This past summer our company celebrated its twentieth anniversary. Kicked it off in July of 1983. To celebrate this event, I had decided to send each principal in all our client agencies and companies $20,000. Twenty large. Being the careful consultant, however, I ran the idea by a few of you first. A focus group of sorts. I was disappointed to learn that the group thought my idea crass. Instead they suggested something more fitting, more cerebral. So reluctantly, but always faithful to your wishes, I offer you instead twenty things I’ve learned about the independent-agency business that you might find interesting or even helpful. The first four are below. Some more will be in the next issue.
Most independent agents are not entrepreneurs. They are often called such, and like it. They often call themselves that. But basically they are not. Some are, of course. Observations like this don’t apply universally. But entrepreneurship is not the main behavior pattern found in independent-agency owners. And we’re talking here about the successful ones. This is intended as an accurate observation, not as a criticism.
If not entrepreneurs what are these cats? They’re private-business owners aren’t they? And that makes them risk takers, doesn’t it? Yes and yes, but mainly they are relationship people, most of whom are good service people and some of whom are good sales people. They have more in common with, say, teachers or local football coaches than they do with the classic American entrepreneur. They just have a better gig (most of them) than Ms. Grundy or Coach Nonecki. Growing size and business value may change the DNA of agency principals in coming decades. That’s another subject.
Most independent-agency owners are not entrepreneurs.
But “entrepreneur” is not a good shorthand definition of the majority of today’s agency leaders. Most of them got into the business by taking a job. In many cases, on the rebound. Venture capital vision, and innovative brilliance didn’t explain the beginning. They tended to grow into their success by focusing on relationships, being persistent, understanding localness, and one more thing — being independent. Sometimes just showing up is a good strategy until you see the light. I think things would work more smoothly in the industry today if people who deal with independent agents — advertisers, association leaders, employees, and, Lord knows, carriers — would think about this and who these people really are. And more smoothly still if independent agents would acknowledge that about themselves. Someone smart once said that not much good happens until you start calling the thing by its real name.
Localness is the center of the independent-agency business. Readers who have worked with the BHBCo for a while will find this anything but new. Localness was a major theme of work and my speechifying for several years in the mid-‘90s. It’s worth stating again.
Localness is not just sentimental and not just traditional. It is essential, as in at the essence. And it’s not just a customer-service thing. It’s an underwriting thing. Granted, there are some classes and lines of business that are more effectively underwritten from time to time on a program basis and thus not sold and marketed through true localness. But these massmarketing ventures tend to be dynamic and temporary developments that exploit imperfections in the market. Ultimately, most small and middle-market risks get arranged, priced, and placed through local customer-broker relationships. And will continue to be. Knowledge of the insured is field underwriting. And it’s critical.
Recent advances in office technology and particularly in internet commerce have been a boon to agencies, as opposed to the doomsday instruments they were portrayed to be by some misguided “seers” a decade or so ago, because they enhance localness.
The independent agency’s biggest current exposure is carrier behavior. A good many agencies are in a position today to be really harmed, harmed to the core, by just one or two more adverse developments in their carrier lineup.
I am surprised by this development. And I’m surprised that I’m surprised. Not to many years ago, I predicted the reduction in carrier ranks as marketplace developments (including a resurgence in localness) overwhelmed insurance companies that did not recognize, or were in deep denial about, what was going on in the field. But I guess I was lulled to sleep by the immense number of companies one could find in Best’s. I never gave serious consideration to the idea that there might be a shortage of carrier markets. There are still a lot of companies, and in a macro sense there is adequate capacity. But in practical effect, some agencies are uncomfortably close to running out of inventory, and not just briefly. And if not out entirely, enough to put the notion of independence to a real test.
Not surprisingly, agency networks and other collectives, that those bring markets and other important services, are prospering. Three good examples that we admire are United Valley Insurance Services in California, the Renaissance Alliance in New England, and Keystone Insurers Group in Pennsylvania. There are others.
I don’t know how this will play out. One can see some early bets, but there are still a lot of hole cards unturned. The response to this development is likely to have more impact on the p/c landscape than any other development in the industry in this decade, save some awful disaster, the likes of which we saw a couple of Septembers ago.
There are some huge opportunities here for regional carriers. Together with smaller and mid-sized agencies, they could do great things.
Sales compensation is the most important line on an agency’s income statement.
There are opportunities for all carriers theoretically, but I just don’t see the larger players having what it takes to react effectively. They just don’t seem to have the humility necessary to pay attention to what’s going on. Some branch managers do, but in the big company action, the prevailing communication wind tends to be at, rather than from, the field.
Sales compensation is the most important line on an agency’s income statement. This is true in the direct sense, meaning that it is likely to explain bottom-line profitability more than any other line; and it’s true indirectly because digging into what’s behind sales comp leads to more important information about agency management and leadership than any other item in the financial statements. In terms of direct impact on profit, the sales-comp line actually shares top billing with the contingent-commission line (for agencies operating mainly in the standard p/c markets). Theoretically, any expense category can be an explainer of the bottom line, through good or lax management. But the facts are that when we observe Agency A as different from B, or different from industry norms, the likeliest points of biggest variance are sales comp and contingent commissions.
An agency’s contingent commission ratio (the number of pennies of contingent commissions for every dollar of regular commissions) often says as much about the types of business the agency is in as it does about the way it’s managed. But sales comp is more revealing. When an agency performs well on the operating side, chances are pretty high that sales comp is well managed. Put another way: It’s almost impossible for an agency to be a good performer in its operations and manage this expense poorly.
Strong operating performance does not necessarily mean a low ratio in the sales-expense line. In agencies that are committed to organic growth, the sales-comp line will often carry some hefty number. Growth is never free, and it’s almost never cheap. But properly managed and when part of a welldesigned perpetuation plan, the investment not only builds value, it unlocks it.
Now, if you’ll excuse me, I have to go put away my money.
Everett W. Shaw
As many of you now know, Everett Shaw joined BHBCo in the spring of 2003. We are delighted to have him. The combination of his people skills, financial skills, and enthusiasm makes him a great fit for us. Prior to joining us, “EW” sold securities and held two marketing positions. He has his MBA and teachers as an adjunct faculty member at a local college. In addition to long hours on BHBCo work, he is in the business-valuation certification process and is brushing up on his insurance basics.Everett W. Shaw
As many of you now know, Everett Shaw joined BHBCo in the spring of 2003. We are delighted to have him. The combination of his people skills, financial skills, and enthusiasm makes him a great fit for us. Prior to joining us, “EW” sold securities and held two marketing positions. He has his MBA and teachers as an adjunct faculty member at a local college. In addition to long hours on BHBCo work, he is in the business-valuation certification process and is brushing up on his insurance basics.
Burke Ink, January 2004