AGENCY-COMPANY RELATIONS: COMPANY CONTRACTS
by Carol Hammes
How to get – and keep – the best company contracts.
INTRODUCTION
The relationship between insurance agents and the companies they represent continues to change. The written agency contract and profit-sharing agreement formalize this relationship and will become the focus of the battle if things don’t go well. It’s imperative that you review whatever you sign very carefully and, if you have any questions, ask your attorney to take a look at new and revised agreements. It’s well worth paying for sound legal advice sooner rather than later!
Sometimes you’re so anxious to obtain a market that you might overlook clauses that bother you. Or a company representative might tell you that certain provisions don’t apply to your agency. If a provision is in writing, it could come back to haunt you. Conversely, if you’re assured verbally that you’re protected under certain circumstances, but that assurance isn’t written, you’ll be up the proverbial creek if push comes to shove. You can rest assured that the company had a whole passel of attorneys making sure that their interests were protected. A good rule of thumb is to look at each contract you sign as though the relationship is ending, not beginning. This might seem like a negative approach, but it’s the best way to identify items that could cost you both time and money in the future.
A company insisting that you sign an agreement without careful review or that’s unwilling to discuss your concerns should raise a red flag. Most companies have a number of different agreements available, and you might be able to negotiate provisions that are more attractive to your type of agency. Even if you’re not able to obtain everything that you would like, the response to your questions and requests will tell you a lot about the company and its attitude toward agents. If they’re arrogant and one sided in their approach to contract negotiations, what might happen with claim disputes or serious underwriting disagreements?
The basic agency agreement and any bonus or profit-sharing contracts should be looked at as part of a package, although you need to evaluate each one separately before signing. Here’s a list of some critical items to look for in the agency agreements. These are issues that have created problems between companies and agencies in the past and definitely should be considered at the beginning of the review process.
Use this list in conjunction with the more exhaustive checklists and guidelines that you can obtain from associations and other sources that are continually analyzing the available company contracts. State and national agents associations usually track what most companies are doing and can provide you with a lot of assistance in the contract-review stage. They might be able to let you know if other agents have been offered more lucrative agreements or if there have been legal problems with certain types of clauses. Don’t overlook this valuable resource in getting the leverage you need to obtain what your agency needs.
Be sure to run a side-by-side comparison of all your contracts. Note if and how each of them differ on major provisions. Be ready to show a company where their contract is deficient.
PRELIMINARY REVIEW CHECKLIST
Announcement. Did the company rep arrive on your doorstep with a contract/change for you to sign without any advance warning? Have the major provisions or revisions been explained? Are you being treated like a partner or a subordinate?
Term of Agreement. Is it specified? Is there any period of time during which the company cannot cancel except for cause? What kind of volume commitment will you have? Will it detract from your independence? Is the cost worth it in return for the promised stability?
Ownership of Expirations. Is it clear that the agent owns the expirations throughout the period of the appointment, as well as at termination? When can the company come in and take the expirations in return for agent indebtedness? Is the agent allowed the opportunity to furnish collateral other than the expirations? If the company is offering an exclusive product and/or territory, what happens to the ownership of the accounts after termination? Will the company or new agent pay fair market value for them?
Company/Insured Relationship. When can the company contact the insured directly, and how far can/should that contact go? The crossing over of the company into the traditional agent/insured relationship started with direct billing and became much more of an issue with the advent of service center arrangements. It’s imperative to spell out clearly both the agent’s rights regarding the direct involvement of the company with the insureds and the company’s responsibility with respect to notifying the insureds in the event of cancellation. When should the agency receive copies of announcements/cancellations/sales promotions that go to the insureds? Will the name of the company be prominent on all company communications to the insured? How does the insured find out that an agency is terminated or that a company is pulling out of the marketing area? In a service center relationship, how will the expansion of your agency’s accounts be handled by the company, and who will own those expirations?
Amendments. Will changes to the agency agreement be agreed upon and negotiated mutually, or will the company impose them? How much notice will be given for changes in commissions rates? Note that 180 days is reasonable. Recognizing that the only direction they seem to move is downward, will commission rates stay in effect for at least 18 months before another change is made?
Indemnification. For what and when will the company hold the agent harmless? Apparently some of the new contracts being offered are narrowing the protection provided to the agent, so you need to pay close attention to this. It’s particularly important to make sure that the indemnification provisions coincide with your E&O policy provisions. Also, how will defense costs be handled?
Arbitration. Both the agency and the profit-sharing contracts should include binding arbitration clauses to resolve disputes without prolonged litigation. The arbitration must be “binding” rather than by “mutual consent,” since the latter gives the company the opportunity to reject the decision.
Termination. Does the contract spell out the grounds for termination, and are they reasonable? For example, will a bad loss ratio or the failure to meet volume commitments for just one year allow the company to pull out? How much advance warning must they give? Do the contract provisions coincide with state law? What kind of opportunities will there be for rehabilitation before the actual termination, and are these guarantees part of the contract or merely assurances made by the company personnel? Does the agent have the right to decide what happens with respect to policy renewals and notifications of insureds? Who will be servicing the business after termination, and will the agent get paid if state regulations require the continuation of policies through your cancelled agency?
Other Things to Look For. Can the agency contract be assigned with the consent of the company? Why might they withhold that consent? What does the contract stipulate with respect to brokerage or “clustered” business? Does the company agree to keep information that it has on the agency’s financial situation confidential? Is your binding authority clarified? How long do you have to get binders to the company?
How much time do you have to pay account balances? This can be a major issue since some companies are lowering the time to 30 days from the traditional 45 days and are requiring payment even though they might not have been able to get the policy correctly issued yet (hard to believe isn’t it?). Do you have to pay their account or can you use your own account current? What is the agency’s liability for audit premiums? Do you have at least 45 days (hopefully 60) to turn the responsibility back to the company?
If you have been offered a preferred contract, what are you getting that is of value to your agency? There are almost always substantial volume commitments that must be met, sometimes in Life insurance as well as Property/Casualty. Will the preferred underwriting pricing/servicing or higher commission rates offset the pressure to meet those volume levels? Do you want or need loan assistance with automation or perpetuation? What do you have to give up in return? For example, if perpetuation assistance isn’t important to you, do you really want to give the company the right of first refusal to buy your agency in return for this unwanted assistance? What is this particular company’s reason for having the “top of the heap” program — and does this purpose coincide with your agency’s strategic business plan?
EVALUATING PROFIT-SHARING CONTRACTS
We have seen a gradual decrease in the amount of contingent income that agents are reporting in their financial statements during the past 10 years despite both good and bad industry combined ratios during that same period. This leads us to conclude that, in general, profit-sharing agreements are becoming less lucrative for the average agent. Nevertheless, some agencies are still receiving 10% or more of their income from this source. It’s definitely worth knowing what your agreements are doing for you and how they could be amended to provide even more income.
Although it will take a little work at first, we recommend that you load all of the various formulas into a spreadsheet program and then run the same scenario through each company’s calculations. The combination of volume commitments and loss experience that usually go into the calculations will favor the type of agency business mix and growth experience that the company has targeted. This means that the same loss ratio and premium volume can produce significantly different bonus amounts. It’s important to know where you stand so that you can evaluate new contracts and discuss existing ones with your companies to see if something can be done to set up a formula that coincides more closely with the type of business that your agency is producing.
As you try to enter the formulas into the computer, you might discover that some of them are incomprehensible or that the company doesn’t provide you with enough information to make your own calculations. This is not acceptable — and you must let the company know it. If it seems that the IBNR or company-loss adjustment or administrative expense factors are out of sight, you have the right to ask (nicely, of course) for a detailed explanation. And make sure that the expenses are net of any company profit factor.
While you’re conducting the year-end company review, you might discover that your agency hasn’t been writing a lot of what it has submitted to a particular company. Run the profit-sharing calculations using the total premiums submitted to see how much money the company’s “lack of appetite” has cost you. This information will come in handy when you meet with the branch manager to talk about the benefits of your relationship.
In reviewing, and perhaps negotiating, your profit-sharing agreements, ask yourself:
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Are stop loss provisions being evaluated realistically? This is something that can be changed to reflect the agency situation and the type of business written more accurately.
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Does the company provide you with the opportunity to “insure” the bonus in October or November?
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What effect (positive or negative) does the company’s decision to treat Personal and Commercial lines separately have on your bonus?
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Are key lines of business excluded?
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Are expenses and commissions based on earned (not written) premiums?
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If deficits are carried over, are credits carried over as well?
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What are the terms for payment of earned bonuses, and how soon are you going to receive the money after the first of the year? What interest rate is paid if the bonus check is not sent out until after April 1?
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Will you continue to receive payments on profitable run-off business if the basic agency agreement is terminated?
ARE WE DREAMING?
Recently, we referred to the agency company “partnership” as a dream. Dreams do come true. For almost every horror story you hear, there are other tales of companies admirably supporting their agents and insureds. A new type of distribution system is evolving out of the need to provide a more rational and efficient distribution system for the consumer. Agency-company relationships are no longer based on blind loyalty to a shared history, but more upon the concurrence of strategic business plans. Companies or agencies, however large, can no longer strive to be all things to everyone. Part of finding the appropriate niche is to identify partners who have carved out that same turf.
What it all boils down to is that agents and companies must be more selective about their key relationships and more professional in establishing and maintaining the contractual and working alliance. Decisions must be based upon mutual need within the context of the most efficient way to provide necessary insurance products and services to the individuals and businesses that recognize the “value-added” that the Independent Agency System offers. Companies that continue to treat agencies with thinly veiled contempt or try to impose contracts and guidelines will decline unilaterally. The increasingly professional and business-oriented agency principals will see to this!
As an agency, you’ll probably never find a company partner that is perfect. But some carriers will be better for you than others. Look for a company that:
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Is financially stable
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Has a history of providing a stable market for selected lines of business
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Provides innovative and creative marketing, underwriting, and pricing
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Treats each agency individually
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Judges each risk on its own merit
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Has decision-makers who are accessible and receptive
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Appoints only professional agencies
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Has efficient and accurate policy processing and claims service
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Makes key underwriting decisions at the local level
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Supports SEMCI
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Pays competitive commissions
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Has profit-sharing calculations geared to your type of agency
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Views the independent agent as important in future distributions plans
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Sees your agency as an important part of its marketing plan.
The late Carol Hammes, principal of The Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She is sorely missed.