Small independent agencies struggling to survive in today's economy and insurance market face plenty of challenges–not the least of which is pressure from the insurers they represent. Many are tired of their insurers demanding more volume when in actuality a small profitable agency is often more valuable to an insurer than a large unprofitable agency. The agencies are tired of missing profit sharing from a company with a 14 percent loss ratio because they were $20,000 short of their minimum volume commitment. And more of them are taking action to do something about it. Instead of going it alone, more agencies are looking at ways to combine forces through “clustering” or aggregating–pooling their resources to combine volume without giving up autonomy or ownership. Although the trend has been around since the 1970s, clustering is becoming more popular in today's economy. According to the IIABA/Future One 2006 Agency Universe Study, more agencies in the under $1 million or $2 million annual revenue range are likely to engage in some form of aggregated arrangement, with 19 percent of respondents noting their involvement at some level. AA&B Web exclusive! Read Clusters and aggregators: Straight from the sources And these arrangements work: In a recent ranking of the country's top 100 agencies by an insurance trade publication, 28 percent were part of a cluster or aggregator. These models, when carefully undertaken, can be a win-win-win: agencies gain market access and profitsharing, and minimize the risk of losing large accounts; insurers get distribution expertise and quality from agencies; and even regulators benefit because of the ease in managing profitability and loss results. Volume aggregation has several characteristics that may be advantageous. It satisfies your company's appetite for volume and allows you to attain profit sharing volume levels as a group when you might not meet them individually. It escalates the aggregated agents into higher percentage payout levels for profit sharing and it increases profit sharing stability due to the aggregated books to sustain shock losses that the individual books' abilities could not tolerate due to the small volume. These factors may make clustering more viable today. Clusters are more accepted today than in the past. There are many different types of entities and structures, and they are constantly evolving. Companies are viewing them much more favorably than in the past. Like any new idea, it took a while for people to get used to it, but it is now an accepted strategy for smaller independent agents. Bill Wilson, associate vice president of education and training for IIABA and director of the Big I Virtual University, recently approached consultant Peter van Aartrijk and me to work on a paper about aggregators. This paper is now available to all subscribers on the IIABA's Virtual University Web site. In this paper, I categorize aggregators into four broad groups:

1. Agency franchise operations (AFO): These offer a franchise arrangement and share revenue while providing market access; a compensation-based model rather than an upstream holding company concept.
2. Market access cooperatives (MAC): The original agency “clusters” in which agencies retain ownership of their businesses, and thus their name, identity, location and assets.
3. Agency platform operations (APO): Taking the aggregator model to the next step, APOs provide service benefits of AFOs and MACs, and further agency structure benefits by setting up large automation platforms for members.
4. Managed agency organizations (MAO): These attract large numbers of agents and provide a common management structure for all members, who usually share the ownership and manage the organization that oversees their agency books of business.

These classifications are really a chronological evolution of how aggregators have developed. The first entities were franchises, like USI; then came market access cooperatives like Grindstone Group. Then agency platform organizations emerged, like Renaissance Alliance and more recently, managed agency organizations like United Valley Insurance Agencies. Another important distinction is that some of these organizations are organized as money makers for their owners. They may even take a percentage of ownership in your book. Others are groups of smaller agents helping everyone survive, with almost a non-profit mentality to their operations.

A brief history of aggregation
The concept of agency aggregation has been around for nearly three decades, dating back to the 1970s, spurred by ongoing pressure from carriers for agencies to produce higher levels of premium. At the time, even some of the big brokers were having difficulty accessing errors and omissions coverage, and infrastructure problems were appearing in the insurance industry. “More and more” seemed to be the mode of the day: Companies were demanding more and more premium, automation was becoming more and more important and more and more expensive. Talented and capable managerial and sales staffers also were becoming more difficult to access. This led to the first aggregations, which took the form of franchises. Assurex was one of these original organizations that responded to some of these problems. As Assurex grew, other groups such as USI saw an opportunity and formed franchises largely based on other service distribution models such as real estate. However, this model never really became a catalytic driving force for smaller agencies, primarily because such arrangements were designed with larger agents and brokers in mind. The trend of smaller agencies pooling their resources in clusters created one of the few alternatives to being acquired or going out of business. The idea was for agencies to collectively access markets on a broader basis than they could individually. These pioneering aggregators understood they could realize enhanced profit sharing and income stability. They saw that they could do this on their own without having to go to a large entity to gain the benefits of aggregation. These became the market access cooperatives described above. As the trend grew, carriers began recognizing the clout of clusters in terms of distribution reach and premium volume. In the 1980s, the early aggregators, which were primarily regional, began expanding into new states and developing new structures. Over time, a generation of insurance agents sought a better way to do business. Renaissance Group, Wellesley, Mass., is a good example. President J. Bruce Cochrane approached a group of insurers with a better distribution model. Several companies signed on to his concept and he built an agency platform organization which set up its own automation platform, established a commercial lines underwriting floor and created an aggregated agency. The Renaissance Group targets larger agencies than the traditional aggregators and concurrent with market disruption in the Massachusetts insurance market place, it simply built what was perceived to be a better mouse trap. The agencies were in the right place, at the right time, with the right idea. They developed a plan, capitalized themselves, implemented and executed. Now they are in the list of the top 100 privately held insurance agencies. Finally, there are a limited number of groups that have taken aggregator characteristics, but really formed themselves like a large agency. United Valley Insurance Services, Fresco, Calif., actually manages itself in a more centralized manner. Established in 1983, it is now a $500 million organization with 50 or more agencies and 50 or more insurers in the mix and a cohesive identity.
Two Maine aggregators
Today, insurance is more dependent on the financial market, and market swings have become more and more pronounced due to the dependence on reinsurance, making aggregators more important than ever.
I work with two in Maine: Grindstone Financial Group and Sevigney Group. These two are good examples because they have the longest histories as aggregators and the longest history with me. Grindstone Financial Group
In 1993, when I was regional marketing manager for an insurer that does business in Maine, a coworkers approached me and asked if I would help two agents who wanted to form an alliance to help small agents like themselves survive. These two agents were Blaine “Buzzy” Holmes of the Holmes Agency, Ellsworth, Maine, and Paul Tracy of the Winter Harbor Agency, Gouldsboro, Maine. We retreated to a conference room in our regional office to build a mind map of the elements necessary to found such a group, and build a contract that would govern its existence. The basic planning process took 2 days. The process then proceeded to the attorney who developed a legal contract for the arrangement. Today the group is comprised of 19 agencies and growing. To support that growth, we recently have created a market access cooperative that rolls volumes into master codes with insurance carriers to improve results and efficiency for the carriers, who, in turn, realize enhanced profits as carriers and for the Grindstone Group. One of the reasons Grindstone seems to work is that although the decision making includes all participants, the final judgment is limited to the original members of the LLC, Buzzy and Paul. The entity always has been structured as an LLC controlled by those two original members. The group makes decisions for the benefit of the members, not just for the LLC. It is managed almost with a non-profit mentality. I sometimes criticize Paul and Buzzy for not charging enough for what they offer, although that mentality is what makes the group so successful. All agency members pay all the same fees and charges. When I postulate why they do not want to increase the fees to reimburse themselves for the effort to set the Grindstone Group up and run it, their response is indicative of why they are successful as an aggregator: “Howard, we make so much more money in our own agencies and suffer so much less grief from the insurance carriers for volume commitments and other areas, we want Grindstone to offer all of the benefits possible to all of the members.” The group has hired Gary Hanscom (who originally worked with me and helped set up the contract) as its sole employee managing the marketing, contracting and affairs of the Grindstone Financial Group. Grindstone does not actively solicit members and adds members very selectively throughout Maine. In my opinion, their success is attributable to the cooperative nature of the principals and their attitude of existing to help small agents survive and thrive. Sevigney Group
The Sevigney Group, Wells, Maine, was founded by Leonard Sevigney, who is now partially retired. I became friends with Len years ago, when I was working for an agency in a nearby town. At his request, I did some risk management consulting for some of his clients, even as his competitor. Sevigney Group was started even prior to the Grindstone Group, with the same mission: to help small agents survive. The group now includes 10 agencies, 9 of which are owners of the Sevigney Group. The group works with them to perform strategic planning and visioning as they move forward. They are an agency platform organization, offering an automation platform and collective management assistance. Sevigney Group is successful and embarking on additional ideas and strategic initiatives to assist in broadening their distribution focus by helping smaller agents, even offering the right individuals the chance to “start” an agency with the group. Sevigney Group is located in a different geographic area than Grindstone and offers a different selection of services. From an insurance company standpoint, the consolidation of distribution has created some strategic challenges. Aggregation provides a means to overcome some of the entry barriers faced by new entrants to the insurance business. Strategically it improves distribution and keeps it local. The consolidation of distribution puts the people who can make decisions further and further from the consumer. Aggregations realize economies of scale while keeping distribution local. These two aggregators are examples of helping to meet the goals of insurance companies while keeping local agents alive and thriving.
One of the fundamental factors driving both Grindstone and Sevigney Group is the owners' commitment to ensuring that all members benefit from participation. Buzzy Holmes, Paul Tracy and Len Sevigney share strong business ethics and values above reproach. They are trusted in the insurance industry and have earned and maintain that trust in test after test. This is an important fundamental in founding an aggregator. The Virtual University article offers tools to evaluate different aggregators and to assist you in deciding a strategic direction for your agency. Peter did a wonderful job of creating these evaluations and gave us all some concrete tools with which to work in making a decision. The tools clearly lay out your options and help you delineate differences and evaluate your “fit” with different organizations.
Based on the paper, I have even developed a consulting package to help groups of agents set up an aggregator, and I am currently helping some groups to set up alliances. I have worked with one group since before it was founded and have built my model with their help. I also have a revenue-sharing arrangement with them for the consulting package that helps them recover costs and allows us to access them for some additional support and advice. Some aggregators also include agency perpetuation options into their strategic planning scheme. The aggregator entity can sometimes improve the agency's ability to finance a perpetuation or sometimes there are members of the aggregator that can provide the perpetuations for some of the members without options. Justified or not, insurance companies continue to demand more from their agents. Aggregation improves and stabilizes distribution revenue and allows agents to share expertise and financial results as well as success and victories. It also provides an excellent forum for improved strategic planning and focus. Aggregation is a way of capitalizing on improved economies of scale for everyone without losing the “small organization” customer service and philosophy. Companies receive more distribution points and fewer contact points. Agencies and their agents retain autonomy but gain clout with their carriers. Insureds continue to be served by local caring contact points. Communities retain local businesses rather than having a mega-agency move in and take the owner out of the store. Everyone wins, and with the improved perception of aggregators over time, no one appears to lose. Maybe this is one option you should consider as you think about the future.