INDEPENDENT AGENCIES ON SLIPPERY SLOPES?
by Victoria Sonshine Pasher
There's no letup yet for the independent agency squeeze that's persisted throughout the 1990s. Facing numerous challenges, agency principals often depend on contingencies from insurers to make any sort of profit. Even so, that's being chipped away, too, as insurers and agencies alike grapple with industry trends such as consolidation and Internet marketing competition.
As Chris Burand, agency consultant at Burand & Associates (Pueblo, CO), explains, average producers don't produce enough business to make a profit. 'They break even at best,' he says, even after three years with an agency. Citing industry averages obtained from the Academy of Producer Insurance Studies and The Middleton Letter, Burand illustrates the problem with the following example:
Annual commission-based revenue averages about $150,000 per producer. If the producer receives an average 40% commission, that's $60,000 on the $150,000 book of business. CSRs, on average, receive a salary of $35,000, so add that amount. Add 13% for benefits, another 8% to 12% for business development and training expenses, and another 20% for rent, office supplies, and so forth. The grand total comes to $152,000 on a book of $150,000 -- and that still doesn't include compensation for the agency owner, receptionist, or bookkeeper.
'The average producer should be generating $200,000 to create a profit,' according to Burand. 'That should not be difficult.' But how? Agency owners 'must provide a structure for producers,' Burand maintains, adding that good agency management involves far more than giving a producer a phone and a list of prospects. Owners must work closely with producers by helping them set and monitor sales goals, and providing sales support and training. While it may seem logical for agency owners-who value entrepreneurship and independence-to give producers a free rein, in reality, 'This is one of the biggest mistakes,' he says. 'Giving producers too much independence can actually cause them to fail.'
But even proper structure and support aren't enough to guarantee that an agency will continue to stay above water.
Agencies are surviving largely on contingency commissions from carriers, Burand notes. But what's troubling agents especially, he adds, is that since loss ratios are expected to increase for insurers over the next two years (according to industry forecasts from A.M. Best Review Preview P/C Edition 1999) contingencies are expected, in turn, to go down, and profits will also suffer. Jack Fries, president of Fries & Fries (Morgantown, WV), conducts seminars with Burand on agency management, marketing, and technology at an annual 'School-n-Ski' weekend for agency owners. He says that when a group of agencies bands together or forms an alliance, it helps them gain contingencies. This arrangement can also be beneficial for the insurance company: Insurance company expenses are reduced, for example, when the company's dealing with 'one' agency as a single source of the cluster's communication, accounting, and billing, while getting the market penetration of six agencies.
Even though insurers' eyes widen when they can see the advantages of entering markets through a single alliance, Fries says, 'Companies still need to do a better job in assisting agencies with marketing efforts for that company's products and services.' This means more than just sending informational brochures; companies might hold sessions about ways to secure new prospects through traditional and online marketing channels.
Meanwhile, Fries urges agents not only to maximize their traditional marketing techniques, but also to boost their online marketing efforts. Gone are the days when agents could simply place an advertisement in the Yellow Pages and be done with it. Communications and marketing are now much more sophisticated, so agents need to improve their methods-not just to retain existing accounts, but to grow new business. Agencies should have Web pages, but 'The key is to position themselves well with search engines,' Fries says. 'Unless independent agents get their message to the buying public through online marketing methods, they'll encounter slippage' in reaching markets.
This article originally appeared in the KPMG Insurance Insider and is reproduced with permission. You can reach Pasher at (212) 872-6810, E-mail [email protected].