Is There Life After Agencies Consolidate?

Whether the would-be aggregator is an agency acquirer, a cluster or a franchisor, some motivational threads are common:

The ability to retain products and markets depends increasingly on the ability to produce volume for represented companies. Those "retailers" producing the most business get the best compensation arrangements.

Agencies and companies always have relentlessly and fanatically pursued improvements in workflow and data transfer efficiency. The ability to concentrate processing for one large operation for transaction volume that is the equivalent of many agencies should logically result in substantial reductions in labor costs over transactions handled by several agencies scattered over a wide geographic area.

Armed with an array of the best insurance products produced by the strongest carriers and supported by a core, consolidated team of processing and service support, the aggregator should be able to emphasize sales and production. The aggregated agency could even become the strongest retailer of products in a larger geographic area than would a smaller agency.

As standalone agency operations are folded into the aggregated operation, the successor organization gains point-of-sale and contact opportunities that represent the remaining portions of the joining agencies. These facilities usually are located in communities dispersed over significant geographic areas, sometimes giving the aggregated agency sales territory opportunities that cover entire states and beyond. As time goes on, new agencies can bring opportunities for further expansion.

With all of these advantages, logic dictates that aggregation of agency operations must result in a larger, stronger, more profitable entitywith acquired bargaining power, stronger products, better agency compensation, customized commitments from represented carriers and, ultimately, further growth through external sales and more agency acquisitions.

Lets first consider the aggregation strategies, in turn, and then examine their struggles.

Some of the largest agents and brokers have taken the purchasing path. The buying entity usually assumes immediate financial and operational control of each purchased organization.

Pure acquisition should provide the shortest and least complicated path to successful acquisition. Even though individual agency owners may get employee contracts, a command vertical is immediately established that should facilitate a coordinated operational plan.

Franchisors usually rely on the approach of seeking support relationships with smaller independent agencies. Franchisors often provide both product and managerial support to start-up agents who have difficulty finding insurance carrier relationships.

In most cases, franchisors attempt to gain some stability and uniformity by either including non-competition covenants in contracts or structuring a relationship within which they take some ownership of each franchise operation.

In at least one franchise arrangement, the core organization provides an acquisition and aggregation business plan to its franchisees, which are usually well-established, mid-size agencies. The franchisee then recruits smaller agencies within its area for aggregation and acquisition. This organization now claims franchises in 48 states and Canada and $2.5 billion in annual premiums.

Individual agency management usually is left to individual proprietors. Agents usually are not allowed to strike individual agreements with markets being provided by the franchisor. But, otherwise, as long as basic requirements of production and lack of competition with carriers are met, individual agencies typically are left to operate as they please.

Agency clusters are best defined as a group of agencies created to produce a single, larger entity that allows each individual agency principal to retain ownership of the whole. Continuing ownership can take many forms, but usually follow two basic themes:

Individual owners of agencies forming the group continue to own their own operations and share in ownership of the cluster corporation.

Individual agencies are folded into the cluster entity, with owners of the forming agencies acquiring an ownership share of the new, merged entity.

Agency clusters have been around for 20 years. During the late 1990s, a more formal iteration of clusters emerged. The forming members usually are owners of agencies that, by themselves, would have been considered to be successful, mid-size standalone operations.

Because the individual proprietors forming the new group usually have had years of experience operating organizations with several employeesoften with branch offices and full property-casualty and financial services capabilitythey bring more knowledge to the cluster formation process.

The new clusters usually represent a minimum of $100 million in aggregated premium volume and can reach significantly higher levels.

For all three strategies, if demonstrating the pure ability to survive as an entity is the essential benchmark, many aggregating organizations pass the test. But many people involved in aggregating organizations at senior management levels will describe frustrations over the lack of effective control of staff and plan, particularly at point-of-sale levels.

Merging firms see the need for more volume and better organization. They want to be stronger as one than as a dozen. But if planning and commitment are inadequate, the "aggregated" entity that emerges can wind up with 12 different brains, 12 sets of CSRs and bookkeepers, and 12 sets of technologies that havent yet been fully amortized.

Other issues impede the ability of aggregators to successfully implement an effective, coordinated game plan:

Nearly all inherit point-of-sale facilities (the joining agencies) scattered over vast geographic areas. Communication is difficult, and departmental staff "face-time" is difficult, if not impossible, on any regular basis.

Organizations find themselves having to cope with two, three or even more existing agency automation systems, in various stages of their economic lives. Until these varied systems can be replaced with a single, common system that effectively supports the aggregating game plan, standardized workflows and effective performance management will be difficult.

Whether the unifying organization is an acquirer, a franchise or a cluster, it usually leaves in place local managers of the previously independent entities.

Therein lies the greatest potential barrier to successful, coordinated management and execution. If local managers are not true believers in the business advantages of a larger organizationand willing to take an effective, daily leadership position in plan implementationthe overall plan may not succeed. The larger organizations are more complex than the individual agencies they replaced, and they demand a more sophisticated style of management.

If the current wave of aggregation, regardless of method, can result in a number of organizations operating with discipline and focus, the retail portion of the insurance vertical can rise to a level that better serves both providers of products (insurance carriers) and consumers of those products.

The benchmark for these organizations will be their ability to achieve growth through operational sales and retention of customers (true growth). Some will succeed. Others may themselves ultimately join the ranks of the acquired. Without a sound, well-executed business plan, the new whole may not be greater than the parts it contains.

Asa Pike (asa@agencyrevenuetools.com) is CEO of Conway, N.H.-based Agency Revenue Tools LLC and has been working with aggregated agencies for 20 years. Agency Revenue Tools provides technology and business plan consulting for independent agents to efficiently offer a choice of personal lines insurance carriers and products at the worksite marketplace.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 18, 2003. Copyright 2003 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.