Managing Company Relations

In recent reports, I have addressed the changing nature of the relationship between the American agency companies and the independent agents that have historically been the backbone of their sales force. A new type of distribution system is evolving out of the need to provide a more rational and cost-effective method of delivering the insurance product to the consumer. No longer are agency-company relationships based upon blind loyalty to a shared history but more upon the concurrence of strategic business and marketing plans. Both companies and agencies have found that they cannot effectively be all things to everyone and are trying to identify partners who have selected that same marketing arena as the niches they are now carving out. Decisions about contracts, commitments and servicing requirements must be based upon mutual need, and both sides must become much more discriminating in maintaining their key relationships.

Although there are some variances based on size, orientation, and location of the firm, the average independent agency places from 33% to 34% of its property-casualty premium volume with its lead carrier, 18% to 19% with the second contract company, and 11% to 12% with the third standard market. Because two-thirds of an agency's premium is with the three top carriers, most insurance companies want to be one of those lead carriers in each of the agencies with whom they maintain ongoing contracts. Many national companies insist upon having at least 30% of the agency's available premium volume as a commitment, a practice recently confirmed by the reevaluation criteria of CNA/Continental agents in the aftermath of the merger. And some of the regional carriers want at least 40% of your business. We have observed a number of agency principals try to buy some time by committing 30% of their volume to four or five companies, but sooner or later it will be time to pay the piper.

You have to decide who you want to do business with and how you want to do it. In today's brutal marketplace, it would be nice to have access to as many companies as possible in order to find one that could come close to the price that some crazy direct writer is quoting. But that is simply not possible. Independent agencies must limit the number of insurance companies that they do business with not only because of the premium commitments but also because it takes time and money to properly nurture a company relationship. One of the reasons there is so much duplication and redundancy in this distribution system is the dwindling level of trust between agency and company personnel. Agencies must pay additional attention to developing closer and more honest communications in both directions. And that is only possible for an agency with a limited number of contract companies.

Over the past several years, the average general lines retail agency operation has placed 90% or more of its business with anywhere from six to 20 standard companies, divided by size of agency as follows:

Does your agency have enough companies, too many, or too few? And are they the right ones to help the agency producers achieve their sales goals? Which relationships are worth building on and which should be terminated? To start the evaluation of your company relationships, make a list of every company that wrote at least one policy for your agency last year and include the following information on each for the past three years: written premium, earned premium, commissions paid, average commission rate, incurred/earned loss ratio, profit sharing bonuses paid, number of policies, average commissions per policy, number of submissions, number of quotes, hit ratio of quotes to orders.

Compute the percentage of total volume placed with each market last year and figure out how much of the total was with each of the 10 top companies. Have a meeting with all of the people in the agency who deal with the companies in a sales, underwriting, claims, or accounting capacity and jointly assign each insurance company an "ease of doing business" grade on a scale from one (low) to 10 (high). At first, you will find this company evaluation process difficult. Each successive year it becomes easier, and the trends start to strike you with clarity. It should soon become apparent which companies are compatible with your style and your type of business.

Regional carriers will often score higher than national stock companies in quality of service, accessibility of top management, understanding of local conditions, belief in and support of the independent agent, and flexibility. These carriers may not be able to handle the agency's larger and more complex commercial risks, but they can provide a stable, long-term market for personal lines and smaller commercial business. The popularity of regional companies has increased over the last several years and has resulted in an increase in market share for this group.

In deciding whether to keep a carrier or to add one, look for a company that:

• is financially stable with a Best's Rating higher than A- or that is at least improving its rating every year.
• has download capabilities with your automated system and is supportive of SEMCI and ACORD.
• has a history of providing a stable market for the lines of business that you write.
• has innovative and creative underwriting and pricing.
• treats each risk on its own merit.
• makes key underwriting decisions at the local level.
• has efficient and accurate policy processing and claims service.
• pays competitive commissions.
• has profit sharing calculations geared to your type of agency.
• has top managers that are accessible and receptive.
• treats each agency individually.
• views the independent agency system as an important part of its future distribution plans.
• views your agency as an important part of its marketing plan in your territory.

Contact potential new companies and begin to screen them against this list (or a personalized version). Find out everything you can about what type of business they want to write, how they write it, and what their pricing practices are. Do not take the marketing representative's word for it-meet with the underwriters to figure out where they are coming from. Question the company personnel about the things that your current carriers are doing (or not doing) that make it easier for you to work with them. Check with your local association and other agents who have been with the company for a while. Do the underwriters actually practice what they preach? Does the company give adequate prior announcement of changes? Do the managers and underwriters operate in a forthright and honest manner?

Once you decide that you would like to proceed, it is time to let the company know more about the agency. There may still be some insurance companies that will sign you up on a handshake but most will require detailed information on your agency to make their decision. In fact, if they do not seem to care about the financial condition of the agency or the professionalism of the personnel, reevaluate your desire to contract with them. In addition to completing their application, provide the branch manager with a submission packet on your agency. It can be your greatest selling tool in having them not only offer you a contract but also to put you on the fast track for becoming a "preferred agent." The chart at the top of the next page lists the major items that should be included in the presentation. Remember, you want this proposal to set your agency apart from and above the others that they might be considering. The documentation packet should be formal, professional, and totally free of grammatical or typographical errors.

If both the agency and the company are still interested in proceeding after the exchange of information, discuss goals for the first and second years of the relationship. What will the company expect? What can the agency honestly and realistically deliver? Set up quarterly meetings with the branch manager for the first year to review all submissions that have been made by the agency and the disposition of each one. Are the agency personnel providing the type of information that the underwriters want? Are the underwriters living up to your expectations in the areas of risk acceptance and pricing? Do not wait until the end of the year to identify and resolve problems. By then, emotions and finger-pointing may interfere with the ability to conduct rational discussions. Compromise is a lot easier if neither of the participants is backed against the wall.

Here's a checklist for creating a complete insurance company submission packet:

• Cover letter with brief overview of agency's philosophy and orientation
• Agency history
• Organizational chart and resumes of principals and key employees
• Agency policy with respect to employee licensing and education
• Copies of articles about the agency or written by agency employees
• Copies of agency brochures, including those for special programs or lines
• Copy of agency strategic business and perpetuation plans
• Financial information, including most recent P&L and balance sheet
• Copy of agency's E&O policy
• Summary of company experience with premiums and loss ratios for each major carrier for each of the last five years
• Copies of company-generated production reports for each major carrier
• Details about agency's automation system and interface capabilities
• Details on marketing/sales methods such as use of sales center, producer incentives
• New premiums/commissions written last year by each agency producer

Continuous Nurturing of Company Relationships

Because much more of the burden of maintaining good agency-company relations now rests with the agency, it is essential that certain people in the organization be given the explicit responsibility and authority to carry out the insurance company action plan. Larger agencies will need to assign a number of people to company communications; whereas in smaller firms one agency principal can handle most of the company relations. In any event, every one of the carriers writing more than 10% of the agency's business should have a key contact person in the agency. Companies with the highest volumes should have two or three different levels of contact. Possible pairings include: agency principal with top executive of the company; agency marketing manager with company branch manager; producer, CSR or placer with the line underwriter or supervisor.

The action plan should contain a budget allocation for each level of contact, timing for planned events, and frequency suggestions for spontaneous calls and visits. After all, it is hard to develop a trusting relationship with someone that you do not know. Many agencies will have one large program or outing a year to which they invite all agency personnel and key company managers, representatives, and underwriters. They also plan trips to sporting events, lunches, or other opportunities for people to get to know each other. Familiarity will help keep communication channels open when each side has a different perspective on an account.

At the end of every year the designated agency principal should meet face to face with the regional vice president or branch manager of each contract company. The purpose of this meeting is twofold: to let company management know where they stand with the agency, and why and to find out what the company personnel think about the agency, and why. Before entering that meeting, you should update the comparative data on all of the agency's major companies so that the discussion can be backed up with hard facts. How much new business did the agency write? How much did each company receive? What were the hit ratios with each of the top carriers? Do you expect to receive a profit-sharing check from this company? If not, was it because of loss problems, not meeting volume commitments, or both? Would you have received a bonus from another company with the same loss ratio and volume?

Both participants should walk out of this year-end meeting with a clear idea of the type of business (and how much of it) the agency has agreed to pursue on behalf of that carrier and what the company will do to facilitate the agency sales and servicing efforts. Commitments should be shared with the agency personnel that are on the front lines since they will be the first ones to know if all is not going according to plan. Have a procedure for them to alert the principal in charge of that company when something happens that is contrary to their understanding of the agency's agreement with the company.

Keep a log of all submissions and review it quarterly, sharing it with the appropriate company representative it if appears as though a problem is developing. Did the branch manager indicate that they wanted widget manufacturers but the underwriters are turning them down or pricing the risks so high that they cannot be sold? Are you sending the wrong type of widget manufacturers? Or is it because the agency personnel are not doing something they could be doing such as physically delivering the applications or calling/faxing with basics on the account before the actual submission is made? It is important to address the issues with the underwriting or branch manager as soon as it becomes apparent to you that the growth plan for the year is in jeopardy while there is still time to salvage it.

The manner in which these communications are handled will often make the difference between the maintenance of a successful relationship and one that is doomed to failure. If the company manager perceives that the agency principal is complaining to cover the agency's own lack of sales success or if the agency principal feels as though the company person does not have either the desire or authority to resolve the issue, the problem will escalate.