Buying A Book Of Business

During the past nine years our executive search firm has been involved in a substantial number of assignments to find superior performers for international, domestic and regional insurance brokers. We have also been retained to search for risk managers and a variety of insurance and risk management consultants. Although we also find senior executives for insurance companies, our searches for risk managers and consultants take us deep into the ranks of the brokers.

The alphabet houses and most large domestic brokers were built by acquisition and merger. Agencies and small brokerage firms were gobbled up at a rapid pace. Their principals usually wound up with a long-term contract that transferred their book of business and their independence to someone else.

A real eye opener for me was learning about some of these acquisitions several years later, usually not from the person who negotiated the deal. Contracts were honored and payments made, but the psychological impacts were dreadful. In many cases, the executive who put it all together had retired, changed jobs or was fired and his replacement was inheriting the problem. The principal who sold his agency and his entrepreneurial soul frequently found himself in a constant adversarial position with the new executive, who in turn acquired a subordinate who was dramatically overpaid by today's standards.

A sizeable number of these acquisitions are still horror stories. I'm sure that patience and tolerance will enable the protagonists to ride it out until those last payments are made. It certainly isn't my place to play Monday morning quarterback as I probably would have supported some of those deal makers.

Carriers, brokers and agents grew the same way. Throw some meat on the skeleton! Premiums for the carriers and commissions for the producers! This carnage which we've witnessed during the past 20 years is now reoccurring at a more rapid pace. Today, survival is the goal, instead of growth. With CIGNA's staggering loss and Mission's disastrous results, one cannot but wonder if the first quarter is the tip of the iceberg.

It would be easy to dismiss the carriers and their problems and focus upon the independent agent distribution system, but they are interrelated. As carriers merge, or go belly-up, their producers will be further affected by additional pressures.

The property and casualty independent agency distribution system is headed for a crunch! With financial institutions nibbling away at personal lines and more sophisticated risk managers influencing corporate buying habits, the squeeze is on! This compression-bottoms-up with personal lines and top-down with commercial lines-will accentuate the pressures on producers. Today's distribution system must change to accommodate all those pressures.

It won't disappear, but it must change.

John Cox, formerly of CIGNA and Associated Madison Cos., said in his recent address to the American Bankers Association's National Insurance and Protection Conference, 'Direct response will never account for more than 20 to 25 per cent of the business. You need personal contact.' He further commented on direct writers, 'State Farm is the best-run insurance company in America and trains people to do very well what they do in a narrow channel,' he said. 'But I wouldn't want to work there, it must be very dull.' He further predicts that the 'independent agency system will survive as long as there is an insurance industry. But in the future the agency will do the entire job and become the insurance company it's representing or will merely sell, like a broker.'

Personal contact may be the best way of niche marketing and other more direct methods will gain momentum until they prevail. I do agree with his further observation that 'the property and casualty industry is in such disarray that it may need the banks to bail it out.'

Edward J. Blackburn's recent presentation to the Western Association of Insurance Brokers was rather specific about the Bank of America's delivery system:

'We have about 1,000 branches in California and our Seafirst network has another 200 offices in Washington.' Jack Blackburn was also candid in his remarks about more than 800 banks being on the FDIC's problem list and the fact that nearly 80 banks failed last year.

With the insurance and banking industries in a turmoil, it is a small wonder that each is enviously eyeing the other's territory. As Mr. Blackburn said, 'We're crossing to each other's turf, and you know something, many of us are thinking maybe that isn't so bad.'

So much for pressures, turmoil and compression on the independent agency system. You've heard it before and you'll hear more about it as carriers hit the regulators alert list and banks enter the FDIC's problem list. What has all this got to do with buying a book of business? Plenty!

As brokers and agents take inventory and analyze their survival options, the more obvious paths jump to the forefront-merge, acquire a book of business, bring in additional talent, franchise, specialize, automate, secure a preferred agency contract, reduce the number of carriers, etc. Some of these steps may very well be solutions to survival. In one way or another, these options require very qualified people, insurance professionals and competent technical support staff.

It is refreshing to take on a search assignment where the broker (client) wants to bring a new producer and account manager into his ranks rather than move a book of business or a particular account. 'I'm more interested in the person as a potential partner, principal and equity holder than their existing business. If I get the right person, the business will follow.'

Conversely, we have turned down a few search assignments where the client has emphasized the need for a book of business and de-emphasized the personal and professional characteristics of the individual. There is something intriguing about acquiring a partner, whereas there is nothing particularly stimulating about hiring someone who proclaims that his accounts will follow.

What is the desired profile of a partner? As a small to medium-sized broker or agent, what do you seek in a person to whom you are willing to give shares of stock in an organization that you have built?

Searching for a partner is like searching for a mate; the basic ingredients should be somewhat the same. Said on broker client: 'I want a person with whom I can trust my wallet or my wife.' Another crusty old producer defined a partner as 'one who could be called late at night to roll my body out into the street from a whorehouse where I died, just so my family would never know.'

Obviously, the ideal situation is to find the partner who meets the above criteria and who also has a personalized book of business that will follow. This is difficult. Do you advertise; retain a executive search firm; hire a consultant that specializes in agency acquisitions; pass the word to your own network; or make direct approaches to targets you have already identified?

'I want a producer with a proven track record, one who has developed new business and effectively marketed and serviced his accounts. I need someone who is self-starter, one who is streetsmart and creative. I want a catalyst who will make things happen, a person with an entrepreneurial spirit who has a lot of energy and a good sense of business. My new partner will help me run the business and, therefore, he must have good judgement. A common thread must be a sense of humor.'

This is an obvious partner profile. How simple-yet so simple that it usually takes a back seat to moving a book of business or a few covered accounts. Good producers are trained 'to eat what they kill.' If your goal is to bring in a producer who can also manage accounts, I urge you to first select the personal and professional traits. The business will follow. Although you may eat part of what he kills, his accounts are subject to the same pressures your existing business faces.

When we recruit, candidates respond to the approach, 'Our client is far more interested in you as a potential partner than in the business you can immediately switch.' When the recruiting pitch is slanted toward moving accounts, the focus is immediately on incentive compensation through commission splitting. That focus usually remains throughout the negotiations, and both parties are blind to the more important issues of partnership.

In summary, the independent agency distribution system is subject to numerous pressures. I am convinced that it will be compressed to the small- to medium-sized commercial account. Personal lines will become too consumer-driven and large commercial accounts will have more astute risk managers effecting greater corporate savings. First, seek partners who will help you combat this compression by developing new small- to medium-sized commercial accounts and, second, worry later about moving their existing business. As Polonius said to his son, 'To thine own self be true and it must follow as the night the day, thou canst not then be false to any man.'