Coverages & Exposures
The most powerful tool for reducing E&O exposures is a coverage checklist. A coverage checklist is a form or software application that lists insurance coverages. Hundreds, maybe thousands of checklists have been developed. Literally dozens are available to agencies. Each takes a different angle, but most are designed to cause the producer to discuss various insurance forms and coverages. Some are simple. Some are complex. Some are on paper and some are only electronic.
When used properly, the goal is primarily to cause insureds to buy the insurance they need and thereby, be better protected. Only when the agent has discussed a coverage the insured likely needs and the insured rejects that coverage does a checklist revert to being an E&O preventative measure. At this point, the cause of the insured’s lack of coverage goes from being an agency omission (not discussing the coverage) to the insureds choice to self insure.
Exposure checklists, rather than coverage checklists, often work better for many producers. An exposure checklist focuses on an insured's exposures versus coverages. For instance, rather than focusing on the O&L form, focus on whether the insured has O&L exposures. The benefits are significant.
- Producers do not have to know as much. Discovering exposures is a pure discovery process. It is about asking questions. This compares to discussing coverages which mandates the producer know coverages.
- Producers can find pain points more easily. Unless you are a coverage geek, discussing coverages can be a boring, dry conversation. Instead, discussing the client's exposures is very personal. The discussion of a coverage has no emotional meaning to an insured but the discussion of what they are going to do when they are faced with a large uncovered claim is something totally different, especially when it is an exposure they did not know they had.
- Producers become problem solvers rather than insurance peddlers. They get to be heroes rather than villains.
If you are interested in learning how to use exposures rather than coverages, contact Chris Burand at firstname.lastname@example.org.
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Countries & Agencies: Success vs. Failure
Francis Fukuyama, the famous American political scientist, recently published a book called The Origins of Political Order. This book is about why some political states succeed and others fail. He examined states beginning in approximately 250 BC through today. Mr. Fukuyama's conclusion is that good political order requires:
- A strong state
- Application of law to all parts of society
- A means of holding rulers to account for their actions
How does the success and failure of political states apply to building a strong agency?
1. A Strong State
What is a strong state relative to insurance agencies?
- A strong balance sheet
- Strong and fair contracts of all nature
- A strong operating foundation based upon performance rather than position or nepotism
2. Application of Rules
In business, the rule of law is known as Standard Operating Procedures (SOP's). How does not applying SOP's to everyone in the agency benefit the agency? How does an agency benefit by only applying SOP's to some employees and not others?
Usually when rules only apply to some, an organization achieves high levels of frustration, high employee turnover, poor morale, potential employment practices suits, and high levels of inefficiency. Disparate application of rules is one of the best ways to create a dysfunctional company.
Before jumping to the conclusion that no one wants a dysfunctional company, a good question to ask is why so many dysfunctional agencies exist. The reality is that some agency owners truly prefer a dysfunctional company. Every human has their own personal strengths and weaknesses. Many agency owners possess wonderful one-to-one personal interaction abilities. A key to great sales is making everyone your friend. Making everyone your friend is not a strength when it comes to leadership or management. So agency owners make a choice about whether to avoid conflict and be friends, or have a high performing agency.
Another reason rules are not applied equally is that dysfunctional agencies create the greatest level of freedom and power for agency owners. After all, they're not agency owners because they want a boss.
In some agencies, rules are not applied equally because of a bias. Most producers are men and most staff are women. Most rules apply to staff and not producers. Whether the basis of the bias is gender or position varies significantly from one situation to another, and the origin of the bias is not really even important. The fact bias exists is a key reason rules are not applied to everyone.
3. Holding Rulers Accountable
When political state rulers are not held accountable to the people, the state gets rulers such as Gaddafi, Hitler, Henry VIII, and so on. When agency owners have no accountability, inevitably their agencies underperform. (And the rational that as the owner, their results show their accountability is nothing more than rationalization because poor results are nothing more than poor results. Accountability entails consequences.) Unlike when a ruler is deposed, rarely can one depose a poor agency owner. The best solution is to go to work for an agency owner that is publicly accountable for results and applies the rules to everyone in the agency, including his or herself.
I often see high staff turnover in agencies where the rulers are not held accountable. They always complain about how they can't find the right people and that's because quality people will not work in that environment unless they have to do so.
Clearly after the 2008 financial meltdown, it should be crystal clear to all that oversight is critical. No one is so good that oversight does not add to success. Good oversight reduces risk. However, this brings me to the crux of the issue. For some people at key ownership and executive levels, their emotional status is so delicate they truly prefer mediocrity over success if the price of success includes accountability. The first step for these owners is to seek the counsel they need to overcome their insecurities. This step requires great strength.
For those that have already overcome or are already seeking counsel or are just fortunate and are already completely willing to be held accountable, the time to grow your agency is NOW. The three most successful agencies I know live by these three principles. They especially stress accountability for the rulers. These agencies have the greatest competitive advantage possible. If you are a similar agency, take advantage of every agency ruled by owners preferring a feudal lifestyle. They are ripe for the picking. If you wish to be held accountable and achieve similar success, call me.
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What are Companies Thinking?
I heard a story recently about a company RVP being really frustrated and angry that his company was writing business for an unethical agency after he had personally pulled the agency's contract. I'd be upset too.
How did this happen? The agency simply joined a cluster that represented the company. This happens regularly. Carriers have consistently proven too desperate and too spineless to pull clusters' contracts when these organizations appoint the wrong agencies. At the very least, one would think companies would have to first approve all agencies operating under a cluster contract. So time after time agents who lose contracts get them right back with no repercussions and sometimes even higher commissions!
A reasonable person has to ask, "Have companies simply given up on asserting quality control at the agency level? Or have companies created two standards? One standard for typical agency appointments for which quality control is high and another standard for clusters for which quality control is poor but they pay more anyway?" What a great business model! Little quality control and pay more for it. I wonder who conceived that business strategy.
The vast majority of clusters, and I have read a lot of cluster contracts, have no quality control. Little if any effort is made to assure quality, whether quality is defined as ethical behavior, upfront underwriting, or growth. Appointing such organizations has resulted in a paradigm change as companies have lost or given away a key point of underwriting and ethical control. I hope their new underwriting systems account for this, although anecdotally, I certainly do not see this happening as too many stories already abound about these same kinds of agents figuring out how to cheat these systems. So now we have the possibility of companies paying more for their own IT systems, paying more for clusters, and achieving worse results once the tail catches up.
So what were companies thinking when they began appointing every cluster that had a federal tax I.D. number without any material questions a decade ago? I've asked many company executives this question and have never received a good answer so I'll take some guesses:
Lower Costs? How? They may have thought they would not have to deal with so many small agencies but could keep the volume just the same. Where's the savings? Electronic distribution reduces manual costs to naught. What else? One annual marketing rep visit? I'll give them this although this is an opportunity cost rather than a direct cost and in the scope of things, it is immaterial to most companies. I once did a study of such agencies for a company and the savings was not in expenses, but in losses. Losses are no different whether such an agency has a direct appointment or is effectively brokering the same business through a cluster. The offset to any savings is that often the cluster is being paid more than a regular agency. I do not see how companies net a gain, especially after losing underwriting control.
Loss ratios for the industry have been exceptionally good for the last five to seven years so maybe the degree to which companies have lost underwriting control has not been realized. This would not be surprising. However, if this is the case, then they are in for a shock when loss ratios turn. As a side note, the good clusters/aggregators may suffer as companies turn against all clusters rather than just the many poor ones.
Growth? Most small agencies are small because they do not sell enough. Whether this is because they do not have enough carriers is extremely doubtful, but maybe the companies think these small agencies will indeed grow faster if they have enough carriers.
The one exception where this likely works is if the agencies are brand new start-ups. According to the IIABA, there are 4,000 new agencies. But let's be real, if an agency has existed for twenty years and still generates less than $500,000 in commissions, their growth potential is limited regardless of how many companies they represent. I absolutely am not suggesting such agencies are doing anything wrong. I am simply stating the obvious from a carrier perspective.
Profit? If expenses do not decrease and growth does not increase, how can profit increase? In fact, a distinct possibility exists that this cluster model turns more agencies into price shops creating more churn and lower retention which increases costs.
Stability? Many companies today are extremely concerned with agency perpetuation, especially internal perpetuation. Their concern is they are going to lose control of their books because their agencies will sell to large brokers and banks. If controlling their books through stable agencies is truly a concern, why would the companies agree to appoint clusters without ever reading the cluster contracts? Many cluster contracts diminish agency value because the contracts are written so poorly or in some cases, written so cagey. And this is the best case scenario. Many cluster contracts effectively transfer ownership of the business to the cluster. Some are overt and some are covert. Why an agency would ever agree to such a contract is the subject for an entirely different article, but suffice for now that a key reason is that many agency owners never read their contracts without thinking someone’s personal promises are more important than the contract (something wise men do not do).
As a result, companies have not only then lost underwriting control, but they have lost control of the destiny of their books. It's one thing for a company to direct a $1,000,000 revenue agency and entirely different to tell the principal of a cluster managing $25,000,000 in revenue what to do. A different tail begins wagging the dog at that point.
Several company executives have told me that so far the large clusters are working well for them (it is clear they do not have the same regard for many small clusters). They have concluded all is well because nothing has gone wrong yet. Insurance results follow two major principals. First is the law of large numbers. Second is that it takes time for losses and problems to hit the books. The largest clusters have not yet truly grown into their positions. It is kind of like a really good linebacker who does not yet know his own strength. It is kind of like the insurance companies that grow quickly and deny the tail is ever going to hit them because they're special.
One of the keys they are not yet seeing is that local, independent agencies can be remarkably loyal to carriers. But when they're one small part without a personal company relationship, that loyalty will erode. In and of itself, stability is thus diminished.
Stability will decline for another reason. Companies are indeed paying some clusters more. They are paying more for unknown reasons because quality is far from assured and likely cheapened. Quality agencies that upfront underwrite, agencies with which companies have personal relationships, begin subsidizing these clusters. Maybe I am just too old fashioned in the belief that quality is still important and should be rewarded because that is not the emphasis of many insurance companies.
This leads me to my final point. Clusters that are designed well and that have well-designed fair contracts have an important place in the insurance distribution system. The best of these organizations have good upfront underwriting systems, they truly deliver new business to carriers at lower costs, and they help their members achieve significantly more than they could on their own. These organizations are likely also subsidizing the significant poor performers. It is not the type of organization that is a problem. It is the quality of the organization. If a company would not do business with an agency as an individual, why in the world would it do business with the same agency operating under the umbrella of a cluster and expect any better results?
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What's Wrong with Asking for Help?
Managing agencies today is far more difficult than it was twenty years ago. For those who have been managing agencies for twenty or more years, you know this. You know that "back in the day," the expectation of an agency owner doing it all was more realistic. Back then, if the owner took care of production, the agency generally took care of itself.
Agency management systems were simple and honestly, not even necessary for a large proportion of agencies. Agencies did not have to do as much processing. E&O exposures were less so agencies could get away with being less careful even while doing less work than today. Companies provided a lot more support. Management was just simpler with a much greater margin of error so an agency owner could produce full time and manage part time.
Times have changed. All the agency owners still attempting to make this "I can do it all" business model work are likely stressed out or fooling themselves they have everything under control. I have seen too many agencies completely fail when managed in this manner. In fact, if one indicator exists of an agency in trouble, it is when an agency executive/owner tells me he has everything under control and is successfully proactively managing his agency while still being a full-time producer.
Recently one such owner confessed that he gave this impression innocently, simply because he did not know his agency was nearly broke. This was not a small agency either. In fact, most of my experience has been these situations occur with large agencies, not small ones. There's a teenager mindset that occurs with size: 10 feet tall and bulletproof. Companies won’t tell these agency owners they have problems because the companies need the volume too much and the agencies' advisors rarely will tell the emperor they have no clothes. So it is easy to let things get out of control. I get many calls for help to fix things after the fact and when working these difficult situations, rarely does the agency owner understand they lost control of their agency years earlier.
Agency owners trying to manage both roles competently today are wearing their shoe leather paper thin. Maybe you are one of them. Maybe you are young and want to learn from their mistakes. So what lessons are to be learned?
1. Agency owners who have failed and have seen the error in their ways have often reflected with sage wisdom, and their words are almost always the same, "I would have run a business rather than an agency. I would not have believed I had all the answers. I would have truly asked for help."
They "truly" would have asked for help versus the advice they did seek. While they sometimes hired accountants, consultants, attorneys, and even psychologists, they now see they were just going through the motions. They picked up some easy to implement advice and ideas, but that was all. With all their heart, they thought they were doing so much more. Now they know they were not. They see clearly now the need for true help and for truly listening.
2. The opportunity to succeed today requires professional sales and professional management. One without the other, or an amateur approach to either, greatly limits an agency's ability to succeed or even survive. This is not necessarily the case yet for small agencies, especially one-man shops. The ownership team that wants to truly grow has to invest in professional management. Profit compression is simply too intense. The margin of error is too thin and only professional full-time management is going to create opportunity.
3. These owners would ask for this professional management assistance. They know their passion is sales, not operations. They know operations is too important to manage in the minutes left between sales and meetings.
Some years ago I wrote an article about how easy it is to see others' strengths and weaknesses. I also wrote about how difficult it is to see one's own weaknesses. This reality is always going to be part of the human condition. Making mistakes is so much more painful now because the margin of error is so thin and simultaneously, the price of mistakes has increased. Agency dynamics have changed dramatically. The question is this, "Have you changed to fit the times or do you have to make your own expensive mistakes first?" The choice is most definitely yours to make. It just helps to ask the question out loud.
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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 - 2013, Chris Burand