another crisis to take the actions I know need to be taken."

Literally I have seen agencies which could not grow prior, more than double in size fairly quickly. I have seen E&O claims and E&O exposures drop to almost nothing. I have seen agency morale skyrocket and I have seen profits double. All these results were feasible before the crisis with less actual effort. But the will was missing. It was easier to keep doing what the agency was doing than spend the emotional currency to make the improvements the principals knew needed to be made. A famous quote some attribute to Bobby Knight makes the same point from another perspective, "Everyone has the will to win. Few have the will to prepare to win."

Having the will to prepare to win requires considerable emotional currency. Not everyone has enough currency and even among those that do, many do not want to spend it. They only spend it when a crisis forces them to do so, even though the crisis carries at least a 20% premium on the emotional price.

So how can you force yourself or your partners into making the improvements you know in your heart and mind need to be made but you cannot bring yourself or your partners to spend the necessary currency? In the wonderful book, "Leading Change" by John Kotter, he recommends manufacturing a crisis. By manufacturing a crisis, you get the urgency created but on your terms. Some might think creating a crisis is devious but really the situation is a choice of two evils. One is a manufactured crisis on the agency’s terms and one is a real crisis on anything but the agency’s terms. Which do you prefer, real but dangerously painful or precautionary proactive?

So what are you going to do if you need to make improvements? Wait or move now?

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Reputation versus Advertising

The top insurance companies are building their reputation by spending approximately $5 billion in annual advertising. When an agency owner is running an agency generating $1 million dollars total revenue and competing against $5 billion in advertising expense, or $1,000,000 vs. $5,000,000,000, a person might feel very, very small. There are only approximately 30 P&C insurance companies that even generate $5 billion in net premiums written annually and the U.S. has approximately 900 P&C insurance companies so everyone likely feels small. You are not alone.

But to focus on this difference is to miss an opportunity. No one is going to compete straight up against that budget. The reason they must spend so much on advertising is two-fold: First, they are building their business through marketing rather than by selling. Marketing and selling are so different that it is a minor crime colleges combine them in their course titles. Second, they are anonymous entities so they have to advertise, thereby creating a persona.

Independent insurance agencies have two critical advantages. First, independent insurance agencies were designed, from absolutely day one to sell. Their business model was never, ever designed to market. Lose track of your roots at your own risk. Second, independent agencies are real people. They don’t have to create a persona.

That persona is defined by the agency owners', producers', and staff's reputations. The reputation is the persona. The reputation is, to some degree and often to a large degree, what is being sold. So what are you consciously doing each and every day to build your reputation? Think of your reputation as a brick wall. Every day you add a brick. What brick did you add today? Consciously adding a brick a day builds a formidable wall.

Adding a brick a day does not happen subconsciously either. It has to be done consciously, by plan. Here are some examples. What did you do today to minimize your E&O exposures? What does E&O have to do with reputation? A good reputation is not built by customers having uncovered claims.

Another example is what did you do today to publicize your good works? Your good works might be volunteer work. It might be publicizing how an insured with a significant loss had the protection necessary to rebuild their lives. We always hear about people with inadequate insurance suffering tragedy so the opportunity is ripe for turning the tables.

Another example is simply providing a thank you to someone. It takes an effort to think and act on a brick a day. If that is too much, a brick per week should be easily doable. What is the first brick you'll lay?

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Record Retention

First -- I do not know all the incredibly important details required to build an adequate record retention program. I do know what I don't know and that is crucially important.

Second -- The guidelines you have seen are likely wrong. I don't know what is right, but I know what is wrong. Generic guidelines are wrong simply because they are generic. Generic solutions are always wrong.

Third -- Agency owners need an excellent attorney that specializes in record retention. Again, I don't always know the right attorney but I know the wrong ones and the wrong ones are ones that have not studied the minute details of record retention law, regulation, process, and contract law specific to record retention.

Fourth -- Record retention does not really matter, until it makes or breaks your case.

Fifth -- Your E&O policy likely only provides coverage for part of your exposure. Possibly the greatest exposure is regulatory. Does your policy provide full coverage for violating laws and regulations?

Approximately 20 Federal laws covering record retention are applicable to insurance agencies. Every state has another set of laws and regulations. Insurance companies, with whom you have contracts, often have contractual record retention requirements. So some generic guideline of seven years has to be wrong because the laws have different requirements for different types of records and different requirements for different data within those records. The ACA likely creates a whole new set of requirements.

The retention range is wide, from approximately 90 days after policy issuance the data must be destroyed, not kept, but destroyed, to records that must be kept infinitely. Not only does a plethora of laws exist, but some laws conflict with other laws. Some laws conflict with regulations. Some laws/regulations conflict with carrier contracts. If for no other reason, you need to ignore generic advice and get a good attorney just for this point. How is a novice to figure out how to navigate conflicting laws? An amateur navigating conflicting regulations/laws is just a wreck looking for a place to happen.

One mythical rule is that rules and regulations differentiate between paper and electronic records. I’d estimate 90% of all agency owners and managers believe this myth as is evident by their answer to this question, "Do you have a record retention policy?" Mostly they answer, "Yes, we destroy paper records after X years." When I ask if they destroy electronic records then too, the answer is virtually always, "No, we keep electronic records forever." Relative and specific to record retention, the laws and regulations do not differentiate. Agencies are supposed to destroy records of both mediums using the exact same standards.

Another important, critical point is having a procedure for records if sued. In other words, what must the agency do if client X sues them relative to the pertinent records? The agency will be far better protected if it has a quality procedure upon which the agency has executed to guarantee applicable records are not altered or destroyed even inadvertently.

A slightly different factor is not what you keep, but what you put into your records. What do you say about clients and carriers in your files and internal emails? Some people in the industry, quite a few actually, seem to live in caves relative to technology. Many agency owners and managers still seem to think discovery risk is limited because plaintiff attorneys will not invest the time to read through files for days there in the agency. Maybe some old fashioned, poor, or bad attorneys still do business that way. But the good and smart ones use software and they can go through ten or a hundred times more data using software to discover weaknesses in your files. This makes being consistent and being careful about what goes into in your files/emails ever more important. If a plaintiff attorney’s software can identify in less than 24 hours inconsistencies or files where someone in your office described someone unprofessionally, the strength of their case increases powerfully.

Similarly, if an hour's worth of discovery shows your record retention is inconsistent or noncompliant, which when using an electronic record search may be all the time required, your defense becomes problematic. Another truth is that some plaintiff attorneys and courts are not concerned with proving the agency made a policy mistake. They win because of the agency's poor or inconsistent record keeping.

Record retention is one of the most significant exposures agencies have. The exposure is critical even though the frequency of suits filed or related to record retention is historically low. The exposure is large because so many agencies are doing so much so wrong. The exposure is large because many agencies likely do not have coverage for the regulatory exposure. This is not a no-win situation though. The exposure can be managed by hiring a firm that specializes in managing this exposure for insurance agencies.

The best firm I know for assistance with managing these exposures is Computational Analysis and Network Enterprise Solutions, LLC (CAaNES). Mark Fidel, President of CAaNES, is an attorney and former producer. The legal and insurance background is vital knowledge for a vendor assisting an agency in such a complex endeavor. (Mark may be contacted at mfidel@caanes.com or (505) 241-9669.) The firm also excels in performing cyber security assessments, vulnerability management services and digital forensics. 

The exposure can also be managed by enforcing consistency and professionalism throughout your organization. While an hour's discovery may ruin a case, an hour's discovery has made suits evaporate for my clients that are consistent, professional and have the leadership to have their procedures audited by a professional E&O auditor. They truly turn a lemon into lemonade.

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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