Despite the worst economy since the Great Depression and a persistently soft commercial insurance market, three independent agencies that stuck to their core missions of proactive client service and managing the cost of risk not only kept their heads above water but maintained a growing bottom line.

The three winning agencies in the eighth annual National Underwriter Commercial Insurance Agency of the Year award program serve as role models for their peers. The trio shared the secrets of their success in profiles published in NU's Oct. 12 edition, available online at the bottom of www.property-casualty.com, under “NU Exclusives.”

Principals from the three winning organizations recently responded to a series of questions about the future of the independent agency system. Their insights are provided below.

Sam Friedman
Editor In Chief
National Underwriter

How is your agency adapting to the recession? What impact is the economic downturn and credit crunch having on your business, and what steps are you taking to compensate?

Charles Rosson
Woodruff-Sawyer & Company
2009 Champion

There is no doubt that the economic downturn and soft market have impacted our business. We're fortunate, though, that we tend to write larger, more complex accounts, which allows us to demonstrate our value to clients beyond insurance placement. As a result, we've become an integral part of our clients' business and are somewhat less dependent on commission income than some of our competitors.

We've been able to get out in front of the downturn from an expense standpoint. We made adjustments in late 2007/early 2008 that positioned us well when the economy really turned sour last fall. The fact that we took action about a year ahead served us well, as we didn't have to make severe adjustments when the full brunt of the recession hit.

Stephen P. DeMatteo
York International Agency, LLC
2009 Honorable Mention

Over the years we've had excellent results in both good and bad economies and in hard and soft insurance markets. We make no excuses and continue to focus on execution. In the current environment we are very proud of the fact that we've grown 8 percent in the past 12 months.

That being said, we've had to deal with our share of client-shrink, whether just exposures or actual bankruptcies–but on the whole our book has remained stable. We are super-focused on retention, which remains in the mid-90s, which we attribute to our RADAR (Risk Assessment and Data Analysis Review) risk management service model and solid new business growth in commercial lines.

One of the benefits of the soft market has been our ability to move otherwise excess and surplus lines business into our direct relationships. These markets are very hungry and show little sign of firming. This has provided a boost to our profitability and helped maintain income in the face of reduced premiums.

This has been great for clients because they are seeing prices fall while moving into stronger companies with superior claims reputations and better terms and conditions. Also, a number of our real estate clients have taken an opportunity in these soft market conditions to address any insurance-to-value concerns and to buy up catastrophe coverage.

We are also much more disciplined regarding producer pipeline management. We have a real-time pipeline management system, and our younger producers are meeting with agency management to assist with opportunities weekly. The entire sales team meets every two weeks to discuss our larger opportunities of $25,000 in revenue or higher. The pipeline is very active–we are very bullish on our new-business growth plan. Regardless of the economic environment, new sales cure all ills.

Dudley Wooley
Ross & Yerger
2009 Honorable Mention

We are hanging in there! In some ways, we are fortunate that our business is balanced between commercial insurance and group employee benefits.

Obviously our commercial insurance business is most affected by current economic woes, but we are again fortunate to have diversity–for example, health care and nonprofit business to balance out oil and gas and financial institutions business.

Health care reform will have some impact on our group employee benefits business–we just don't know to what extent. Bottom line, we ebb and flow just as our clients do!

We are continuing to focus on new business. We have a saying that “new business solves a lot of problems!” We are also being more protective of existing relationships with our insureds.

The current soft market has created a very competitive environment where many insureds are focused solely on the price of their insurance programs. A comprehensive study of our expenses and staying dedicated to our conservative budgeting practices has helped us stay profitable even in these difficult times.

Sam Friedman:

How is the commercial lines market looking for the Jan. 1, 2010 renewal season? Are there any areas where rates appear to be rising and coverage availability shrinking? Are any lines particularly soft right now? How do you see the market playing out into 2010?

Charles Rosson:

The marketplace continues to show signs of price competition in the majority of lines of business, although the intensity is slowing. There are a number of strong carriers that are expanding their appetite and capacity for risk, creating even more intense competition. Certain areas like California workers' comp and capacity lines such as property and catastrophe coverage show signs of slowing or slight hardening. The carriers are focused on retaining their renewals and defending books where they continue to show good margin.

While we expect less price intensity in the coming year, for the most part clients are not looking to increase their overall insurance spending. We expect them to make choices on how best to manage their insurance dollars, which will require brokers to continue bringing creative options, solutions and data to help make these decisions.

Stephen P. DeMatteo:

All corners remain consistently soft. Capacity is very good–it isn't restricted in any way. We hear underwriters talking about increasing rates, but we've seen zero discipline at this point.

Much has been written about carriers releasing what they perceive as redundant reserves on their books to boost short-term results. So we know that can't go on forever, and an effort to firm prices will eventually happen–maybe by 2011. For now we see pretty flat pricing with pockets of continued reductions in 2010.

Dudley Wooley:

We feel the market will remain soft or flat throughout 2010. Currently, the commercial insurance marketplace feels very soft to us–more so for new business than renewals. Carriers' actions are very unpredictable, so the work is even more challenging than normal.

We've seen some leveling and even some hardening when loss experience indicates or carrier appetite has changed. Continuing financial pressures have put some upward pressure on D&O coverage for certain segments of our business, such as financial institutions.

Sam Friedman:

How do you avoid the trap of policy-peddling and price-shopping, especially in a commercial market that is still as competitive as this one, and with buyers under pressure to lower their insurance costs? How do you maintain a full-service agency under such conditions?

Charles Rosson:

While we certainly don't recommend that clients change insurers every year, we take our fiduciary responsibility as agents very seriously to find our clients the best possible terms for the best price. If a client's risk profile or the appetite of our insurance company partners changes, and there is a better option out there, you can be sure we'll find it.

Our clients value the long-term carrier relationships they've developed but must also be mindful of the impact of economic pressures and insurance market dynamics. By bringing them options on programs, understanding the carriers that match with their risk profile and providing risk solutions, programs can be crafted that will respond to their needs over time.

We maintain a full-service agency by pricing our business and staffing our agency in line with our scope of service arrangements. We've worked hard to make sure we have an efficient service delivery model where our resources are allocated appropriately. Clients needing additional services receive more resources, and they pay for them.

We operate at profit levels below industry norms in order to grow the business and provide consistent client service. There is no pressure to meet high profit targets in each reporting period.

We also have a committed shareholder group–we're 100 percent employee-owned–which is focused on ensuring excellence and the long-term success of our firm. A good brokerage needs to move with the ebb and flow of the markets and economic cycles and remain strong advocates for clients. We've been in business for 90 years, so we're experienced in riding the waves and helping our clients to do the same.

Stephen P. DeMatteo:

We are disciplined but not perfect. I'd say what we are most disciplined in is seeking to position the playing field in our favor whenever possible. If that means there are markets where we have preferred relationships that haven't been approached, then we may choose to compete.

But that is less than 10 percent of the time. The majority of the time we are engaging prospects outside of the 90-day renewal window, trying to solve problems and differentiate ourselves in a way other than the transaction.

Our RADAR risk assessment approach–which helps clients to identify, assess and mitigate risk–is not a fundamental new idea. We win and retain clients because we execute better than the competition. We've also worked hard to educate our markets to truly believe in the process, and when clients execute our strategies, the insurers in turn get better risks to write. We just help everyone connect the dots.

We also drive producer activity by only paying commission above a minimum threshold, which cuts out wasted quoting exercises in our commercial lines department for small transactional opportunities.

We are also one of the few agencies that does not have a dedicated marketing department by design. We believe the placing broker should also service the account, as that builds a stronger client relationship. So minimizing the bid process frees that staff up to be more consultative.

Dudley Wooley:

We work with our clients to stay focused on total cost of risk and not just the immediate price of insurance. Over the long haul, focusing on total cost of risk will reduce your short-term costs of insurance, as well as deliver other valuable returns on investments in a viable risk management program.

In these uncertain economic times, we direct our clients' focus on the value they receive for the commission dollars or fees they pay, financial stability (both our agency's and our insurance carriers') and proactive service and advice.

Sam Friedman:

How do you incorporate risk management into your standard operating procedures in sales, retention and service? Are you having any trouble convincing clients to remain focused on containing losses and overall cost of risk given the pressure to cut corporate budgets and with the insurance market basically still competitive in terms of price?

Charles Rosson:

Risk management and risk control are fundamental to the counsel we provide to existing and prospective clients. They are a core part of our overall value proposition, given their direct impact on our clients' ability to effectively manage their direct and indirect risk-transfer costs.

For example, we manage public clients' securities litigation exposure through detailed counseling about a variety of corporate governance and risk mitigation practices, along with specific analysis of proprietary litigation data. This process is part of our service offering for all public D&O clients.

Similarly, we leverage internal engineering and business continuity planning expertise to support clients' immediate and long-term objectives for both loss mitigation and premium reductions.

Other examples include regular review of contracts and bid specifications for both insurable and uninsurable risk-transfer issues. For our construction clients, our risk control and online resources focus on both management and field levels for optimum effectiveness and to prevent claims from occurring. We also provide solid business counsel in terms of financial and operational planning to support their surety programs.

Controlling cost is a constant priority for clients, and is obviously crucial in the current economic environment. While our clients are scrutinizing all of their expenses, we leverage the short- and long-term economic value that effective risk management can have on their cost of risk and overall profitability. In addition, we focus on risk management activities that can have a measurable impact without substantial investment.

We also counsel clients to start or continue implementing risk management efforts now, in spite of the continued availability of inexpensive capacity for most buyers. When market conditions change, clients with active risk management programs in place are better positioned to reduce their prospective cost of risk, as measured by more favorable risk-transfer terms and improved risk profiles.

Although every client's risk tolerance varies, the basic factors informing their risk assumption and risk-transfer decisions haven't changed. As a result, we continue to integrate cost-effective risk management strategies and counseling into the insurance and risk-transfer programs we manage for our clients to meet their broader financial objectives.

Stephen P. DeMatteo:

We incorporate it successfully because we embrace the reality that “risk management” means something different to different types and sizes of clients. In real estate it may mean lease and vendor contract reviews. If it is an industrial client it may be workers' comp or fleet issues where we have quarterly service meetings to address progress on annual service goals.

We have won clients on the basis that active risk management is key in any market. And while we are in the soft end of the cycle now, the effort to raise rates will come eventually, and any time you can differentiate from the crowd you will do better than the competition.

We work to refocus the client to think in terms of overall cost, rather than just price. That is a paradigm shift for most middle-market customers. Often the client thinks the only way they can control cost is to bid the insurance.

We know they want to talk premium–and eventually we always will talk premium–but our process helps them identify cost-drivers, make operational changes to positively impact the trend, and create a service plan that tells a great story to their underwriters along the way.

It is a little more work, but it builds better long-term results and client loyalty, and ultimately achieves the lower premium price the client started out looking for.

Dudley Wooley:

Yes, the ongoing soft market has made this a challenge. Convincing clients to invest in risk management projects that may cost tens or hundreds of thousands of dollars is difficult when it may only yield a few thousand in savings in year one. The challenge is to help them understand the long-terms savings for these investments.

Sam Friedman:

How are your agencies compensated when you go beyond standard insurance placement to offer risk management and other non-insurance services? What is your policy on compensation disclosure?

Charles Rosson:

Our process for determining fair and adequate compensation involves having a deep and detailed conversation with the client about their priorities, and we mutually agree on our total compensation. That compensation can be in the form of fees, commissions and/or a combination of the two, and is always fully disclosed.

This is our policy as part of our corporate compensation disclosure statement, and is an area of real differentiation for us. We feel strongly that the client should understand the actual costs of their program and the compensation we receive to service their program and provide consultation on issues.

Stephen P. DeMatteo:

We provide a high level of pre- and post-loss services to all customers. We have to, since we know that is the right thing to do, and because competition is so steep it is simply required to create loyal clients and raving fans.

If a client is paying us in the form of a fee in lieu of commission, then it is contemplated in the overall fee discussion.

We believe the ultimate litmus test regarding compensation is the client's measure of the amount of value we deliver. If the client is satisfied and believes they are getting real value for what they pay, there are few questions about our compensation.

That said, we fully embrace transparency and are involved in our home state of New York in the evolving compensation disclosure discussion. We feel strongly that we deliver a higher level of service than other agents, and in the vast majority of cases we are providing many more capabilities in return for income at levels that are largely in line with what other agencies charge for simply placing a policy.

We do not fear the compensation conversation with a client. I believe that it is just such fear that drives many of the negative reactions to income disclosure embraced by some in the independent agency segment. Transparency and an open dialogue regarding income where desired by a client will contribute to elevating the perceptions of agents and our industry as a whole across the country just as much as providing value-added services.

Dudley Wooley:

Most of our revenue is based upon a traditional commission income model, although we do have several clients that prefer to do business on a fee basis. Deriving accurate fees can be a challenge, and is usually easier to do on larger accounts where we have several years of data upon which to base our fee structure.

When offering certain services, we may charge additional fees or pass through costs associated for those services and products.

The tough question lately for us is: “How much can we offer our clients in terms of services and products for the commissions they already pay us?” In turn, this also helps us open many conversations with prospects.

Yes, we will disclose compensation amounts and structure when our clients request that information. We have found that most of our clients expect us to receive a fair compensation for the work we provide and trust us to do so at a fair price.

Sam Friedman:

How big a part do employee benefit sales and services play in your agency business, particularly group health? Are you concerned about the impact of health care reform?

Charles Rosson:

Employee benefits are a very important part of our business, and have been for more than 40 years. We've been bullish on benefits overall, but we're watching the health care discussion taking place in our country closely–and in fact, we're at the forefront of how the benefits industry will be reshaped and impacted.

In July, our benefits compliance officer was invited to Washington, D.C., to meet personally with select members of the House of Representatives in both parties to consult on the state of current reform proposals and to propose a variety of alternative options.

The knowledge and interaction we gained with lawmakers and industry peers there is also helping us provide cutting-edge advice about the potential impact of reform on employee benefits programs.

I've also been making our voice heard as a board member of the Council of Employee Benefits Executives, which represents the benefits community as part of the Council of Insurance Agents and Brokers.

While certain reform elements being proposed could negatively impact our business, other aspects–such as an employer mandate–could actually create additional opportunities in the industry.

Stephen P. DeMatteo:

Group medical benefits are a key driver for the agency despite the potential storm clouds rolling in with health care reform.

We concluded a merger with Sequoia Benefits in January 2009 on the belief that there will always be a role for firms that provide good advice to customers, and we wanted to improve our scale and overall capabilities to meet this challenge. This transaction makes us much stronger in both group and individual lines.

But I also believe that we, and the industry as a whole, are very resilient. If macro issues force us to change, we will.

Dudley Wooley:

Group benefits are a significant source of revenue for our firm. Our last analysis showed that of that total revenue segment, 60 percent is related to group major medical plan income.

As such, we are very concerned about the impact of impending health care reform legislation. In a worst-case scenario, we could be cut out of the distribution channel for some of our fully insured groups.

If so, we would have to consider working on a fee basis with our clients to provide continuing services on their major medical plans, or simply focus on non-major medical products and offer more services that help our insureds reduce their costs for health care expenditures.

Sam Friedman:

What are some of the big technology challenges your agency has faced, and what did you do to overcome them? How big a role does tech play in your agency operations and business planning?

Charles Rosson:

In this extremely paper-based industry, the insurance process can be a very cumbersome one. We've made it our goal to be a true leader in using technology to work with clients in a secure and efficient way.

For example, our “Passport” application is a Web-based platform for client collaboration and program management. This tool helps us overcome the challenges and inefficiencies we used to face with having to e-mail documents to clients, delivering binders and coordinating with multiple client locations. Policies and other program information are uploaded to the secure site, which is customized for each client and can be accessed anywhere in the world by approved users.

We have other technology tools that make day-to-day administration easier, such as “CertOnline”–our online application for certificate management and issuance in real time; our “Safety Toolbox”–which provides our construction clients with online access to a variety of safety management resources; and our development of a client portal for life science companies that is used to instantly transport information required to secure clinical trials coverage.

We've also been through some challenges regarding an agency management system that really works for us. We went through a long analysis of systems and none met our needs in terms of how we work with our clients. So we signed up with a smaller provider and have been working closely with them to develop their next-generation software and its end product and features. We expect an increase in staff productivity as a result.

Stephen P. DeMatteo:

Over five years ago we identified technology as an issue permeating every aspect of the business, and we staffed the role with an IT professional. This allowed us to be early adopters of every capability available through our agency management system, such as the growing ability to download policy information directly from insurers. This is helping to cut down error rates, reduce paper, and minimize the needless back and forth with insurers.

We've also been able to streamline certain client tasks, such as certificates of insurance and auto ID cards. More recently our efforts have been in using tech to help the client more directly by providing both casualty risk management capabilities, such as online OSHA reporting and compliance, as well as benefits administration services.

Dudley Wooley:

Historically, I think the commercial insurance industry has looked at technology as a necessary evil. Today, we are faced with the challenge of understanding how tech can best serve our agency and clients' needs and deciding which to implement.

Insurers are pushing more and more work down to the agency level, so it has forced our employees to become more adept at using different technologies to improve their workflows.

Most recently, we have begun to explore how to best use the various social media that exist. You can bet that if our clients demand that we service and support them using these new technologies, we will determine how to best use them in our business model.

Sam Friedman:

How do you go about recruiting new blood? Are you still hiring producers and support staff despite the recession? Are you maintaining your training efforts? How has the recession impacted the talent pool available?

Charles Rosson:

We're absolutely hiring, and have a formal recruitment pipeline of experienced producers and strategic hires. We feel one of our huge competitive advantages is our ability to attract talent. Our independent nature and true focus on clients makes us an attractive place for top performers, who are able to work without the distractions and bureaucracy they might experience at other brokerage firms.

Training is fundamental to our organization and remains a huge priority. We begin discussing our desire for colleagues to continue their growth and development of skills during the interviewing and orientation processes, and typically most employees have a training goal established each year as part of their annual goals.

We conduct a fair amount of training in-house, including CPCU and ARM classes taught by one of our partners. We have a generous tuition reimbursement program, and in the last few years we added an MBA assistance program.

Stephen P. DeMatteo:

The overall talent pool of college graduates is exceptional, and over the past 18 months almost 100 percent of our new hires have been from top-flight schools. It is allowing us to build a team of young professionals who can see the broad range of rewarding career paths they can have in the industry, and in particular here at York.

We are also actively recruiting new producers. We believe our ultimate goal is to attract producers that strive one day to be agency owners. We believe this both helps drive our culture, as well as help us advance one of our greatest priorities–the internal perpetuation of the agency.

Dudley Wooley:

To remain a leading independent agency, we must continue to grow our client base and bring new production and support talent into our agency. Even though the talent pool may have expanded recently due to cutbacks in other industries, finding quality producer candidates is challenging.

Right now, we are not large enough to spend the time necessary to develop “green” talent straight out of college, so we are looking for proven sales talent and/or people with insurance experience who want more out of their careers–such as an equity position with a growing independent agency. Taking it a step further, new producers and support staff must mesh well with our culture and demonstrate that they can bring something positive to the table for our clients and their coworkers.

Sam Friedman:

How do you see the agency system evolving over the next few years? What will be your biggest challenges? What will be the biggest threats to your business?

Charles Rosson:

I'm very confident that clients will continue to rely on high-quality advice and service from brokers, but they will demand more and they'll want validation of the value we're delivering. We are operating our business as if the current economic environment and market will exist indefinitely, but I think a potentially great threat to our business would be if the U.S. lost its advantage in fostering entrepreneurialism and funding new ideas.

To a large extent, we've built our company on emerging industries such as technology and life sciences. We've worked with many smaller companies which have grown into larger ones. Regulatory activities, the funding that exists to back new ventures–these are factors that either encourage or impede entrepreneurialism and have an impact on creating a good environment for companies to grow.

Stephen P. DeMatteo:

We think the direction the agency system's evolution is headed in the next few years will be marked by the ever-increasing pace of consolidation. We know this will present us with acquisition opportunities.

That fact by itself is an organizational challenge for us because growth by acquisition is not in our culture. We've grown the business from $1.5 million to $10.5 million over the past decade with 100 percent organic growth.

Our biggest challenge will be maintaining a similar growth rate in the face of this much larger base. We will have to think long and hard about straying from this successful organic growth strategy in the future just because there will be more potential acquisition targets. We inherently believe acquisition integration to be very disruptive to colleagues, markets and clients.

Dudley Wooley:

The agency system must embrace change at an increasingly faster pace than in the past. Continuing consolidation among carriers, advancements in technology, and emerging products and risk management resources will challenge our ability to function more like business consultants and less like shoe salesmen in the future.

Our biggest challenge is to not stop listening to what our clients want amidst all the change going on in our workplaces. The biggest threat is our own unwillingness to embrace change.

Sam Friedman:

If there was one thing you could change about the agency environment today, what would it be, and what change would you make?

Charles Rosson:

On the surface, it's too early to lump agents and brokers together as if we're all created equal. You see this in the health care debate, where it is clear policymakers don't understand the value we deliver and how we help our clients manage their businesses. It's too easy for those who don't understand to be dismissive of our worthiness.

As an industry, I would like us to make our voices heard by being active in our trade associations. We have several excellent groups that serve as our public face, advocate for us and work with lawmakers to show our value.

These associations provide a conduit to provide input with such matters as the health care debate, comment on policy decisions, show the level of sophistication of our people, raise awareness of our profession, and overall, promote our industry.

Stephen P. DeMatteo:

I think we need to continue to improve the overall perception of our industry. This has been a theme for many years.

We should all strive to gain trusted adviser status with our clients. But ad campaigns alone won't make it true–it has to be a grassroots effort. We believe York International is doing its part. But we think if all agents challenged themselves to raise their game, the change would take hold much quicker.

Dudley Wooley:

When I started in this industry in the mid-1990s, I felt like there was opportunity for the independent agency business to elevate its reputation. We play a vital role for our clients–working with them to protect their businesses and lives–and we should carry the same confidence and strive for the same mutual respect that other professionals like CPAs and attorneys have.

To that end, I think we should promote even more professional education and development in our industry.

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