Why Not Cluster?

Size does matter. Small agencies can give the client a warm and fuzzy feeling, but they usually can offer only basic products. For those who need to be larger but don’t want to give up their autonomy, a cluster may be the answer.

There are so many things that a firm can accomplish with a cluster … that one firm can’t do alone. Due to the flexibility the cluster offers, it is by far the easiest type of association an owner can be a part of, if properly put together.

What is a Cluster?

A cluster is a group of agencies that band together to share some resources.

What to Share

Losing direct control of the cash flow is a concern with many independent agency owners. With the typical cluster, each owner keeps his or her own commissions. They share only those things that they decide as a group that they want and need to share. Cluster members often share some or all of the following:

• Markets;
• Office location;
• Employees;
• Marketing;
• Accounting;
• Client value-added services;
• Group purchasing power; and
• Management.

Cluster Benefits

There are so many benefits of being in a cluster. The most important is to have more market clout, which takes the pressure off the individual members to meet volume commitments. In addition, it is easier to receive larger contingency checks because of this larger volume.

There is also the ability to have cost savings because of sharing people and functions – this can then create more profits. A wonderful aspect is also the ability for the members to lean on each other and be each other’s board members.

Because there is power in being larger, the cluster also gives the members a bigger presence in the marketplace.

Cluster Problems

One major concern with clusters or associations is the lack of commitment. The clustering versus merger option can be compared to living together versus marriage: you are partners, but there is no real commitment.

Not everything is perfect for everybody in a cluster. Sometimes there are personality clashes, so the process of choosing members is important. Owners will need to give up some control over their operations, now that some of it is a group effort. This could mean that everything may not work out in one’s favor. If that is at all an issue, then clusters are not for you.

Insurance companies periodically grumble about appointing clusters. Recently, a few major carriers voiced their concern. The reality is that if you have a good book of business, then a cluster will not be a problem. On the other hand, if there are issues, the carrier might react. This is the same concern whether or not the carrier is working with one agency or 20. The carrier may want to approve the cluster members, once the concept is brought to the carrier’s attention. If there is a bad egg in the cluster – i.e., an agency the carrier does not like and has taken away its appointment – it might jeopardize the cluster’s appointment with that market.

Succession Planning

Because the group members get to know each other and have the opportunity to work together – sharing many things – there is also an opportunity to use the cluster for perpetuation of the business.

As members want to retire, they can sell their agencies or books of business to an individual cluster member or to the cluster corporation, which will then own it on a group basis.

Clusters might help with financing of acquisitions, as well.

Sometimes a cluster can be used as a prelude to a future merger. It is a good idea because it will allow the two firms to get to know each other before a formal joining of forces. If it does not work out, the separation will not be as traumatic because a cluster is easier to dissolve than a merged entity. For some owners, however, the initial commitment is important, so this two-step approach may not be desirable.

The Cluster Contract

A key aspect of the cluster is having a great contract that covers all that the cluster will share and do for each member. The list includes items such as:

• Services to be provided to each agency;
• Ownership of book of business;
• Buy/sell agreement in case of death, disability or retirement;
• Obligations of the cluster;
• How to exit or terminate from a cluster; and
• Appointment of new cluster member criteria.

For those needing a little support, market clout and power in numbers and volume, a cluster can be the way to go. It is flexible, easy to set-up and can be an excellent solution for the smaller agency that wants assistance and power, but yet retain its autonomy.

Some Key Cluster Considerations

• What will be the cluster structure? Will it be very loose and flexible, or a much more formal arrangement with many shared services and expenses?
• Who will hold company contracts?
• Who will have responsibility for the premium collection and trust account — the cluster or each member?
• What is the limit of the cluster’s management control?
• What will be the binding authority for each member?
• How will the admission of new members be handled? Will they be treated the same as the founding members?
• How will the withdrawal from the cluster be handled? Will this impact the umbrella organization? How will markets be affected?
• Should each member sign a non-compete agreement?
• What will be the expense to run the cluster? How will the members be charged to be a part of it?
• Who do the producers represent — the cluster member or the cluster itself?
• Does each agency have its own E&O coverage, or does the cluster have one policy?