Commentary: Time To Start Evaluating the Future of Your Agency

The pace of consolidation within our industry is accelerating much faster than anticipated a few short years ago. In addition to the fact that the total number of players are shrinking, those remaining—specifically the risk bearers—are standardizing certain segments of the insurance product so that they can better manage the related risk. With this push to simplify product delivery, the need for a professional agent to sell and service the product is diminished. This kind of product standardization coupled with rapid consolidation will continue to fuel the competitive and self-limiting nature of the marketplace.

As underwriters fight to survive, they are forced to take a short-term view on financial gain. At the same time, they are developing long-term goals on such issues as the optimal ratio of direct-to-consumer business versus business through independent agencies, and how they ultimately want to manage their relationships with independent agencies.

The upshot of all this activity is continued pressure on the mid-sized insurance agency to operate in an efficient and cost-effective manner. The entrepreneurial sales organization must create a strategic and realistic plan for success that is based on a sound financial premise and supports a business plan that is obtainable and thoughtfully conceived.

To grow or be someone’s asset

Let’s face it, there are really only two options if you wish to be a player at all:
1) decide you have the talent, the guts and the capital to grow your business and recreate your company so that it can remain independent; or 2) decide you don’t have these key elements and restructure your operations so that you become an attractive asset for a merger or acquisition.

Underlying either option is the need for business excellence. While your brokerage business is under compelling pressure to grow through acquisitions, internal growth or mergers, you cannot ignore the impact of such growth on your culture or your profitability.

The road you choose must be reality-based with intelligent forethought. Your path must mirror your commitment to deciding which option is right for you and your assessment of your resources must be rigorous and realistic. Only then will you have a reasonable chance for success.

As you make this pivotal decision, let’s examine just a few of the marketplace factors more closely.

A view from the companies’ perspective

In addition to the consolidation described earlier, carriers are continuing to raise their level of minimum acceptable volume along with their expectations for professionalism, good communication skills, quality work products and the capability to be Internet-friendly. Hit ratios and business demographic requirements are constantly changing.

I recently attended a meeting with a large national carrier that involved its top executives and agency principals from around the country. A comment was made that agencies are engaged in the same process as the insurance companies—that is, analyzing who the survivors will be and aligning themselves accordingly. There was total agreement on this point, and, in fact, an executive from the carrier indicated that developing a plan for moving forward was a top priority of theirs, as only a proactive position would assure their survival.

Additionally, with the passage of the Financial Services Modernization Act of 1999, insurance companies along with financial service providers, banks and brokerage operations, whether overseas or domestic, will move to capture or develop the appropriate resources to compete for the consumer’s business, creating a controlled cross-selling matrix of services.

As this consumer-targeted matrix is formed, the second wave of this process will focus on the development of a proprietary sales force or on the alignment with agencies that have the demographic spread, know-
ledge, resources and ability to deliver fully integrated financial products and services.

A view from the agencies’ perspective

This marketplace is equally or even more dynamic for agencies. This year industry analyst Marsh Berry predicts that agencies with receipts of $1 million to $5 million will control 37.2 percent of the market. By 2010, these agencies’ share of the market will drop to less than 19 percent.

Over the same 10-year period, agencies with revenues over $5 million will see their market share jump from 49 percent to 77 percent.

Market factors demand action

I expect that at this point you might be asking yourself: “Just what does all this mean to me? I’m doing well and I’ll adjust. I always have.” However, the classic definition of insanity is “continuing to do the same thing over and over and expecting different results.” There is compelling need for change.

Let me share my personal experience. In 1981, our agency’s revenue was $1.5 million. At that time, we recognized that we needed to grow or merge in order to perpetuate the agency, its value and our stability in the marketplace, and we elected to aggressively grow.

By 1991, my partners and I had developed the organization to more than $5.5 million in revenue, and by 1993 we were more than $6.5 million. Our growth was primarily organic and was accomplished during both hard and soft markets—but it wasn’t enough. We perceived the need for additional substantial growth from within the organization over the coming five years.

As it turned out, there was an alternate solution, and as the saying goes, timing is everything. In 1993, USI approached us to become its charter agency and we seized the opportunity.

While the story of USI’s meteoric rise from nonexistence to being the fifth largest insurance brokerage in the United States in five years is well known, the result of that decision for us was just as phenomenal. We were able to grow our agency from $6.5 million in revenue in 1994 to more than $20 million in 1999. That decision, for us, was the right one at the right time.

Which option is right for your agency?

The basic issues and decision processes we faced in the mid-1990s are the same you face today; however, the stakes are much higher and the urgency is far greater. The issues are more compelling, the decisions are no less risky, and the outcome can be just as rewarding.

Getting to the heart of these issues must become part of your planning process starting today as you choose which option is right for you.

It’s decision time

If you can answer these questions positively and without hesitation, you have an exciting and enviable challenge ahead of you as you begin your journey to create a vital, thriving and competitive independent agency.

If not, that’s okay because your future will be equally as challenging—it will simply take a different direction. You will be charged with the opportunity to develop your organization to its maximum capability, restructure it to maximize profits, and subsequently merge with or be acquired by those who are creating the organizations of the future. The sales and relationship-based organization you have developed, and the talent and vitality that it reflects, will be the lifeblood of the independent agencies of the new millennium.

While I believe that, to a large extent, the die has already been cast and the best answer to the question of whether to grow or merge may already be in place, with or without your knowledge, I suggest that tomorrow does offer opportunities and incredible challenges for you to work with. But one thing is patently clear-there is no room for the status quo.

Getting down to business: creating your plan

If you accept and agree with the urgency of the issue, then it’s time to create your business plan now. Below are some of the major steps you’ll need to take to create and enact your plan:

• Begin by assessing the strengths and weaknesses of your leadership team. Determine what you need to do to make them part of the solution. Share your vision, give them a clear understanding of the process, and make sure you have their absolute commitment to success. This might require some painful decisions; however, if you are not willing to take this first step, don’t bother to put on your shoes.

• Survey your staff. What do they think of the organization? What is their level of commitment to your new vision? What issues do they identify as needing a “fix” in order to implement your vision?

• Lay out your plan for success and communicate, communicate, communicate.

• Actively measure, monitor, and hold yourself and your team accountable each step of the way.

• Review your plan continuously and be ready to adjust it as necessary. Accept that this is a never-ending process.

• Lastly, don’t forget to enjoy yourself. Don’t be trapped by the fear of success or failure. And, finally, do not lead using fear; this is a fatal trap.

A parting thought

In my 40-year career, I have observed clients, insurance agencies and companies lose sight of a critical ingredient: people. In fact, the synergy of a focused team clear on their purpose and dedicated to each others’ well being is more powerful and more important to the long-term success of a business than any other factor. Your leadership backed by an empowered organization has limitless potential. Your clear and rational focus is the key.

If you’d like to learn more about In Focus Consulting, please contact Paul Bronow at (818) 971-5304.

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