I HAVE worked with many independent agencies in Southern Louisiana, and quite a few are located in New Orleans. I have visited New Orleans twice since Hurricane Katrina hit, and the devastation is worse than television could ever convey. I believe that well-managed agencies will survive this difficult time. Unfortunately, many that were unprepared will end up in bankruptcy. To avoid their fate, I highly recommend you take the following steps. All of them will increase your agency's value; so even if you think you never will suffer a catastrophe, there is no reason not to implement these steps immediately.

1) Get in trust! I doubt that many agencies that were not in trust will survive Katrina. (To be in trust, cash plus premiums receivable, divided by premiums payable, must be greater than 1.0–preferably 1.1). In a catastrophe, insurance companies rightly are going to want the money they are owed, but customers are going to quit paying. An agency that is out of trust essentially has already spent customer money and is relying on next month's customer payments to meet this month's company bills. This is an unethical (and stupid) practice.

To minimize taxes, owners of many agencies–especially ones organized as “S” corporations–take out all their profits at the end of the year, per their accountants' advice. And they often do so without regard to their trust ratio. If your accountant advises you to take out all your earnings, even if you're out of trust, you should point out the problem or even find a new accountant. Unfortunately, I have encountered accountants who know perfectly well the importance of having a trust ratio above 1.0 but still advise agents with a lesser ratio to take money out of their agencies. Again, this is an unethical practice–and in the event of a catastrophe, it will bankrupt an agency. Think about all those houses in New Orleans that will be declared total losses, resulting in cancelled policies. Companies will demand the unearned commissions on those cancelled accounts! So don't spend money that is not yours. You must keep your trust ratio at 1.0 or greater.

2) Have adequate working capital.Maintain at least 30 days–preferably 60 days–of working capital. Most agencies that are in trust will have at least 30 days' working capital, but that is considered the bare minimum advisable. Maintaining a 60-day cushion is a much sounder business practice. An agency with 60 days of working capital can weather a catastrophe much better than one trying to get by with half that amount. This is another matter that too many accountants fail to consider when giving agencies tax advice. Always ask your accountant to give you advice that will ensure you maintain sound business practices, not just minimize your taxes.

3) Maintain accurate, complete data. Following a catastrophe, insureds are going to be upset if they discover they are not adequately covered for losses. Agencies that have documented that they offered clients proper protection but that clients declined it will have a much easier time defending themselves from E&O claims.

Agencies also need to be able to determine a catastrophe's impact on their books of business. With good data in its automation system, an agency can readily figure out how many of its insureds will have incurred losses. This helps the agency plan its response. The alternative is to grope around blindly.

4) Have a catastrophe plan. Every agency needs a catastrophe plan. Believe it or not, a catastrophe plan does not consist solely of bringing home a backup copy of your data every night. Following Katrina, many agents discovered that having backed up data was the least of their worries. So develop a comprehensive catastrophe plan. The Louisiana and Tennessee state chapters of the Independent Insurance Agents & Brokers of America have “boilerplate” plans agents can customize. No doubt help is available from other sources as well.

Do not forget your hardware needs following a catastrophe, and don't plan on being able to get new hardware locally. Have a prearranged plan with a supplier outside your area that can overnight replacement hardware to you.

Satellite phones seemed to work throughout the hurricanes, whereas cell phones did not. It might be worth investing in a couple for your key employees.

Make sure that you have cell and satellite phone numbers for all employees and that everyone knows whom to contact to organize the initial recovery meeting.

It's not a bad idea to have a power generator. Make sure your extension cords are long enough to reach from the generator to your equipment.

6) Secure your cash. Do business with at least two banks, one of which is not local. If one gets wiped out, you at least will have access to funds in the other.

Every agency should have preestablished lines of credit. Getting a line of credit after a catastrophe probably will be more difficult. While a bank might cancel a preexisting line of credit, I think the odds are in an agency's favor. Much like your carrier's underwriters, I believe the banks are more likely to say no to a new risk than cancel an existing risk in good standing.

7) Use coverage checklists. Every agency should use coverage checklists. Some “experts” suggest coverage checklists increase an agency's E&O exposure, but I beg to differ. The proper use of good coverage checklists will result in insureds buying more insurance. The more insurance they have, the less likely a loss will be uncovered. Additionally, a coverage checklist can provide documentation that a client declined recommended coverage, giving the agency more E&O protection.

8) Handle your payroll wisely. Pay producers when the agency receives its commissions from its carriers, not when policies are issued. To do otherwise means producers are paid before the agency receives its money. Even in normal times, this does not make sense. Following a catastrophe, however, an agency is going to need every penny it can find. It should not deplete its funds by paying producers out of pocket, rather than waiting for company commissions.

These are a few of the key steps every agency should implement so it can cope with a catastrophe. Hurricane Katrina left many agencies in misery. No agency should ignore the lessons they learned the hard way.

Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (709) 485-3868 or by e-mail at Chris@burand-associates.com.

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For The Manager: If the next disaster hit your area, would you be ready?

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