Winning Agents Remain Risk Managers Despite Soft Market, Economic Woes

Despite having to cope with a stubbornly soft property-casualty market and the shockwaves of a faltering economy, the three winners in the seventh annual National Underwriter “Commercial Insurance Agency of the Year” award program refused to abandon the full-service risk management approach that sets them apart from the competition. Indeed, the ability to keep risk management atop the agenda is what makes them role models for their peers.

Their agency profiles appear in NU's Sept. 29 edition. However, as part of the award program, NU flew principals from this year's winning agencies to New York City in late September to discuss how they plan to overcome the threats and seize the opportunities ahead.

Read on for an edited account of NU's State Of The Agent Roundtable discussion.

Sam Friedman,

Editor, National Underwriter

How are your agencies adapting to life in a soft market? How do you hold onto accounts and generate organic growth with prices and commissions falling?

Gary Ivey,

J. Lanier Smith & Co.

2008 Champion

I have been in the business since 1972, and this cycle actually moved down quicker on pricing than any I've been involved with. Pricing fell off the table faster–even with catastrophe-exposed property.

Still, there are good opportunities evolving to pick up offices from bank-owned agencies, or from those who got into the brokerage business late and do not know how to cope with a down market.

We've been able to pick up producers who may be leaving the national brokerages, or those whose firms changed their compensation schedules. So, on the positive side, in the soft market we've been able to acquire more talent and agency offices.

Organic growth is very difficult. In the last 15 years, we have not had a year where our growth wasn't double-digit. In 2008, we're up between 2-and-4 percent. That's real unusual for us, because if you give raises to your employees of between 3-and-5 percent, and your biggest expense is your compensation, you can see that you could actually end up this year with a loss.

To generate organic growth, we look a little closer at what's in our producers' pipelines. We try to make sure they're productive, that they have good prospects and have a continuous flow of accounts.

Our employee benefits operation, which is a major part of our revenue stream, has been a good contributor and helps us on the organic growth side because medical costs continue to outpace overall inflation, which requires annual health insurance rate increases, so your revenue on those accounts increases. That's the positive effect of having diversification of income. (For more on the employee benefit operations of our winning agencies, see NU's Oct. 20 edition, page 14.)

We also reexamine all our clients' programs, because when the property-casualty market softens, you sell more limits, as well as higher towers on their excess insurance, or on their property if it's layered coverage.

You also get better terms and conditions in a soft market, and you sell coverage that somebody may not have looked at in the past when prices were higher. Employment practices liability insurance is an example.

There are benefit programs that have been squeezed so heavily, quite often this reduction in property and casualty costs gets transferred over to the benefits side, and buyers might take out a new initial benefit for their employees.

We also renegotiate with all our markets to try to earn more revenue on each transaction. We're actually seeing some pushback from different markets that maybe want to reduce commissions, but that's unusual. Usually when the price drops, the markets become more pliable to acquire business and are willing to pay more money to get that business.

We also push economic value, which is the service side of our organization. We emphasize risk control, claims advocacy and cost containment. Good risk management principles and services are still in demand by customers, and maybe more so as they've been impacted by the economic cycle.

Ray Bouchard,

Bouchard Insurance

2008 Honorable Mention

We tell our producers to focus on areas they can control. We can't control the economy. We can't control the pricing in a soft market. We like to say revenue cures all ills, so let's go out and write some new business.

There are a lot of opportunities out there, so new-business sales are critical, and we do hold our producers accountable for hitting certain numbers.

Retention is also huge. We have a program in place where senior management is involved with any account that might be in jeopardy, and it's been very successful in retaining business.

We have worked very hard over the past few years in hiring new producers–we've hired 24, and in a shop our size, that's pretty significant. We've generated production from all of them, as over 50 percent of our new revenue over the last few years has been brought to the agency from producers who have been with us less than four years. So we've been very active in recruiting, training and building up our young sales force.

We believe very strongly in our “ClearTrac” process, which is basically a consultant sales approach. Our producers are not bidding on accounts unless we have a real opportunity to write them and a current need is going unmet. In fact, when producers bring prospects to our marketing folks and to our management, they have to have a good story as to why we're going to work on that account.

In the ClearTrac process we're doing a full exposure analysis, claims analysis, safety checkup and risk management review of their policies. From there, we put together a game plan and then that's executed.

We also incorporate service schedules that establish what's expected of us, and also give our client the ability to grade us at the end of the year to see if we've done what we said we were going to do.

Again, this process is good for the client, but also good for us. It identifies coverages they may not have, which is obviously an opportunity to sell more insurance.

After 2004, when our home state of Florida was hit by several hurricanes, the market got very, very tough and pricing went out of sight. A lot of our clients dropped coverages–they simply couldn't afford it.

Now that the market has moved the other way, we're going back trying to recapture some of that revenue by adding directors and officers coverage, EPLI, umbrellas and increasing limits.

We also have a much more concentrated effort on cross-selling. The last couple of years we have actually hired more benefits producers than property-casualty producers. It's been very exciting to watch the growth of our benefits book, where pricing is not sliding like with property and casualty.

Also, for our personal lines book of business, we have personal lines salespeople looking to write high-value dwellings, and it has been a profitable line for us. So for business owners, our producers are offering not only commercial and employee benefits, but personal lines as well.

By working on new business, setting high goals and holding our producers accountable–plus cross-selling within an account and bringing in new producers–we're trying to keep the agency's revenue at least neutral.

Ted Ostrander Jr.,

Lassiter-Ware Insurance

2008 Honorable Mention

Like Bouchard, we're also in Florida, which is somewhat unique in that while the country was going through a soft market, because of the hurricanes, Florida's market was still somewhat hard until January 2008, when rates fell off the cliff.

Once prices dropped dramatically, we refocused our sales efforts. Even though we had been doing service timelines and stewardship reports, we really pushed that a lot more–it's now pretty much mandatory.

We put in place many different kinds of plans relating to sales, laying out what producers are required to do. We carefully check what they have in the pipeline–and it's more than just putting in names. We expect them to be running them through our marketing department.

Group benefits have been huge for us. We've been doing benefits for over 20 years, but lately that's frankly saved us in terms of maintaining growth because there is no soft market there. We have seen some reduction in benefits from clients just because of the economy, but by and large we've written some very nice large accounts.

We've refocused our efforts to do more cross-selling, especially on the group side. We require a group producer and a property-casualty producer to team up, so whenever a group producer goes out on an account, a p-c producer goes out as well. Even if they just sit there after being introduced, we want them to start building relationships so we can work the cross-sell.

We've also focused more on program business. We kicked off an environmental unit, and it's been doing very well. We've started a not-for-profit unit where we've written quite a bit of business as well.

We also sell the services of professional employment organizations to clients looking to outsource some staff functions, as well as selling insurance to the PEOs–so we generate revenue at both ends. That PEO business has not suffered at all, and in fact has continued to grow.

Ray Bouchard:

We also sell PEO services. It's just another arrow in the quiver. There are some clients where a PEO makes sense, and we want to be able to offer that product and service to our accounts.

Gary Ivey:

Our largest single-client premium is a PEO–a very large firm operating on a national basis, where we write all lines, including workers' compensation and some group benefits.

Sam Friedman:

What's been the impact of the struggling economy on your clients and on your insurance agency business?

Ray Bouchard:

We've seen a number of longtime clients just go out of business this year. Certainly, most firms are reducing payroll, cutting their fleet size, maybe looking at selling off properties, so on top of the soft market it has affected our revenue.

We're fielding quite a few questions from our clients as to the financial solvency of their carrier, so we're getting information out as to what's going on in the marketplace and how this could directly impact them in making sure they're with the right insurer.

The only thing you can do, no matter what the state of the economy, is to go out and create new opportunities and try to write new business.

We measure everything. Our producers are measured on a net new-business basis, and as accounts are lost, we certainly look to make sure the accounts they bring in are going to more than offset any lost revenue.

Ted Ostrander Jr.:

The slowing economy certainly has affected Florida because we are construction-oriented, and the construction market has taken a pretty big hit, so with the soft market, we're facing a triple whammy.

We also had a workers' comp rate decrease of about 20 percent that started Jan. 1, while reduced payrolls resulted in internal audits and reductions of the premium base.

At the end of the day you just refocus your efforts, and if you're not working new business, then you will just simply not survive in this market.

We're also looking for opportunities where new producers might be available, as well as an occasional opportunity with another agency that makes sense for us. But overall, it's all about new business–and not about selling on price, but selling the agency's capabilities.

We've refocused on acquiring agent-of-record letters rather than just trying to quote an account, because the market is so soft. We say to prospects that you can keep your carrier, but we sell them on having our agency service them.

Gary Ivey:

The property market in Florida is a little bit different than where we are in Georgia. Carriers want our non-catastrophe-exposed accounts so badly, mainly because they want some diversification of risks, that their pricing is even less expensive.

But we face the same problems with firms cutting back on payroll, so if premiums are reduced after [workers' comp] audits, on top of reducing your price for the new year, you're getting hit twice–especially if you have a big position in residential construction.

We also have to take a look at credit risks, because we all pay the carrier and, like my colleagues here, we have a number of clients who have had to close their doors. In the last five business days, I had one 150-restaurant chain that filed for bankruptcy. Another of our clients–a major auto dealer–filed as well.

That's just the way it is in the economy right now, with bankruptcies, consolidations, takeovers of clients, vulture capital money (if you want to call it that) sucking up these customers. Add in those return premiums on lower payrolls, and credit risk on top of that, and it's clear this is a time when brokers and agents have to be extremely disciplined internally.

If you're dealing with clients or prospects whose financials might be weakening, to avoid exposing your agency to credit risk, one of the tools from a risk management standpoint you can use is premium finance. You protect yourself on the front end because you've transferred credit risk to the premium finance company, as well as the insurer, since the product guarantees the premium payment.

In any economy, however, this is a highly competitive business. We try to bring more economic value to clients, as well as better risk control. We bring more claims intervention to try to get a lower net cost of risk. We look at every aspect of risk financing.

Sam Friedman:

How do you incorporate risk management into your sales and service process, and how do you keep risk management concerns front and center at a time when premiums are dropping and buyers are tempted to price-shop?

Ted Ostrander Jr.:

Risk management is a key part of our culture. The key selling point is what can you bring to the client that differentiates you from every other agent out there, and if that's risk management, you constantly talk about that with your producers, your staff and your clients.

If you have good risk management in place, whether you are shopping a new piece of business or negotiating a renewal, this is a very soft market, and if an account is good at keeping the lid on losses, the incumbent carrier will absolutely lower the price.

Where risk management really makes a difference in our sales is with those accounts that spend $50,000 to $250,000 in premium. A lot of those accounts don't have risk managers and don't have a human resources person, so the chief financial officer or the owner is generally running the whole show–so what we can bring is serving as their risk manager. We also bring HR services to that account along with risk management, besides shopping the market for them.

The key is that account has to understand there's a value in risk management. If they don't understand that value, it's really not worth our time.

Meanwhile, we compete against agencies like these two here today. They're very, very good agents and risk managers, so we know we have to bring more than just a cheap price to the table. That's where the services we offer make the difference. We must make the client understand how we will help save costs.

Take workers' comp, for example. We bring a whole program that's going to reduce their experience modification factor, and the effect that'll have on the premium they have to pay. That way, you don't ignore the price concerns. You never get away from the price discussion, but at least you begin to refocus the buyer and point out your value.

One of our biggest successes has been on the HR side, because most clients with 100 employees generally do not have an HR department. What you find is they really don't have a clue how many laws they are violating, so we do an audit for them. We do that free of charge, and just that helps bring the client to our side. We try and get on their side of the table so the buyer understands we are here to help them, and not just to sell them the cheapest price.

At the end of the day, that's why we try to go for the agent-of-record letter as opposed to just showing them the price, because we try to convince them price is not the driving issue. Instead, it's what we can do to help lower their overall costs.

Gary Ivey:

From a risk management perspective with the client, we look at what we call economic value, which to you as a buyer can mean a reduction in price. But it can also mean pre-loss services that we provide, such as risk control that lowers ultimate net costs by reducing losses and makes you more attractive to the market–and if you have a deductible or self-insured retention, saves you significant money because the loss never happens in the first place.

After the fact, we can also help from a claims advocacy standpoint, getting the best outcome for the client. In claims advocacy, we have 26 coordinators who report on and track claims. We have five people who don't do anything but be the advocate to represent the client in complex or large losses, trying to come away with a much happier, well-informed client, who will then refer you to other people.

As for price, right now I think carriers and insurers are taking on business at a much higher risk at much cheaper rates, so if you have a good risk thanks to solid risk management, certainly they're going to provide you a less expensive price.

We emphasize the risk management process all the way from exposure identification to how you treat the risk in terms of intervention. We determine the correct retention, and suggest what risks you should not transfer.

If we can drive an economic value through the risk management process, demonstrate it well and follow it up with stewardship, we'll get clients that move their business to us, and we'll retain those clients because we give them more value.

Ray Bouchard:

Risk management is the cornerstone of our sales philosophy, unlike so many of our competitors–present company certainly excluded–who focus on the renewal date and compete only on price.

Certainly the renewal is important, but so are the other 364 days of the year if we add value by managing the total cost of risk.

Our clients know that year in and year out, on the insurance product piece of the cost of risk, we're not always going to be the cheapest, but the services we bring to the table are going to make the difference.

Going through exposure analysis, finding out what the client is doing to make sure they have the coverage they need in place, and then following through on it using our service schedule, we're able at the end of a period to quantify all the things that we do.

Many times when you're working with a client on a renewal you're meeting with a decision-maker, but many of the services we offer affect other people within the organization, and it's critical that all we do bubbles up so that everybody knows what we're adding to the equation.

Certainly, with our HR consulting, for example, you might have somebody in the HR department thinking to themselves we couldn't get by without our agent–without Bouchard. But we need to make sure that gets communicated to the ultimate decision-maker.

If you're doing all these risk control services, the insurance product pricing will take care of itself. You've got a better risk, and quite frankly the marketing and the securing of insurance is the easy part. Most all brokers can do that. Again, focus on what you're doing the rest of the year.

Sam Friedman:

What role does the alternative risk-transfer market play in your operation, and how do you keep self-insurance options in the mix with traditional insurance prices falling?

Gary Ivey:

We have a separate department that we formed about six years ago. We realized that as some of our clients reached certain scales, the options they need quite often involved alternative risk-transfer rather than the traditional market, and the entr?e into these accounts as they reach that scale was alternative risk-transfer.

We hired someone with a major consulting firm who had set up many captives, and around him we began to build our new department. By 2007, we were number-two in the Caymans with captive formations. We were getting single-parent captives out of the homebuilders markets, as well as for health care risks.

But we were also getting deductible reimbursement captives, because you had to take so much of the deductible associated with your catastrophe coverage that you could move your retentions up, take the premium and form your own captive. Since there wasn't another really large storm, these accounts now have fairly substantial assets, and they're actually so sold on captives they want to invest in others.

We are also seeing good growth on group captives for those with like-minded risks because the market swings so wildly between too cheap and too hard. With group captives you can begin to level or smooth that cycle and gain control of your program.

We also have an agency captive where we do risks primarily under $500,000 in premium, which we use as a way for the agency to share risk and change its return associated with a select book of business.

During this period we've built an international department and brought aboard property specialists who have contacts with markets outside the United States, including Bermuda and Lloyd's. We can build coverage towers with larger clients and use a number of insurers that maybe your competitor can't.

We also try very hard to form relationships with limited distribution markets–people who have gone direct historically, who you can convince to distribute their product through you. We've had some good success with that approach in the agriculture business, for example.

With the softening prices in the traditional market, we've seen a reduction in the number of single-parent captives formed. But while alternative risk-transfer has slowed, it certainly hasn't gone away. It remains a valuable option and gives us a big competitive edge.

Ray Bouchard:

Well, it's not the hot topic it was a few years ago. It's definitely cooled down from our point of view.

In the late 1990s, our agency formed two agency-owned captives. That was when workers' compensation was a much tighter marketplace, and especially difficult for the smaller, middle-market businessowner, so we formed a captive for that risk. We felt that because of our expertise in the comp business, we could make it profitable, and it was very successful.

The other agency-owned captive we put together was for the staffing industry, where we've been involved for many years. We put best practices in place, and that was very successful, too.

Since 2003, Florida workers' comp rates have been reduced 50 percent due to reforms, making it a buyer's market now, so the need for captives really isn't there. We've dissolved those captives but had a very good experience on both of them.

Going forward, we're looking for areas where there's a need for a captive.

Ted Ostrander Jr.:

It certainly was a little easier to market captives several years ago when the market was quite a bit harder. Still, most agents need to be aware of captives, understand what they can do, and be prepared to talk a client through all the options available.

Because pricing is so much lower, there's not a lot of interest, but it's still an option, and if we can talk to the client about captives and explain the option to them, no one can come in and take them away from us just by offering to form a captive.

I will say that once a client is in a captive–especially a single-parent–they're not going to leave. Once they're in, it's very hard to take them out, so we want our people to be aware of it, to understand the concept, and to be able to talk to those clients that might fit the captive profile.

Sam Friedman:

How are your agencies compensated when you go beyond standard insurance placement to offer risk management and other non-insurance services?

Ray Bouchard:

Another word for “value-added” is “free,” but while we do offer value-added services, you cannot treat each client the same, and you can't offer all of your services to every account across the board. There's got to be some critical mass with a client to give them the full menu.

For instance, we have a tier level based on how much revenue an account generates. At certain tiers, they're given certain loss control or claims management services. Those clients have the ability on a fee basis to buy more services, and each producer understands where those clients fit.

We do have clients that buy additional services, and most of the time it's for loss control. Our loss control folks do a lot of in-house training for clients–everything from OSHA training for construction risks to training lockout, tag-out procedures.

So we know going in, when we are working on a new account, what menu of services that client is eligible for. We sell the appropriate value-added service, and then tell them what other services are available on a fee-for-service basis.

On the benefits side, we have contracted with a national actuarial firm that can look at the credible claim data and project out six months into the future what the renewal rate should be, and that's been taking off as well. Again, for that service to make sense you have to have a larger group.

We've also revisited our producer compensation model. We don't pay producers on any account that generates less than $5,000 in revenue, and quite frankly most of our producers are going after accounts much larger than that. We have a small-business unit that is perfect for the smaller accounts, and we transfer them there.

We also have servicing producers who are more like account executives, and then we've got producers who are compensated based on new-business sales. We are constantly looking at our producer compensation model to make sure we can afford to give them the tools they need.

Ted Ostrander Jr.

Most of our services are value-added, but we also stratify what we will allow an account to get. We have to. The larger the account, the more services we provide, although there are some services that we can give an account of any size because they're Web-based.

We have guidelines, and we have a business development person in our office responsible for monitoring that. If an account qualifies, we are going to make sure they get the services, but if it doesn't qualify because of size, there are still some services we can give them.

We do charge fees if it exceeds that threshold, especially in loss control. Sometimes our HR person develops fees, but by and large it's value-added based on the size of the account.

Gary Ivey:

We also tier our clients, providing varying levels of service based on the client's size and revenue associated with them. We sell services separately as well.

Sometimes services are a defensive mechanism. If you go back to the captive piece, we have found that our specialty in captives has saved us a lot of clients where somebody–perhaps a national broker–has come in and pitched that idea. So it's been a tremendous tool both on offense and defense.

These services build walls around our existing clients so that people can't penetrate our accounts, and they allow us to go out in the field and get new business from a position that everybody isn't emulating.

Sam Friedman:

How do you see the independent agency system evolving over the next few years? What will the biggest challenges be? What will be the biggest threats and opportunities?

Gary Ivey:

I think there will be increased consolidation among agencies and brokers.

Speaking before the election, a macro-legislative event could affect all agents and brokers–such as a federal single-payer arrangement for health care. Each of the winning agencies here features significant benefits operations, and each wants to grow in that area. Workers' comp would be affected by such a change as well.

I think the biggest controllable challenge for agencies is nonproducing producers. How do you put the right reward system in place? What do you do about the stick as well as the carrot?

It is not just a matter of growth, since agencies that do not have organic growth cannot maintain their revenue position.

The nature of the business is such that any account written as new business comes from another agent through competition. Producers that are sitting on books of business and not growing will lose clients and shrink. Newly recruited producers that do not produce become pure expense.

You must have a defined, written and agreed-to set of goals for each producer. You must build an organization that supports production via resources and specialized practices. You must become a sales organization.

We also face challenges in terms of how our carriers will perform in the short- and long term. AIG became involved in turmoil with its parent's federal loan, as a result of its Financial Products division trading credit default swaps, for example.

The soft market is going to have a gradual but significant effect on the surplus of the industry, and any overleveraged insurers could become takeover targets. Fewer markets will be the order of the day.

Ultimately, property-casualty could look like the benefits marketplace, which has so few markets that price competition is not how accounts move from one agency to another, but almost always involve a change in the broker-of-record, based on the communication skills and sales abilities of the producer.

There are opportunities in a number of areas. For instance, direct writers are moving more toward distribution through independent agents and brokers.

Banks have their own issues and cannot concentrate on their insurance operations. As a result, accounts and offices are there to be taken over.

Venture capital money has not been as prevalent, and the purchases they have made in the recent past have virtually come to an end, so there is not competition from this area for purchases.

Ted Ostrander Jr.:

First, I believe most agencies will be quite a bit larger and will be more regional in scope. There will also be fewer agencies, as it becomes harder for smaller agencies to meet the production requirements of multiple carriers, as well as match the scope of services offered by the larger agencies.

Second, I believe most agencies will be run more professionally. By that, I mean agencies will pay more attention to their balance sheets, as well as their profit and loss statements. They will also want to make money on their operations, rather than relying on profit-sharing and contingents.

I think you will see more and more agencies sharing ownership with producers, and with other key people as well.

Third, I think more and more agencies will specialize and do niche marketing. There are several reasons for this.

For one, the agency can control costs better. For another, the agency can focus on a specific type of business and understand it very well. It can then work with companies to develop needed coverages unique to that class and can focus its marketing to that class. Finally, it helps a producer become successful quicker. It seem like most of the truly successful producers have developed a niche they market to.

I see the biggest threat to our industry being our government. What will happen if insurance becomes federally regulated rather than state regulated?

How will the different states react to catastrophe exposures? Will they create government-funded programs that are insufficiently funded and not actuarially sound? If so, what effect will that have on the carriers in that state?

What will happen if we get some form of universal health insurance or some variation of that, such as the Massachusetts plan?

I don't have answers to these questions but believe they could have a profound effect on how insurance agencies are run.

While these are certainly threats, they may, in the longer term, be opportunities, since most good agencies look for ways to succeed, even in difficult environments.

Ray Bouchard:

The financial services industry is in crisis. This may fuel additional mergers and acquisitions among insurance carriers. Over the last five-to-10 years, we have seen the insurance carrier landscape change dramatically, and for the most part this gives our clients fewer options. This creates less competition and stifles creativity.

Attracting the best and brightest talent to our industry is a prime challenge. Good human capital is at a premium, and our industry is doing a terrible job promoting and training its future workforce.

Having a career in the insurance agency business is the best kept secret in the world, and if young people knew the endless opportunities and salary ranges in this field, this would change. Going forward, equity positions are going to be an imperative to attract and retain good people.

Agency perpetuation continues to be an issue. Internal perpetuation–funding privately-held agency buyouts–is becoming harder and harder. Look for carriers to be a part of the funding for these deals if selling to the public brokers, banks or private-equity groups is not the desired outcome for the agency. Carriers have a stake in the agency perpetuation game as well.

Another challenge is that providing value-added services to clients isn't cheap. As our industry evolves to a more consultative, trusted business adviser role, loss control, HR, claims management and other services must be offered.

This puts a tremendous amount of pressure on the bottom line. It doesn't work, paying producers the highest split of commissions AND providing all these services to customers. This is where the creative agencies will prevail by offering top producers other types of incentives, such as equity options in the agency.

I think the long-term health of the independent agency system will be very strong. I remember years ago worrying about the direct writers taking over, and that surely hasn't happened.

Sure, there will always be the “price shoppers,” but in today's business environment, customers need the advice and counsel of their independent agent more than ever. Be it managing their total cost of risk or managing human resource issues, the advice given to our customer is invaluable.