Why would a retail agent want to get into the program business? Providing a single carrier solution goes against the agent's traditional role of securing the best deal from competing insurers.
In reality, a program can help a retail agent increase its revenues on an account, expand business and provide the best deal for its insureds, especially in the ongoing soft market.
Advantages include:
o Increased commissions. While an agent may receive 10 percent commission on a brokered piece of business, programs often pay 17.5 percent to 24 percent. This is intended to cover the program administrator's costs of handling and marketing the program in addition to the commissions paid to retail agents. A retail agent with a niche book of business may have sufficient volume to create a program and retain a greater share of the premium even allowing for additional underwriting costs.
o Competitive advantage. Programs typically are offered on an exclusive or semi-exclusive basis. An agent should be able to negotiate some level of exclusivity for the program within its market, providing a competitive advantage and allowing an increase in business within that specialist niche.
o A better deal for insureds. Programs provide insureds with access to a unique insurance product, often offering specialized coverages not available elsewhere. The expense structure within the program may allow more opportunities for certain buyers or groups of buyers, such as associations, to take advantage of credits within the rating structure.
o Franchising opportunities. A retail agent can leverage its local expertise in a specialty across the country by offering the program through other retail agents outside its own territory. This creates a "franchising" opportunity, using the program as the brand. The program's expense structure should be sufficient for the agent to earn a reasonable share of commissions on policies distributed through other retail agents.
Competing in a soft market
The commercial insurance market has seen declining premium rates since 2005, with pricing declining at double digit rates over the past two years. For agents and brokers, this has meant reduced revenues and shrinking profit margins. It also can mean more work because of increased competition and the need to shop policies more often. These pressures are particularly acute for wholesale brokers, as more risks are accommodated in the admitted market with fewer needing surplus lines solutions.
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Why program business?
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With the assistance of a national program broker, the agent puts together a roofing contractors program, which pays 22.5 percent commission to the agent as the program administrator. The program broker receives 2.5 percent for structuring and placing the program and the agent outsources the administration of the underwriting, administration and back office for a further 5 percent. The agent receives a net 15 percent
Eighty percent of the agent's roofing book comes into the program. The balance remains with existing insurers. The agent's revenue on its local book increases to $700,000; $600,000 from the net program commissions ($4 million times 15 percent) and $100,000 from the residual open market placements ($1 million times 10 percent).
After the initial success of the program in its own region, the agent offers the program through other retail agents in the rest of the country, paying them a 10 percent commission. Another $8 million in premium comes into the program. The program agent receives an additional $400,000 in revenue ($8 million times 5 percent). The net result of creating the program is to increase revenues from $500,000 to $1.1 million.
Starting a program does not need to be a daunting undertaking. There are resources available to help put programs within the reach of retail agents. This sector of the insurance industry is growing. Programs can be a very effective means of handling niche market business and the opportunities can be attractive for agents particularly in the soft market.
Nancy L. O'Keefe is the founder and president of Outpulse Inc., an underwriting administration service provider. She has more than 35 years experience in the insurance industry, with management positions involved in agency and insurance company operations and with technology vendors providing agency management, rating, policy management and claim management systems to the industry.
Andrew Berry is the head of sales and marketing for Outpulse. He brings more than 20 years of experience in the property-casualty insurance industry in support of marketing and business strategies.
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