All-Access Pass

Ronnie Tubertini, president of Jackson, Miss.-based SouthGroup Insurance Services, joined a cluster called Mississippi Insurance Managers in 1984. A few years later, his agency joined other MIM agencies in forming a new cluster, Associated Insurers of Mississippi. When two of the agencies in AIM were acquired by bank holding companies, the seven remaining members merged their operations and formed a single, large agency, SouthGroup, which remains a member of AIM. As for MIM, it is now a managing general agency. Need a scorecard?

Tubertini’s experience illustrates a phenomenon that has gripped the independent insurance agency system since the 1980s, when many small agencies banded together in clusters, combining their premium volume to achieve higher commissions and contingent bonuses from carriers. During the tight market conditions of the 1990s, when many carriers trimmed the smaller branches from their agency plants, more agencies jumped on the cluster bandwagon, aggregating their premium volume to increase market access. Today, nearly half of all agencies—not just small ones—are reaching out to a wide range of cluster-like organizations.

This is one of many eye-opening trends from the recent Agency Universe study prepared by Future One, a cooperative effort between the Big “I” and about 20 agency carriers. The study finds that 45% of all agencies currently work with outside organizations such as wholesalers, clusters, Internet market access providers, cooperatives, huddles and related groups. The main drivers in this movement are the desires to package risks and access coverage. For smaller agencies, the external help plays an even more significant role in agency operations, with 59% turning to the outside organizations for a broad range of market access assistance.

New Partnerships
Traditional wholesalers are agents’ primary partners, offering their services to the widest array of agencies, with 21% of agencies placing 15% of their business through wholesale outlets. Then there are the so-called aggregators, networks and franchises—broad categories under which clusters, cooperatives, huddles and other market access providers fall. Eighteen percent of agencies use Internet market access providers, although typical usage by each agency is limited. The survey found that the Big “I” Markets platform is the dominant online source. Eleven percent of agencies are members of networks, 7% are members of clusters or huddles and 7% are members of agency operations franchises.

The size, scope and range of these “working relationships,” the study indicates, are extraordinary and somewhat surprising, given the softening in the p-c insurance market. Reasons for the continuing interest in external market access providers run the gamut, from the ability to attract higher commissions to the need to provide greater choice of markets to customers. Carriers also seem more interested in dealing with these intermediary-type organizations than they did in the past. “The paradigm has shifted completely,” says Mike Mayo, president of Superior Access, a market access network.

Whatever the reason, the proliferation of working relationships marks a fundamental shift in agency operations— perhaps with profound consequences. Anytime another layer of intermediation is put between the customer and the ultimate provider of products or services, the risk of distancing that customer rises. The change in agency operations is so pronounced that the Big “I” Council for Best Practices will study it this year in an effort to draw Best Practices around it.

“A lot of agents are looking for new ways to do business, but are not sure how to get involved with these outside organizations and, once they do, if they’ve made the right decision,” says Madelyn Flanagan, Big “I” vice president of education and research.

History of Wholesalers
Flanagan is referring largely to the aggregator model that sprang up in the past 20 years. Wholesalers, on the other hand, have been assisting retail agents since the late 1800s. Many national carriers today successfully migrated across state borders by working with managing general agencies in various states. Entrusted with the carriers’ underwriting pens, the MGAs then sought out local entrepreneurs to establish retail insurance shops. In many cases, these MGAs later became branch offices of the carriers.

Wholesalers have access to both admitted and non-admitted markets that fill a void, coverage-wise, usually in tight markets. But why the continuing use of MGAs as the cycle softens? Bernie Heinze, executive director of the American Association of Managing General Agents, believes good relationships are hard to break up, and when an outside party provides access to a much-needed market for an important client, loyalty persists.

“In a hard market, carriers are always looking for that independent branch office that has a relationship with agents to expand their business in that jurisdiction or in a particular line of insurance,” Heinze says. “When the market softens, retail agents that may now be able to get a direct appointment with a carrier still do business with the MGA to expand the number of markets they provide. They stay because of the ability of the MGA to assist their promise of offering carrier choice to their customers.”

Market Reach with New Partners
Relations with wholesalers have stood the test of time. Newer working relationships, however, are with a semantically challenged slew of third parties, beginning with clusters, the preferred term in the 1980s and 1990s for describing the aggregation of (generally smaller) agencies’ premium volumes. More recent organizations predicated on market access include huddles, networks, cooperatives and franchises, each with its own business practices. (See sidebar below.)

Shared Agency Services calls itself “an old-fashioned farmers’ cooperative,” says Jack Sherrill, managing partner at Savannah, Ga.-based agency Sherrill and Co. SAS is owned by its member agencies equally, with the revenue from their combined contracts shared on a production basis. “I’m a retail agent in Savannah with 11 employees who has been in business for 30 years,” Sherrill says. “I’m not interested in selling out to a larger agency, but I do need market access for my customers. By combining our premium volume with other SAS members I get that access.”

While SAS is predicated on providing access to more markets, there are the added perks of profit sharing and higher commissions, benefits typically outside the reach of smaller agencies. “All of our carrier contracts also include full agent commission to our owners,” Sherrill notes.

The catalyst for forming the cooperative in 1995 was not market access; rather, it was the Insurance Services Office, Inc., which changed the way it charged agents for the provision of property rates. “By joining together we would pay one rate, as opposed to each of us paying a separate rate,” Sherrill explains. Above all, he says, the cooperative “responded to my concerns about wanting to stay small and independent, and yet being able to service my customers thoroughly. I’m providing trusted choice, which would be hard for me to justify if I had a contract with one or two carriers.”

Thanks to SAS, he has access to an additional 13 markets. “None of us were desperate for markets; we just wanted more choice,” he says.

Finding Niche Products
Sherrill’s experience is not unique. “The goal of independent agents to provide more markets to customers is a driving force behind the rise in outside working relationships,” says Paul Buse, president of IIABA’s products and services subsidiary. “With the mix of business across the typical independent agency being, on average, more than half commercial, the agency will be handling diverse insurance needs for a variety of business organizations. To effectively serve these customers, the agency will need to engage in outside relationships to access niche and specialty products.”

As an example, Buse cites the potential need for special event liability insurance, coverage that is typically outside the parameters of a customary general liability policy. “Say your daughter wants to get married in the local park in May,” he says. “What if someone drinks alcohol you provide and then slips and falls and sues you? This liability is not something every carrier covers. Or what if a customer owns a garage and does car repairs in it and wants coverage for that? We provide an efficient means for agents through Big ‘I’ Markets to access carriers to cover these risks.”

The Franchising Factor
Brooke Franchise Corporation also helps independent agents access more markets, but it hews more closely to a Starbuckslike franchising model, according to Shawn Lowry, president of the Overland Park, Kan.-based organization. Since its inception in 1996, Brooke has grown to 737 agency locations and has exclusive contracts with more than 500 admitted and non-admitted insurance companies.

“When we started, most of our franchises were existing insurance agencies that had perpetuation issues, although today most franchises are actually startup agencies,” Lowry says. “We use Claritas software that identifies population trends, demographic factors, vacancy rates, traffic count and other factors to determine where best to put a Brooke franchise. At the same time, we’re receiving 1,500 contacts a month from people wanting to open their own insurance agency.”

Unlike a more traditional independent agency model, Brooke holds all company contracts. In return, individual agency franchisees obtain access to a veritable plethora of carriers that “they otherwise would not have access to,” Lowry contends. “And they become more efficient.”

SouthGroup Insurance Services seems like a franchise, in that the agencies that merged to form it all tout the SouthGroup name from their windows and marquees. With 17 offices throughout Mississippi, the brand is catching on, Tubertini says, noting that the merged entity has contracted with “all the carriers that are de facto in the state.” This begs an obvious question: Why is SouthGroup still a member of the AIM cluster? “Even though we’re writing more than $100 million in premium now, there are still a couple companies in AIM that, by ourselves, we would not have maxed out the contingency grid for the bonuses,” Tubertini explains. “We might get a 3.5% bonus as SouthGroup alone, but by being a member of AIM might get a 4.5% bonus.”

What to Watch For
The complex array of outside parties assisting independent agents and brokers and their assorted contractual terminology gives pause for consideration. Revenue models for the wholesalers, aggregators, networks et al vary subtly and in some cases significantly, as do agency ownership criteria. The small print in contracts requires myopic study—for good reason. “There are a large number of predatory contracts out there being signed by agents who feel they have no choice and are, in effect, giving up their independence by executing these agreements,” Mayo says.

In particular, Mayo warns agents to be mindful of the “out” clauses in contracts, i.e. “how much they will have to pay in gross commissions to terminate their relationship with the organization,” he says. “Some of the most recognized clusters out there require you give up two and one-half years of gross commissions to leave that organization. There goes your independence.”

Despite the potential pitfalls, Bill Norman, senior vice president of agency distribution at Safeco Insurance Company, is bullish on the rise in working relationships. “These new organizations are entrepreneurial; their services are a way to bring the value of the independent agency closer to the consumer in ways that consumers seem to prefer,” he says. “You can tap into the value of the independent agent without walking down to Main Street and sitting down at their desks, or having them sitting down at your kitchen table. Any time an agent can access more distribution points with fewer touches, there are advantages.”

Mayo concurs. “Agencies that used to effectively compete in their communities with a single carrier or a national brand coupled with a local mutual are finding that the spread of rates between these markets and the direct writers no longer is enough to win accounts or hold onto them,” he says. “If an independent agent has access to diverse markets, chances are that, in any ZIP code for most types of business risks, they will win.”

The evolution toward more and expanded working relationships likely will continue. “It will happen more and more because the economy, technology, consumerism and entrepreneurialism will make it happen,” Norman says. “People will simply continue to take new ideas to the marketplace for the benefit of consumers. It is the industry’s responsibility now to understand these developments and provide a context around it.”

Russ Banham (bzwriter@aol.com) is an IA senior contributing writer.

Before You Leap

Wondering what the first step should be when joining with a third party? Big “I” Vice President of Education and Research Madelyn Flanagan says agents should prepare a checklist of questions to ask when approached by outside intermediaries. “A starter kit might be a good way to approach this subject,” she adds. “We’re not saying this is a bad way for doing business; in fact, it can be wonderful for agencies. We just want them to be aware of the decisions they’re making and understand the outcomes it may have for the agency in the long run. Agents are presented with these varied options and a short timeframe to make a decision. We want to be sure they have all the tools to make the best decision.’”

Safeco’s Bill Norman has a similar take. “Agency practices are certainly much broader than they used to be,” he says. “Unfortunately, the assessment of agency best practices has lagged behind the actual evolution of independent agencies. It’s time to catch up for the ‘best practices’ concept to continue to have value.”

What’s in a Name?

Clusters, huddles, networks, cooperatives and franchises are among the types of organizations catching on with agents. How do they differ from one another?

“These organizations take different forms based on the economics of bringing efficiencies to the carrier by combining premium volume through a unified discipline,” says Paul Buse, president of IIABA’s products and services subsidiary. “Clearly we need to study the different ways in which these operations provide value-added service.”

Bill Norman, senior vice president of agency distribution at Safeco Insurance Company, agrees. “We need to decide what the lexicon will be, as far as agreeing on the meaning of all these different terms,” he says.

Mike Mayo, president of the market access network Superior Access, breaks down third-party providers into two camps: wholesalers and networks or aggregators. “Entities have found that some carriers don’t like the term ‘wholesaler’ or ‘aggregator,’ so they’ve come up with fancy words like ‘huddles’ to differentiate themselves or not subject themselves to the stigma of a name,” he says. “I think of Superior Access as a blend of what used to be called a wholesaler and an aggregator.”