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The Virtual Insurance Agency

Many smaller agencies would like the market clout and economies of scale of larger agencies. Historically, about the only way to do this has been through mergers or clusters. Now there's a new way that has benefits for all parties involved.

During the last ten years clustering has become a popular but controversial method for small agents to survive and perpetuate themselves ten years. However, clustering is not a new concept. Called by other names, informal conglomerations of agencies is at least thirty years old. Clustering remains a viable vehicle for protection against the ravages of a soft market, downward pressures on commissions and contingencies and continually increasing costs. However, it is not the panacea that it was once considered. The causes of their problems are not ones of form, they are problems of personalities.

Agency Consulting Group, Inc. has been helping agents form and develop clusters since 1985. After ten years of clustering experience, our analysis is that the successful clusters mature into "something else" while the unsuccessful ones just fade away into broker relationships.

When we saw mature, successful cluster groups act more like single agencies than conglomerates of separate agencies, we began developing a new concept of a single, large, professionally managed insurance agency owned by its member agents (but not controlled by any single member). We call the new concept The Virtual Insurance Agency c (VIA). The VIA appears to provide all of the benefits of a large business to small and medium agents without the loss of the latitude and liberty they are accustomed to in their own small business. it also avoids some of the drawbacks of clustering.

Clustering has worked for some agents but not for many who find that it is like "living together" instead of getting married. Clustering originated for operational economies of scale and for combined marketing. But for a long time, both the members and the carriers involved always questioned the depth of commitment of a Cluster Group. Companies suspected that clusters were formalized brokerage situations and that other individual agency contracts continued to exist, potentially resulting in negative selection to the cluster carriers.

While the cluster carriers presented exclusivity to the cluster members, many cluster members also maintained other contracts as individual agencies. Cluster members tried to help each other through shared information, facilities, automation and personnel, but the suspicion always existed that employees would first serve their original employers before assisting the other cluster members. The worst problems were encountered through the egos of the agency owners, each of whom knew the "right" way to best accomplish a task.

We found many cluster members spending more time on management issues, accounting and procedures than they spent selling insurance. And clustering has not been cheap. We have often urged cluster members to annually analyze their cluster costs compared to the benefits received from the organization. In most clusters, the Cluster Group is in addition to, instead of replacement for member organizations. However, once involved in a cluster that works, agents have been reluctant to give up the major benefit achieved - additional markets - even though they admit that they may not generate sufficient additional growth to justify the annual expenses.

The Virtual Insurance Agency is a "marriage" of small agencies - in a BIG way. The commitment to the Virtual Insurance Agency is complete. A large number of small independent agents merge into a single corporation. However, each agent maintains his identity as a profit center and as much of his location, staff and functions as he desires. Instead of owning a few hundred thousand dollars of equity in a small agency whose future is questionable, the VIA member owns shares of stock worth the value of his original agency in a business that begins life being worth millions of dollars.

The member agent of the VIA becomes an officer in a multi- dimensional, multi-talented organization that can insure anyone from the corner grocer to a multinational conglomerate. Each agency becomes a profit center for the VIA and each owner becomes a part of the talent pool available to any other VIA profit center. While the VIA shares certain administrative activities in a centralized format (automation, an accounting and finance department, marketing, claims, etc.), several functions are left to the profit centers to fulfill. The most important of those functions are sales, market penetration and direct customer contact.

BENEFITS TO OWNER/AGENTS

The benefits to the owner/agents are many. The VIA will do demographic studies, market research and target and telemarket to provide each member the maximum number of sales leads possible. If the agent wants to sell, this is his chance to get back into the game. The VIA will be professionally managed and will begin its insurance organization with marketing department that will assure completion of submissions, pre-underwrite risks to assure most efficient handling by carriers, and quote and prepare professional proposals for its producers. It will offer centralized administration that will permit agents to eliminate redundancy (and expenses) IF THEY SO CHOOSE.

Of course, the most efficient profit centers will also be most profitable -- and the bulk of the profit center's profits become the annual bonus for the profit center managers (the former agency owner). Active owner/profit center managers will find their revenues increasing and their expenses decreasing (certainly a desirable combination for individual income). And as the VIA continues to grow, it grows more valuable, enhancing stock prices faster than the small agent could ever expect his own agency value to grow. Eventually, he can transfer his stock to his next generation if a child is in the business. If there are no successor generations, he is guaranteed a buy-out of his stock when he retires or if he dies or becomes disabled. The profit center bearing his name will go on after him.

BENEFITS TO CARRIERS

The benefits to the carriers are exciting. The VIA will be professionally managed and will hire professional marketing and underwriting staff. The carriers will initially enjoy multi-million dollar books of business as a selection is made that will best satisfy the needs of the marketplace penetrated by the VIA. Agreements will be made with each carrier for substantial growth in specific target markets jointly agreed upon by the VIA and the carrier.

Those markets will be fully penetrated by the VIA's marketing staff who support the sales force comprised of the agents and producers within the profit centers. In return for a full marketing commitment, the carriers will be asked to competitively price and accept a high proportion of the submissions made to them. This stops the high expense of "spinning of wheels" and multiple quoting that has plagued both the independent agency system and the carriers supporting it.

NEW BLOOD

The VIA will become the vehicle for the recruitment and training of new entrants into the independent agency system. Once a producer (assigned to one of the VIA's profit centers) reaches a specified gross commission level, he becomes eligible for stock purchase and ownership. Besides the obvious benefit of asset building, he also becomes eligible to start a new profit center or to perpetuate a profit center whose manager is retiring or leaving and "run" his own operation.

DEDICATED SALES FORCE

The best of our generation of insurance agents have built organizations around themselves as they grew more successful. Their organizations grew due to their sales abilities. But as their agencies grew they became more involved in administration and management. The more they grew, the less time they had to sell -- and sales was how they achieved success. This is "Catch- 22" at its finest example. Moreover, these great salespeople did not necessarily make great managers (even though they owned the business). The VIA's dedicated management staff permits its owners and their producers to concentrate on re-acquiring market share from the direct writers in the best way possible -- selling insurance!

MARKET DRIVEN SALES EFFORTS - IN TWO DIRECTIONS

Insurance agencies face two distinct market forces -- the types of customers available to them and the needs and desires of their carriers. The Virtual Insurance Agency will address both. First, the Virtual Insurance Agency will conduct a market analysis of every territory in its geographic boundaries to define the industries available to be insured and data on every prospect available within every industry. This will comprise the markets available to each profit center. The combination of all market analyses will define the total market potential of the Virtual Insurance Agency.

The second market force acting on the Virtual Insurance Agency and its profit centers is the appetite of its carriers. For many years Agency Consulting Group has counseled its larger clients to approach their carriers for commitments of 1) market segments that the carriers are seeking, and 2)to write a significant percentage of submissions in those desired classes of business. The Virtual Insurance Agency will negotiate with its carriers to identify the desired classes of business, solicit every prospect in these classes through its producers and to expect the carriers to respond competitively to the Virtual Insurance Agency's marketing efforts to capture the desired market segments. These marketing plans will be negotiated by Virtual Insurance Agency each year with each company and will be the core of its marketing efforts.

THE VIRTUAL TALENT POOL

One of the appointment criteria that will add owners and territories to the Virtual Insurance Agency will be a specific area of expertise that can be shared by the other partners in the Virtual Insurance Agency when needed. Since the Virtual Insurance Agency will be a strong marketing corporation, it is likely that some of the prospects developed in each territory will either fall outside the knowledge range of the owner/manager of the profit center or will fall into an area of expertise of one of the other owner/managers of the Virtual Insurance Agency.

The goal of the Virtual Insurance Agency marketing effort will be to develop files and quote every qualified and acceptable commercial account within the territory. This objective will take years to accomplish and will keep the owner/managers of its profit centers very busy as salespeople. In the event that a prospect is developed that requires a skill or talent different from that of the resident owner/manager, he will have the ability to draw on the combined talent pool of all owner/managers to assist in the sale. The owner/manager being tapped to assist will enjoy additional compensation if a sale is made, but the account will remain in the book of business of the originating profit center.

THE VIRTUAL INSURANCE AGENCY AND THE FUTURE

Whether by design or by necessity, there will be fewer insurance agencies in the future than there are at present. If by necessity, we will see a continued trend toward mergers and acquisitions with former owners either retiring or being absorbed as employees of the larger organizations. Either way, the former owners will lose control over their business futures. If the compression of corporate entities is done by design, concepts like the Virtual Insurance Agency will be implemented to provide maximum control over the future by the initiators or owners of the insurance agencies that comprise the new entities.

Theoretically, each agency owner will create more time to sell insurance, increase operating efficiencies by permitting the Virtual Insurance Agency to manage at least the non-insurance administration of the agencies and make more money through a combination of more sales and lower direct expenses. Of course each Virtual Insurance Agency will operate somewhat differently and will achieve different results. However, the basis of each Virtual Insurance Agency will be centralized prospect marketing, a dedicated sales force, cross-pollinated talent pool and centralized marketing to carriers. This will assure success at a number of levels:

1. Carriers will enjoy working with one group of technicians from whom they receive high quality submissions and to whom they are responsible for competitive and timely products. In larger Virtual Insurance Agencies this may replace working with dozens of agencies and hundreds of individuals -- the underwriter's nightmare. Companies have long desired to use the skills and talents of independent agents, but in a consolidated fashion with dedicated marketing efforts.

2. Agency owners will be able to maintain their ownership integrity as well as substantial latitude over how their office is to be operated. They will be limited only by how little or how much they would like to earn personally. If the principal wishes to use the minimum services of the Virtual Insurance Agency, he will enjoy a steady flow of leads and better markets that he currently maintains. His restrictions will be the underwriting guidelines of the Virtual Insurance Agency and the cost of his own operation. However, the more administrative efforts he turns over to Virtual Insurance Agency, the more time he will have to sell and the less direct expense will be incurred by his "profit center." The owner/manager will be the recipient of the lion's share of profits of the profit center (as determined by the Board of each Virtual Insurance Agency).

3. The independent agency system will finally have a vehicle to permit new agency owners to enter the system. If a territory is vacant in a Virtual Insurance Agency, a licensed agent with a book of business of an acceptable size can trade it for stock and become one of the owner/profit center managers of the Virtual Insurance Agency.

4. The insurance buying public becomes the greatest winner in this transition. They continue to maintain the ability to deal with independent agents representing a variety of carriers to permit marketing and placement with the company that best suits the clients' needs. Without this vehicle, the independent agency system will still diminish and the buying public will have to become their own brokers, shopping for their insurance with an agent for each company that they wish to consider.

Frequently Asked Questions

1. What is the VIRTUAL INSURANCE AGENCY?

The VIA is a "Mega-merger" of a large number of independent insurance agencies, designed to add professional management, professional marketing, more available markets and the economies of scale of a large agency to the entrepreneurial smaller independent agencies of the U.S.

2. Who owns the VIA?

The VIA is owned by its participating agents.

3. What is the difference between a VIA and a Cluster?

A cluster is an informal marketing agreement between a group of agents, all of whom maintain ownership of their accounts and, in many cases, also maintain independent contracts with carriers. The VIA is a formal merger of agencies into a single corporation holding all company contracts.

Most clusters involve all participating owners in management and operational decisions, taking time away from individual agency efforts. The VIA will have dedicated, professional management and marketing staff, permitting the owners to devote their time to sales and service of clients.
The carriers have questioned the commitment of agency groups who have no ties to each other from an ownership standpoint and maintain other carrier relationships outside of the Cluster. The carriers representing the VIA will have one large book of business with one organization and will know that no agency contracts exist outside of the VIA contracts.

4. How is ownership determined?

Agency Consulting Group will analyze and value each candidate for the VIA. The participating agencies will trade their interest in their own agency for a number of shares of the VIA in proportion to their value versus the total value of all agencies entering the VIA.

5. Does this mean that I will have to give up ownership of my accounts?

Yes. The last ten years have taught us that while small independent agencies have declined in value due to the actions of the marketplace and the carriers, large agencies have maintained and grown their values because of their consistent performance and growth patterns. If the VIA works for you, the value of your stock in the VIA (comparable to the value of your agency) will grow faster than the value of your existing agency over time.

6. But what if I don't like the VIA after joining?

Included in the VIA agreements will be a "No-Fault" release that permits the owners to re-trade their stock for their books of business at the end of the first year of participation.

7. What should I expect the VIA to do for me?

The primary purpose of the VIA is to convert our small and medium sized independent agencies from primarily service organizations with secondary sales functions to primarily sales organizations. Service will still be a key to retention, but the VIA will help you focus on new business again.

8. How will the VIA help me sell?

The primary function of the VIA will be the development of new business.

The first functions of the VIA will be Market Research, Direct Target Marketing and underwriting, pricing and marketing to carriers. We already have the Market Research in place that will identify every commercial account in the VIA territory. Our partnership with the carriers will identify their targets within the VIA's territory. The VIA will develop specific (and different) marketing plans for every category of target markets and implement the programs. Leads will be generated to the agencies (who are the VIA owners) and will be monitored carefully to assure maximum contact with every target prospect.

The VIA will also have Sales Training modules in place to assure that the independent agents who have been the best technically trained people in the industry will also become the best sales trained people in the industry. Each agent will be offered the sales training combined with Contact Software to better control the communications with prospects.

9. Will the VIA guarantee me more markets?

NO! BUT-- The volume represented by the combined premiums of between 20 and 40 agencies will be presented to the best carriers in the marketplace. The pre-VIA analysis performed by Agency Consulting Group on each member will assure both the carriers and the VIA members of the high quality of the books of business represented by the VIA.

10. What happens if your analysis of an agency determines that the agency would hurt the VIA?

Agency Consulting Group has analyzed insurance agencies for fifteen years. In the event that an agency is not suited for VIA participation, ACG will inform that agent (confidentially) to avoid any stigma attached to his withdrawal from participating in the VIA.

11. What kind of analysis will be done and what will disqualify agencies from the VIA?

The first and foremost qualifier is the agent's historical loss ratio. Regardless of the reasons for specific losses, an agents history is a fair estimate of that agents selection quality. We will not look at any single year. The review will be a minimum of three years and may, in many cases, review five or more years of results.

The second qualifier will be the agents historical financial performance. Since every participant will become a profit center, the agents will be required to "live within their means". Certainly, the facilities of the VIA will free agents to sell more and will permit a reduction in administrative tasks for each agent, but the agents must take advantage of these economies to generate profits for itself in order to truly utilize the strength of the VIA.

The third qualifier will be the agent's desire to remain (or become) an active producer of insurance. While the VIA will be an available facility for books of business of retiring agents, those agents who will not take advantage of the sales efforts of the VIA will find the concept too expensive. The VIA will spend money to generate new business. It will not be an appropriate vehicle for a maintenance book of business.

12. What is the "Profit Center" you mentioned?

Each agency will become a Profit Center for the VIA. The Profit Center manager(s) (the agency owner(s)) will be responsible for the operations of his profit center. His (their) personal income will depend solely on the performance of the profit center (just as it is currently dependent on the performance of the agency). All commissions are accrued to the benefit of the profit center. A proportion of VIA contingent income will also accrue to the profit center.

The immediate benefits to the profit center will be the elimination of direct costs of marketing, bookkeeping and other administrative duties. To the degree that personnel costs can diminish as the result of the VIA assumption of these roles, profit center expenses will decrease and it's profits will grow.

The immediate costs to the profit center will be VIA administrative fees charged to the profit center for services provided to and/or used by the profit center.

The results of enhanced production efforts combined with administrative expense reductions is expected to yield stronger profits to VIA profit centers than they experienced as independent agencies. The lion's share (to be determined by the VIA's Board of Directors) of the profit center annual profits become the annual bonus of the profit center managers.

13. How much will entry into the VIA cost me?

Each agency will sponsor its own Agency Analysis and Agency Valuation by Agency Consulting Group, Inc. The results of the analytical and valuation tools will be invaluable to the agencies regardless of their participation in the VIA. Agency Consulting Group, Inc. has discounted the combined Analysis and Valuation to $3,000 for the VIA prospects (normally $5,000 for the two analyses).

Known fixed costs of the VIA will include the Market Research Analysis of the territory, the personnel costs of a marketing and accounting staff, automation to manage the financial operations and the sales functions and costs attendant with professional presentations to and appointments of carriers. Agency Consulting Group will manage the initial stages of the VIA and will be responsible for locating and hiring its General Manager once the VIA is fully established. All preliminary and organizational development costs will be shared by the VIA members in the same proportion as their ownership.

All other costs will be determined through the organizational meetings of the specific VIA in question. The owners will determine what functions the VIA is to provide its members. Agency Consulting Group will calculate the costs associated with each function. Costs of on-going administrative and marketing activity will be shared by the members in proportion to their use of these services.

14. Will I still be running my own shop in the VIA?

ABSOLUTELY!! The greatest strengths of independent agents are their entrepreneurial spirits and their sales ability. The VIA will support the entrepreneurial spirit that has made agents successful small businessmen. The VIA Profit Center Managers will have management control over the conduct of their profit centers. The exception to this control, of course, is if the profit center is not generating a profit. The VIA will be available to assist in any way necessary to assure regained profitability.

The VIA will also support and assist in the renewal of sales efforts of the agents who comprise the ownership of the corporation through very active marketing, sales training and recruitment of additional producers for each profit center.

15. How would I ever get my value out of the VIA?

The VIA will be start as a corporation with a value equal to the values of all of the agents who have merged to create it. The future value of the VIA, like any other corporation, will depend on its growth and profit in the future. The entire principal of the VIA is built on the premise that a large agency with professional management, operational economies of scale, dedicated sales and marketing programs and a trained and motivated sales force comprised of owners of the company will grow more and become more valuable than would any of its component agencies. Each year the VIA will be re-valued for stock valuation. In the event of death, disability, retirement or separation from the corporation, an owner's stock is guaranteed to be redeemed for it's fair market value by the corporation.

Trading the equity in your agency for stock in the VIA makes sense to any agency who agrees that the value of small agencies in the U.S. is declining and that the VIA stands a better chance of growing profitably than does any small agency.

More Information:
For more information about the Virtual Insurance Agency concept, visit the Agency Consulting Group web site or call or email Al Diamond at 800-779-2430 al@agencyconsulting.com.