Independent agents are getting hit with a double whammy these days–still suffering from commission losses as a result of the persistently soft market, while simultaneously dealing with the fallout of a severe recession that is cutting account spending on insurance and driving some clients out of business. How does an agency expect to survive in such a challenging climate, let alone grow?

Expectations for a hard market turnaround do not appear to be materializing anytime soon given the drop in demand for coverage. And while some early signs of economic improvement have been cited, a quick end to the recession is not in sight.

Indeed, many agencies will struggle over the next 24 months as the economy slowly recovers, because the long-term effects of unemployment will begin to have a more sustained impact on insurable exposures beginning next year, warned Patrick Linnert, executive vice president for Marsh Berry & Company Inc., the Willoughby, Ohio-based consulting firm.

Compounding agency woes is the fact there is no sign of any dramatic uptick in pricing in the near future. “Insurance rates are stabilizing, and some are starting to go up a little bit, but I don't see any 15- or 20 percent rate increases this year,” he said.

The consensus opinion among industry observers is that for most agencies, the current economic environment is a test. At the end of this crisis, the agencies left standing will be those that were efficiently run and which positioned themselves to take advantage of the economic upswing and hardening market. They will have accomplished this by becoming lean-and-mean operations, investing in new talent and finding new business at the expense of poorly run competitors.

For some, survival might mean partnering or being acquired to salvage what they can of their business. “We all know how bad it is outside, and we have to focus internally to make sure we are operating as efficiently as possible,” said Mr. Linnert.

“The small- and medium-size agencies need to take a step back and look at their business,” added Audra Szollosy, senior vice president for Hales & Company in Harrisburg, Pa. She said agencies need to consider some strategic planning initiatives, either on their own or with the help of someone from the outside.

“What the larger agencies are doing is tightening up their financial management and making cuts where they can, but not where it is going to cut growth,” according to Shirley Lukens, senior vice president and partner with Reagan Consulting Inc. in Atlanta.

The one common piece of advice all three consultants had was that in times like these, the first step an agency needs to take is to get its house in order.

Mr. Linnert noted that Marsh Berry has been discussing survival considerations lately with agents in seminars titled “How Do You Outrun The Economy?”

Before an agency can consider making any kind of strategic move–whether it is an acquisition or bringing in new talent–principals have to make sure the firm is operating as efficiently as possible.

He and other consultants suggested this might include changes in the compensation structure for principals, putting more money back into the firm, releasing underperforming producers, or considering furloughs if the situation calls for that–since the agency should try not to let good, experienced workers go if they can help it.

Even the largest agencies are reviewing their finances, noted Ms. Lukens, as owners leave money in the firm instead of taking it out as compensation to provide a cushion for economic hard times. “They are living within a budget and taking salary cuts so they can reward good employees and provide incentives to those who go above and beyond,” she said.

Some agencies, she noted, are turning to premium financing for their clients to ensure good receivables management. It is a tough time for clients, too, she said, and premium finance is one way to ensure receivables are paid in a timely manner.

“It's not an easy environment,” said Ms. Szollosy. “It is a difficult time for small and midsize agencies.”

What agencies need to do is go through a SWOT analysis–analyzing their strengths, weaknesses, opportunities and threats, according to Ms. Szollosy. The objective, she said, is to establish the foundation for building a stronger organization–the first step in strategic planning.

The next step is to grow the business, and that means aggressive marketing, differentiating the agency from others, and capturing business that is expected to remain with the firm long after the recession is over and the risk management services of a harder market are in demand.

Jack Roche, vice president of field operations, marketing and distribution for Worcester, Mass.-based Hanover Insurance, said a successful agency will be the one that grows even in such a difficult market and views this time as an opportunity to do that.

“It is a strategy that allows for eventual winners and consolidators in this market,” he said.

The most successful agents will be those who avoid selling insurance on price alone, he explained, adding that customers are looking for agents who will counsel them about their risk profile.

“The agents we see growing have proactive strategies to differentiate themselves,” he said. “They are out to create a value that a customer will respond to.”

As a company, Hanover seeks those agents who want to grow and have developed the strategy to do so. More importantly, the company takes the initiative to work with such agents and craft the type of insurance solutions for clients that will contribute to growth.

Joseph B. Smith, president and chief executive officer of Smith Brothers, a Glastonbury, Conn.-based independent agency that works with Hanover, noted that “winning agents have to be aware of the environment they are in and invest in their agencies to see the opportunities.”

He emphasized that a winning agency must define how it is different–and if it promises something different from the competition, to deliver.

Despite the economic downturn, Smith Brothers expects to see its revenues increase by the end of its fiscal year, and he attributes that to continued investment in the firm. “We think that if we continue to invest in quality and deliver on our sale promises, then the business has a lot of hope and promise for the future,” he observed.

Mr. Linnert said that what a successful agency needs to do to grow is to actually concentrate on a minority portion of its clients and service them well. He said the focus should be on the top 20 percent of accounts, which normally provide 80 percent of the agency's revenue. “You can do a lot more for a $10 million account than an $8,000 account and still stay profitable,” he pointed out.

However, Al Diamond, president of the Cherry Hill, N.J.-based Agency Consulting Group, advocates a different approach to dealing with the clients–something he terms: “Relationship Selling Agents.”

The idea is not to work on a select few clients, but all the clients in the agency, with “fairly aggressive marketing campaigns” that go after small- and medium-size accounts. He said it is not a quote program but selling security and management.

“You do what you can do on pricing, but so does everyone else,” said Mr. Diamond.

He said this model is actually nothing new but goes back to the 1940s, when agents and clients built a personal relationship. It is also dependent on referrals, which helps to build retentions.

Growing in this way will spell dividends once the soft market and economic crisis end, he added.

“We want [agents] to become the doctors instead of the used car salesmen,” pointed out Mr. Diamond. “It's a trust thing. But now you have to know what you are talking about and build that trust.”

The benefits of getting an agency's financial house in order are not limited to improvements to the bottom line. It is also essential for any borrowing an agency might contemplate.

Lenders who specialize in dealing with insurance agencies say that when bankers were lending to homeowners or other businesses without doing their proper due diligence, agency-focused institutions continued to closely monitor their programs and today are still making loans–provided they are for the right reasons.

The last thing that an agent should ever consider borrowing for is to mask earnings problems within the agency, warned Rick Dennen, president and chief executive officer of Oak Street Funding, based in Indianapolis. “You don't want to add more to the problem,” he said.

When it comes to borrowing–leveraging is the word most often used–agents need to focus on what they must do to be successful, then factor in borrowing requirements to accomplish that goal, suggested Mr. Dennen.

Whether the plan is to make an acquisition or invest in technology, the agent should consider if a combination of the agency's equity and debt will do the job, or whether it may be more advantageous to bring in a partner instead, he advised.

“They have to have a focused business plan on what they are going to do, how they are going to do it, and how the loan is going to get repaid,” he said.

Where in the past an agent may have gotten a loan from just about any bank, perhaps with some difficulty, today it is virtually impossible to borrow via traditional channels, according to Robert Pettinicchi, executive vice president at InsurBanc in Farmington, Conn.

Standard banks have gone back to the basics, loaning only to those businesses they understand–a focus that virtually shuts out insurance agencies, said Mr. Pettinicchi.

“There are loans out there, but you have to jump through hoops to get them unless you deal with someone like us who understands [the insurance agency business],” said Mr. Pettinicchi, whose bank was founded by the Independent Insurance Agents and Brokers of America.

Getting a loan is not more difficult through InsurBanc than in the past because the bank never changed its lending standards, he noted, adding that since the credit crisis, demand for agency lending has grown, but more of those requests fail to “hit that bar” the bank has set.

For Oak Street, loaning money is making an investment in the agency's plans and management, said Mr. Dennen. Six months ago, many agents with good credit were afraid to make acquisition deals and sat on the sidelines, but now those with good credit are making their moves, he observed.

It helps that agency valuations have become “more realistic,” allowing deals to go ahead, he added.

Mr. Pettinicchi also noted that leveraging is not limited to funding acquisitions or technology investments–it can also apply to covering the expense in bringing on a new agent, acquiring additional books of business, or even buying office space instead of renting it.

Many agents are not experienced borrowers–especially smaller agencies, he noted, and when it comes to making large loans for acquisitions, it is wise to seek professional advice from consultants, attorneys and accountants, he suggested.

“A lot of agents like to take advice given to them on the golf course, but that is not necessarily going to help their business,” warned Mr. Pettinicchi.

Special Reports /

Agents Hunkering Down To Survive Economic Threats

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