I consult with insurance agencies, brokers, carriers, and support systems of all sizes. My agency clients range in size between $100,000 in revenue to far over $100 million in revenue. I believe small agency owners have the hardest job because they must generate the revenue, service the revenue, manage IT, manage people, manage carrier relationships, and wash the dishes. Years ago when I began my career, life was less complex and being a small agency owner was easier. But now, small agencies are expected and required to perform similarly to large agencies in many ways, including all the regulatory burdens.
This is a problem for the insurance industry because this industry is based on having tens of thousands of relatively small retail distributors. Business schools, high-flying consultancies and P/E firms have been advising so much dilution is a waste and the roll-up opportunities are rich for the easy taking. And carriers have watched helplessly (well, the weak carriers have watched helplessly) worrying they were losing their negotiating leverage, and they have.
However, potentially a bigger issue exists and that is answering the fundamental question of whether the industry needs small agencies and whether in this environment, small agencies can survive. The industry was built on the backs of small agencies because it was by far the least expensive way to build a distribution force. Insurance is also based on trust and local people trust local people far more than some New York based faceless entity. An interesting side benefit is that this local trust likely, in fact certainly though only on an anecdotal basis, reduced E&O claims. People think twice about suing their neighbor but not Wall Street.
Smart insurance companies would be wise to support small agencies, and even provide incentives, provided those small agencies performed. A key reason carriers moved away from small agencies is the lack of performance. Another reason is many small agencies were excellent upfront underwriters and upfront underwriting has been taken over, for better and for worse, by algorithms and drone inspections. These small agencies lived off slow growth, low loss ratios, and high contingencies. The smart carriers already know that the contingency model is dead. They just don’t know how to pull the plug, but it makes zero sense to pay underwriters to underwrite, agencies to underwrite, and software firms to create underwriting systems.
Arguably the most successful carrier today primarily pays the software developer to underwrite. Other carriers will follow or be put out of business.
If you are a small agency owner in this environment, and hopefully representing one of the handful of quality carriers who directly support smaller agencies, what else can you do to make your life easier?
Hire the best advisors possible. That is the most important advice I can give. Small agency owners are far more likely to rely on suggestions from other owners and do-it-yourself this or that. For example, with legal agreements, they try to cut and paste someone else’s agreement without much clue as to what they are doing. These are bad practices to follow.
In 1990, this might have worked but in this more complex carrier and regulatory environment, do-it-yourself projects should remain something done at home. The pain of the mistakes is not felt immediately. For example, creating a flawed producer contract or a non-piracy agreement will not cause pain until someone violates the contract or you are sued.
I have warned agency owners their contracts were flawed more than 10 years prior to them feeling the pain. Their responses are always the same, “It’s worked so far!” A fence always works, even if it is broken, until the wrong person crosses over. A legal agreement only works if it withstands pressure. In other words, if you get an agreement, have someone test it. This requires hiring an attorney or consultant that has been through these situations many times.
And hire high quality advisors. I have read countless legal agreements written by the local attorney who “has done hundreds of these agreements” but has not a clue how to write the contract. Maybe the problem is that insurance agencies are unique businesses, and the attorney is too naïve or egotistical to ask the right questions to write the contract correctly. Or maybe they are just incompetent. But the contracts written by 90% of the smaller (and sometimes large) law firms I review are deeply flawed, and I’m not even an attorney testing the fence.
The same goes for the local, run of the mill accountant. Some generic accountants are great. I’m lucky my own CPA is so good, but most are not. Without any question whatsoever, insurance agency accounting is unique, and especially independent insurance agency accounting is unique. The CPA must understand these unique requirements if they are to offer correct advice. They absolutely cannot offer the advice the agency owner needs if they do not understand insurance agency accounting.
I analyze insurance agency financials every week. It is interesting to me how the financials and operational details agencies send my firm today often have more problems than 25 years ago. I do not know all the reasons why. But one reason is that many of the systems agencies use today are subpar. And small agencies are hard pressed to afford the better systems. For some reason or another though, many small agencies have been sold that all those “bells and whistles” of the more complex systems are not necessary. In reality, if you want an easier life and the ability to grow successfully, you need many of those bells and whistles.
The most important feature you need is an integrated accounting system. Those agency management systems that recommend using a system like QuickBooks for accounting are missing a key point because those accounting systems are like the generic accountants. Insurance agency accounting is unique, so you cannot use a generic accounting system and get correct results, much less results, reports, and data that correlate. When you are a one-person band and can keep everything in your head, you might get by for some time.
Eventually your accounting needs to work and often the time when someone discovers it does not work is when they are ready to sell and/or when they are facing a suit, a divorce, a disability, or their families are trying to clean up and sell the agency after their death.
The world is more complex today. Smart insurance companies should support well-run small agencies to regain the leverage and reduce their concentration of risk. Small agencies should hire the best advisors they can afford to make their life easier so they can do what they really enjoy doing.
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.