Clusters

INTRODUCTION

The cluster concept has been a popular one for doctors, dentists, realtors, and others for many years. Insurance agency clusters have been around for a few decades, but interest in them intensified during the hard market of the early 1980s. At that time, smaller agencies banded together to protect themselves against increasing carrier demands brought on by tighter market conditions.

Like snowflakes, almost no two agency clusters are alike. And, to add to the confusion, hardly any two groups agree on cluster categories. For example, one cluster consultant may recognize five types of clusters while another may see only three forms. For our purposes, we'll discuss the three most general types of clusters:

1. The independent cluster is a looser formation. Agencies under this format combine such things as advertising, rent, automation, and clerical services, but retain independent ownership. Each agency under the cluster is responsible for its own carrier relationships, billing and correspondence.

2. The intermediate cluster provides more services in exchange for less independence. A management corporation is established to handle the administrative, processing, and overhead tasks. Operating costs are shared by all cluster agencies. Carrier relationships are generally handled by the management company, but agencies keep their independence.

3. The complete cluster owns or has the option to own all member agencies.

The management company operates independent}y and member agencies act as sub-producers. Agencies may be in one location or linked via computer.

Variations exist within each category, but the general concept is the same. The kind of cluster you enter into depends on what you feel most comfortable working with. If it's independence you value, you should probably choose a less structured cluster.

REASONS FOR CLUSTERING

Clusters have a number of advantages and disadvantages. Generally, clusters offer the most to smaller and rural agencies whose carriers are demanding more from them than they can produce. Clusters can provide:

• Increased premium volume-Increased premium volume means an increase in an agency's clout with its carriers. Carriers may demand $500,000 or more in premium volume from agencies-something many rural agencies simply can't provide. A cluster helps such agencies group together to provide more premium volume and a better market mix.
• Increased specialization-Small agencies may be too busy working on standard lines to specialize. With a cluster arrangement, specialization is now possible.
• Improved efficiency-Bigger can mean better. Larger agencies can streamline operations, thanks to more staff. Such areas as prospecting, solicitation, applications, quoting, rating, and placement can be simplified. As part of a larger entity, a member agency may be able to take advantage of carrier-sponsored direct billing, rating software, computer applications, technical support, and risk management facilities that make account placement and retention much easier. Office supplies can also be purchased in greater quantities at less cost.
• Perpetuation planning-Few agency principals have made any plans for the future of their agencies. A cluster can provide the means for principals to dispose of their agencies at a reasonable price.
• Education/training programs-Many agencies cannot afford an adequate education program for their employees. The combined staffs of a cluster may warrant training programs and increased educational opportunities.
• Increased services-With a number of agencies in a cluster, extra services, such as loss control, risk management, and excess and surplus lines services may be offered. A smaller agency couldn't provide such a variety of services to its clients.
• More selling time-Clusters often have an overall cluster manager to handle the administrative work, leaving principals more time to sell.

On the other hand, many agency owners may not benefit from a cluster. Some of the disadvantages of clusters include:

• Decreased independence-While this isn't true of all cluster arrangements, often principals will find they can no longer work their own way without a problem. Clusters, to work properly, need some checks and balances.
• Forced growth-If an agency owner is happy with a small agency and limited growth, he or she should not join a cluster. Clusters required each participant to move forward and grow.
• Loss of control-Agency principals may find they can no longer dictate how their time will be spent and on what. Appointment-setting may be centralized.
• Personality conflicts-Perhaps the biggest disadvantage is the inability of cluster principals to reach agreement on fundamental management decisions. The majority of clusters fail because of personality conflicts.

HOW TO CHOOSE WITH WHOM TO CLUSTER

You've weighed the advantages with the disadvantages, and you've decided you want to participate in a cluster arrangement. Your next decision: is whether to start your own cluster or join an existing one. There are tradeoffs. If you start a cluster, you will spend a lot of time putting it together, but it will be a reflection of your desires. If you join an existing cluster the work has already been done, but you must adapt to its business philosophy.

STARTING A CLUSTER

Creating a cluster may be easier than joining one, depending on your point of view. When you start your own arrangement, you can choose exactly how you want it to be organized. Entering an existing cluster requires you to adapt to pre-established rules and regulations. Most of the time spent on a cluster will be spent in locating cluster parties and planning.

Before looking for potential cluster agencies, you should make a decision as to what type of arrangement best suits your needs (see the types of clusters at the beginning of this section). For example, are you more interested in increasing growth or sharing expertise? Among the areas you need to look at are:

• Markets-Most clusters share markets. It is the pooling of premium volume that gives a cluster an advantage with its carriers. Because carriers will have to be consolidated under this type of arrangement, you should decide which carriers you want to keep.
• Identity-Will the cluster assume your agency name, allow each agency to retain its own name, or create a new name? In general there are two forms:

1. the cluster takes on one image and operates under one name, or
2. operations are consolidated, but each agency retains its own identity.

• Equipment and physical facilities-Agencies in a cluster usually operate from one facility. Those that do not usually have one central location in which computer facilities and some personnel are located. Such items as computer equipment are generally shared, as well.
• Advertising-When a cluster has a single name and identity, shared advertising is a distinct advantage. The pooled resources can give a cluster money to advertise on a much larger scale.
• Employees-If the cluster is to share staff, you may gain increased technical expertise, but some employees may become redundant. This is an important consideration which must be weighed carefully.

The next area that needs to be looked at is the actual legal, contractual arrangements. For example, the cluster can be a joint venture (or partnership) or a corporation.

Once you have taken all the above factors into account and decided on the form your cluster will take, you will need to find suitable agencies to include in the cluster. The following questions will help both you and prospective agencies determine whether you are "right for each other". Also, have prospective cluster members fill out the "Agency Profile" sheet to get a better idea of their business and goals.

1. Do you have outside ownership interests in your agency that need to be considered?

2. Do you have any major capital financial obligations? Look for such things as an agency purchase, automation commitments, unbreakable long-term leases, and so on. Both sides should consider the effect on the cluster.

3. Could you share all aspects of your agency with a competitor when considering forming a cluster with that competitor? If the agency can't be open, a cluster will not work.

4. Do you have strong feelings about maintaining control over your book of business and growth? If the answer is yes, that person probably would not make a willing cluster partner.

5. What are your retirement plans, if any? A successful cluster should be able to accommodate each partner's retirement plan, provided it is a reasonable one.

6. What do you want out of a cluster arrangement? By discovering a person's personal and professional goals, you can compare them with your own to see if they will mesh.

7. What is your business philosophy? If the owner is very much a hands-on manager, chances are that person won't adapt well to a cluster arrangement.

With all your questions answered, the next step is choosing which of the prospective agencies you feel will work well within your cluster. Cluster finalists should already have signed the "Intent to Enter Into a Cluster Agreement". At this stage, you'll want to sit down together and work out minor differences. You should gather all potential participants together and discuss the following:

1. Companies/Markets

2. Producers/Employees

3. Cluster Location

4. Marketing/Administrative Duties

5. Services

6. Management Responsibilities

7. Expenses Allocation

8. Income Allocation

9. Legal Structure of Cluster

10. Allocation of Cluster-generated Business

11. Common Marketing Plan

12. Cluster Officers and Duties

13. Management Committees and Authority

14. Start-up Activities

As you get closer to finalizing the cluster arrangement, each agency should discuss with its carriers their attitudes toward the cluster. Some insurance companies may have experience working with clusters and be able to offer you some ideas. Other companies may be opposed. Whatever the case, knowing in advance how carriers feel helps you determine which carriers you want to keep.

You should also review all potential agencies for E & O claims-both past and future. Participating agencies may or may not have the same E & O carrier. You should compare carriers, looking for the best coverage at the best price and limits.

It's a good idea to hold a planning meeting involving all participants. You'll probably find it helpful to hold it in a neutral location, away from all concerned agencies. The meeting should cover:

A review of the cluster.

• A detailed discussion of the 14 topics listed previously. Most decisions can be made at this point. For example, decide who will serve as a cluster officer, and so on.
• A specific list of the steps that need to be completed to get the cluster started. You should also set a time frame.
• Signing the "Cluster Member Agreement". You should tailor it to your specific needs.

With the details set, it's time to carry out your plans. Carriers and agency staffs should be kept informed of your decisions-a summary of your plan should be given to all parties. Carriers should be informed of the cluster's objectives, mix of business, marketing initiatives, and forecasts for that particular carrier. You should meet with carriers personally to establish a relationship between them and the cluster. Follow-up meetings should also be set.

Agency staffs should receive similar preparation. Because a cluster allows for employee consolidation, you should identify those employees who will not be making the transition before holding a meeting. At the meeting, let employees know that their duties and responsibilities may change and to consider the changes as a new opportunity for personal and professional growth. Also let them know:

Location: Whether your agency is moving, the other agencies are moving to your location, or no move will be made, inform your staff.

• Accounting and Records: Accounting and records may be merged, which may mean retraining for some staff.
• Sales: Your producers may be directed by a cluster sales center, or they may continue as before, or some procedure in between. Whatever the case, let them know and keep them informed of any changes.
• Planning: Have a summary of the cluster's plan ready for your staff. Go over the marketing plan with them, and make sure it's completely understood.
• Attitude: A cluster arrangement will have a big impact on your staff's morale. You may meet resistance. You should make it clear that although a cluster means they will have to be ready for compromises and flexibility, it also means increased growth opportunities.
• Management: It may be a good idea to hire a cluster manager who is new to all involved agencies. This person will be impartial and his or her duties should include holding the authority to deal with carriers and all placement activity. If you don't hire an outside manager, one person can be appointed to handle these responsibilities to assure carriers of the cluster's stability. Many large clusters form an executive committee to oversee management decisions.
• Consolidation: A number of areas may be consolidated and your staff will need to know which areas those are. Such areas as financial controls, agency underwriting and placement, carrier relationships, surplus carriers, personnel activity, and supply and equipment purchasing may be consolidated.

In addition to the procedural aspects of a cluster, management and staff will also have to handle psychological factors. Often clusters fail because the amount of time and effort spent in starting the arrangement falls off drastically after the initial move is made. You should recognize that a successful transition may require months of integration. Employees can suffer from this lack of reassurance. To make sure the cluster goes smoothly, try the following:

1. Be honest and straightforward with your staff. Try to find out what's happening in the "rumor mill" and clear up any misconceptions.

2. Keep the lines of communication wide open. It may mean having a staff meeting at least once a week.

3. Let your staff know there are some things that haven't been figured out yet, but that they'll be the first to know when things are set.

4. Serve as an example. It's your job to stay in control and promote team spirit.

In summary, starting a cluster takes a lot of thought, time, and effort, but you have the satisfaction of creating a cluster that suits your needs. However, you should be prepared to make some compromises along the way.

JOINING A CLUSTER

Joining an existing cluster may be an easier route, but depending on where you're located, it might be difficult to find such an arrangement. You may find no existing clusters in your area, or only one. If you have a choice, first identify which cluster culture might best suit your agency, then go about contacting the clusters and finding out how they operate. You should be prepared to answer a number of detailed questions about your agency.

In addition to answering the cluster's questions, you should have a list of questions. The following questions should help you determine whether the cluster is right for you:

1. How is the cluster set up? For example, do agencies operate under one name, or do they keep their individual identities? Are all agencies located in a single facility? What is shared and what isn't?

2. Are carriers consolidated? (They should be, since it is the sharing of markets that provides clusters with their biggest advantage.) If so, which carriers presently exist, and are you accepting any new carriers?

3. What staff, equipment, and so on are expected of you? Where would your staff fit in? If the cluster consolidates a lot of activities, many of your staff may be unnecessary. You will need to determine how you feel about that.

4. How much control does the cluster have over books of business? Are there growth limitations/expectations?

5. What arrangements are made for retirement plans? Are perpetuation plans in place for all participating agencies?

6. What is the cluster's business philosophy? For example, what is its goal growth, specialization, and so on?

7. What are the major functions the cluster would expect of your agency?

8. How is cluster-generated business allocated?