Agency Survivors: Winners Must Out-Sell, Out-Market, Out-Compete

What we do know is that many of the largest agents and brokers are enjoying the very best of times. Industry statistics indicate that many (but not all) privately owned insurance agencies with revenues of $10 million or greater enjoyed top-line revenue growth in 2001 of 15 percent or more. Unofficial statistics for the first half of 2002 indicate that many of these firms are experiencing 20 percent or more growth in revenues, as well as record productivity, profitability and new business success.

For other agencies, however, times are not as good. A great deal of business has moved from standard markets to alternative markets–often at reduced commission rates and without contingency agreements. The rating base of many accounts is down, and customers are buying less insurance. The result has been that the increasing premiums are not always resulting in increasing commission income.

Many agencies that do not have the skills and resources to compete in this market are "getting voted off the island." The "losers" lack sales fire power, company representation, and/or the business savvy needed to compete in a difficult insurance marketplace–a market that is demanding more than the cheapest price to win customers and retain existing relationships.

So what are the winning characteristics and qualities of the high performers?

Do the agencies that want to be counted among the best but are currently not yet there have time to reengineer their business?

Will the current hard market serve as an "immunity idol" that will protect those firms that are not willing to make investments in future growth?

There are three factors to consider when predicting who will survive. The agencies likely to prosper long term will:

Out-sell the competition:

New business for an insurance agency is the brick and mortar of shareholder value, the source of expanding service to customers, the fuel for employment and compensation advancement to the staff, and a bandage for the inevitable organizational misstep. The ability to achieve a predictable and sustainable flow of new business is the new defining characteristic of the best agencies and brokers in the United States.

At the time when the market was the most difficult for property and casualty agents and brokers because of soft pricing, from 1992 through 1998, the firms that are enjoying the greatest success today made the most significant investment in new producers. Many of the producers hired between 1992 and 1998 are the most significant contributors to the agencys increasing top line and the increasing shareholder values.

Therefore, an agencys ability to hire, train and retain production talent has become the most significant contributor to their long-term success.

Organic growth that comes from new client relationships is vitally important to the health and welfare of the organization. The hard market is covering the inability of many firms to grow organically, and many are deceiving themselves into thinking that the good (not great) growth of the top line means that the agency is healthy.

But the unwillingness to look beyond the net growth numbers and identify the source of the changes in revenues would reveal a different story. Growth of 10-to-12 percent or less reflects that the agency is "maintaining" its current position. Growth of 20 percent or more reflects a true sales organization.

Is it too late to invest in production talent? There is generally a two-to-three-year "validation" for producers. Investments made today should be made with the hope of breakeven cash flow in two years and significant returns on investments in four-to-seven years. Investments in producers require patience, but must take place now as many firms have more capital than ever before to make such investments.

If you plan to still be an agency principal in five years, use the "bubble" of revenues that we are enjoying today to reinvest in producers. If you plan on selling or retiring in the next five years, put the cash in your pocket, but be prepared for a lower valuation on your stock when you do sell.

Out-market the competition:

The greatest challenge that many smaller agencies are facing today is gaining access to competitively priced insurance products with standard companies. The shrinking pool of standard markets is pushing many accounts to non-standard and non-traditional providers, often at reduced commission rates.

The effect has been that many agencies are struggling to retain their book of business, and are experiencing limited growth in revenue. With the commission rates now being reduced by some carriers, the agency staff often has to work harder than ever to retain business. This has taken away from time needed to pursue new business, and has resulted in declining profitability.

While there are some exceptions to this trend, it is becoming clear that access to insurance companies and strong relationships with key carriers has never been more important than it is today.

The survivors of the next few years will continue to reinforce their existing strong company relationships, and hopefully work to avoid the rampant use of price-cutting as a sales strategy that was exhibited during the height of the soft market.

Out-compete the competition:

Competition today is built around the ability to find competitively priced products for clients and prospects, and to do so in a timely fashion. Many agencies are building their firms around the concept of a "trusted advisor" with their clients (as opposed to the "vendor" relationship that most have with their customers).

While the price of insurance will always be a major determining factor in the ultimate selection of a broker and carrier, it is no longer the only–or, in many cases, not even the most important–criterion.

Agency skills in marketing, coverage comparisons and alternative risk-financing solutions are contributing to account retention and new business. The great agencies are now in the "creative solutions" business for their clients, with insurance being their primary tool.

The most successful agencies often have a specialization of tasks in selling, marketing, claims, loss control, and other value-added products and services. The specialization of activities, especially in marketing with carriers, can result in the ability to move more quickly than the competition.

When a producer is burdened with all aspects of selling, marketing, and servicing of the account, it will be difficult to respond to the rapidly changing market and to have the competitive intelligence to represent your customer. Create internal specialization of activities to better serve your clients.

Who will be the "Agency Survivor" of 2003?

The insurance brokerage business in a flat economy is almost a zero-sum game. One agencys victory is often another agencys defeat.

The current market will likely not cause sufficient pain to create an exodus of agencies from the business. (In fact, statistics indicate that the number of agencies are on the rise after 15 years of decline.) And unlike the "Survivor" TV series where there is only one winner, this market will produce numerous winners and numerous losers.

Robert C. Smith is a principal and senior vice president of Reagan Consulting Inc., an Atlanta-based management consulting firm that serves the insurance distribution system. He may be reached at (404) 233-5545 or by e-mail at robbie@reaganconsulting.com. Additional information about Reagan Consulting is available at www.reaganconsulting.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.