The aggregator advantage: join forces to get through tough times. April 30, 2009
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Small independent agencies struggling to survive in today’s economy and insurance market face plenty of challenges-not the least of which is pressure from the insurers they represent. Many are tired of their insurers demanding more volume when in actuality ac·tu·al·i·ty
n. pl. ac·tu·al·i·ties
1. The state or fact of being actual; reality. See Synonyms at existence.
2. Actual conditions or facts. Often used in the plural. a small profitable agency is often more valuable to an insurer than a large unprofitable agency. The agencies are tired of missing profit sharing from a company with a 14 percent loss ratio because they were $20,000 short of their minimum volume commitment. And more of them are taking action to do something about it.
Instead of going it alone, more agencies are looking at ways to combine forces through “clustering” or aggregating–pooling their resources to combine volume without giving up autonomy or ownership. Although the trend has been around since the 1970s, clustering is becoming more popular in today’s economy. According to
2. In keeping with: according to instructions.
3.
….. Click the link for more information. the IIABA/Future One 2006 Agency Universe Study, more agencies in the under $1 million or $2 million annual revenue range are likely to engage in some form of aggregated arrangement, with 19 percent of respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy. noting their involvement at some level.
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And these arrangements work: In a recent ranking of the country’s top 100 agencies by an insurance trade publication, 28 percent were part of a cluster or aggregator.
These models, when carefully undertaken, can be a win-win-win: agencies gain market access and profitsharing, and minimize the risk of losing large accounts; insurers get distribution expertise and quality from agencies; and even regulators benefit because of the ease in managing profitability and loss results.
Volume aggregation has several characteristics that may be advantageous. It satisfies your company’s appetite for volume and allows you to attain profit sharing volume levels as a group when you might not meet them individually. It escalates the aggregated agents into higher percentage payout pay·out
n.
1. The act or an instance of paying out.
2. A percentage of corporate earnings that is paid as dividends to shareholders. levels for profit sharing and it increases profit sharing stability due to the aggregated books to sustain shock losses that the individual books’ abilities could not tolerate due to the small volume. These factors may make clustering more viable today.
Clusters are more accepted today than in the past. There are many different types of entities and structures, and they are constantly evolving. Companies are viewing them much more favorably fa·vor·a·ble
adj.
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. than in the past. Like any new idea, it took a while for people to get used to it, but it is now an accepted strategy for smaller independent agents.
Bill Wilson, associate vice president of education and training for IIABA IIABA Independent Insurance Agents & Brokers of America and director of the Big I Virtual University, recently approached consultant Peter van Aartrijk (www.aartrijk.com) and me to work on a paper about aggregators. This paper is now available to all subscribers on the IIABA’s Virtual University Web site (www.iiaba.net/vu).
In this paper, I categorize cat·e·go·rize
tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es
To put into a category or categories; classify.
cat aggregators into four broad groups:
(1) Agency franchise operations (AFO AFO Ankle-foot orthosis ): These offer a franchise arrangement and share revenue while providing market access; a compensation-based model rather than an upstream holding company concept.
(2) Market access cooperatives (MAC): The original agency “clusters” in which agencies retain ownership of their businesses, and thus their name, identity, location and assets.
(3) Agency platform operations (APO apo- 1 A prefix indicating a protein component in a conjugated molecule–eg, apoferritin, apolipoprotein, see there 2 Apolipoprotein, see there ): Taking the aggregator model to the next step, APOs provide service benefits of AFOs and MACs, and further agency structure benefits by setting up large automation platforms for members.
(4) Managed agency organizations (MAO MAO – An early symbolic mathematics system.
[A. Rom, Celest Mech 1:309-319 (1969)]. ): These attract large numbers of agents and provide a common management structure for all members, who usually share the ownership and manage the organization that oversees their agency books of business.
These classifications are really a chronological chron·o·log·i·cal also chron·o·log·ic
adj.
1. Arranged in order of time of occurrence.
2. Relating to or in accordance with chronology. evolution of how aggregators have developed. The first entities were franchises, like USI; then came market access cooperatives like Grindstone grindstone
or grind common metaphor for industriousness. [Pop. Culture: Misc.]
See : Industriousness Group (see page 24). Then agency platform organizations emerged, like Renaissance Alliance and more recently, managed agency organizations like United Valley Insurance Agencies. Another important distinction is that some of these organizations are organized as money makers for their owners. They may even take a percentage of ownership in your book. Others are groups of smaller agents helping everyone survive, with almost a non-profit mentality to their operations.
A BRIEF HISTORY OF AGGREGATION
The concept of agency aggregation has been around for nearly three decades, dating back to the 1970s, spurred by ongoing pressure from carriers for agencies to produce higher levels of premium. At the time, even some of the big brokers were having difficulty accessing errors and omissions errors and omissions n. short-hand for malpractice insurance which gives physicians, attorneys, architects, accountants and other professionals coverage for claims by patients and clients for alleged professional errors and omissions which amount to negligence. coverage, and infrastructure problems were appearing in the insurance industry. “More and more” seemed to be the mode of the day: Companies were demanding more and more premium, automation was becoming more and more important and more and more expensive. Talented and capable managerial and sales staffers also were becoming more difficult to access.
This led to the first aggregations, which took the form of franchises. Assurex was one of these original organizations that responded to some of these problems. As Assurex grew, other groups such as USI saw an opportunity and formed franchises largely based on other service distribution models such as real estate.
However, this model never really became a catalytic cat·a·lyt·ic
adj.
Of, involving, or acting as a catalyst: “Deregulation’s catalytic power . . . is still reshaping the banking, communications, and transportation industries” Ellyn E. driving force for smaller agencies, primarily because such arrangements were designed with larger agents and brokers in mind. The trend of smaller agencies pooling their resources in clusters created one of the few alternatives to being acquired or going out of business. The idea was for agencies to collectively access markets on a broader basis than they could individually. These pioneering aggregators understood they could realize enhanced profit sharing and income stability. They saw that they could do this on their own without having to go to a large entity to gain the benefits of aggregation. These became the market access cooperatives described above.
As the trend grew, carriers began recognizing the clout of clusters in terms of distribution reach and premium volume. In the 1980s, the early aggregators, which were primarily regional, began expanding into new states and developing new structures.
Over time, a generation of insurance agents sought a better way to do business. Renaissance Group, Wellesley, Mass., is a good example. President J. Bruce Cochrane approached a group of insurers with a better distribution model. Several companies signed on to his concept and he built an agency platform organization which set up its own automation platform, established a commercial lines underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. floor and created an aggregated agency. The Renaissance Group targets larger agencies than the traditional aggregators and concurrent with market disruption
A situation where markets cease to function in a regular manner, typically characterized by rapid and large market declines. Market disruptions can result from both physical threats to the stock exchange or a unusual trading (as in a crash).
….. Click the link for more information. in the Massachusetts insurance market place, it simply built what was perceived to be a better mouse trap This article is about the video game. For the board game, see Mouse Trap (board game). For other uses, see Mousetrap (disambiguation).
Mouse Trap is a 1981 arcade game released by Exidy similar to Pac-Man It was ported to three home systems by Coleco; . The agencies were in the right place, at the right time, with the right idea. They developed a plan, capitalized themselves, implemented and executed. Now they are in the list of the top 100 privately held insurance agencies.
Finally, there are a limited number of groups that have taken aggregator characteristics, but really formed themselves like a large agency. United Valley Insurance Services, Fresco fresco (frĕs`kō) [Ital.,=fresh], in its pure form the art of painting upon damp, fresh, lime plaster. In Renaissance Italy it was called buon fresco to distinguish it from fresco secco, , Calif., actually manages itself in a more centralized cen·tral·ize
v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es
v.tr.
1. To draw into or toward a center; consolidate.
2. manner. Established in 1983, it is now a $500 million organization with 50 or more agencies and 50 or more insurers in the mix and a cohesive cohesive,
n the capability to cohere or stick together to form a mass. identity.
TWO MAINE AGGREGATORS
Today, insurance is more dependent on the financial market, and market swings have become more and more pronounced due to the dependence on reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. , making aggregators more important than ever.
I work with two in Maine: Grindstone Financial Group and Sevigney Group. These two are good examples because they have the longest histories as aggregators and the longest history with me.
GRINDSTONE FINANCIAL GROUP
In 1993, when I was regional marketing manager for an insurer that does business in Maine, a coworkers approached me and asked if I would help two agents who wanted to form an alliance to help small agents like themselves survive. These two agents were Blaine “Buzzy” Holmes of the Holmes Agency, Ellsworth, Maine Ellsworth is a city located in Hancock County, Maine, United States. As of the 2000 census, the city had a total population of 6,456. It is the county seat of Hancock CountyGR6. (www.holmesagency.com), and Paul Tracy Paul Tracy (born December 17, 1968 in Scarborough, Toronto, Ontario) is a professional automobile racer in the Champ Car World Series. He also goes by the nickname “The Thrill from West Hill“. of the Winter Harbor Agency, Gouldsboro, Maine Gouldsboro is a town in Hancock County, Maine, United States on the Schoodic Peninsula. The town has many historically separate fishing and summer visitor villages, including Birch Harbor, Prospect Harbor, and Corea.[1] The population was 1,941 at the 2000 census. (www.winterharboragency.com).
We retreated to a conference room in our regional office to build a mind map of the elements necessary to found such a group, and build a contract that would govern its existence. The basic planning process took 2 days. The process then proceeded to the attorney who developed a legal contract for the arrangement. Today the group is comprised of 19 agencies and growing. To support that growth, we recently have created a market access cooperative that rolls volumes into master codes with insurance carriers to improve results and efficiency for the carriers, who, in turn, realize enhanced profits as carriers and for the Grindstone Group.
One of the reasons Grindstone seems to work is that although the decision making includes all participants, the final judgment is limited to the original members of the LLC (Logical Link Control) See “LANs” under data link protocol.
LLC – Logical Link Control , Buzzy and Paul. The entity always has been structured as an LLC controlled by those two original members. The group makes decisions for the benefit of the members, not just for the LLC. It is managed almost with a non-profit mentality. I sometimes criticize crit·i·cize
v. crit·i·cized, crit·i·ciz·ing, crit·i·ciz·es
v.tr.
1. To find fault with: criticized the decision as unrealistic. See Usage Note at critique. Paul and Buzzy for not charging enough for what they offer, although that mentality is what makes the group so successful. All agency members pay all the same fees and charges. When I postulate postulate: see axiom. why they do not want to increase the fees to reimburse re·im·burse
tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es
1. To repay (money spent); refund.
2. To pay back or compensate (another party) for money spent or losses incurred. themselves for the effort to set the Grindstone Group up and run it, their response is indicative of why they are successful as an aggregator: “Howard, we make so much more money in our own agencies and suffer so much less grief from the insurance carriers for volume commitments and other areas, we want Grindstone to offer all of the benefits possible to all of the members.”
The group has hired Gary Hanscom (who originally worked with me and helped set up the contract) as its sole employee managing the marketing, contracting and affairs of the Grindstone Financial Group. Grindstone does not actively solicit members and adds members very selectively throughout Maine. In my opinion, their success is attributable to the cooperative nature of the principals and their attitude of existing to help small agents survive and thrive.
SEVIGNEY GROUP
The Sevigney Group (www.sevigneygroup. com) Wells, Maine Wells is a town in York County, Maine, United States. The population was 9,400 at the 2000 census. Wells Beach is a popular summer destination. History
The Abenaki Indians called the area Webhannet, meaning “at the clear stream,” a reference to the Webhanet River. , was founded by Leonard Sevigney, who is now partially retired. I became friends with Len years ago, when I was working for an agency in a nearby town. At his request, I did some risk management consulting Noun 1. management consulting – a service industry that provides advice to those in charge of running a business
service industry – an industry that provides services rather than tangible objects for some of his clients, even as his competitor. Sevigney Group was started even prior to the Grindstone Group, with the same mission: to help small agents survive. The group now includes 10 agencies, 9 of which are owners of the Sevigney Group. The group works with them to perform strategic planning Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. and visioning as they move forward. They are an agency platform organization, offering an automation platform and collective management assistance. Sevigney Group is successful and embarking on additional ideas and strategic initiatives to assist in broadening their distribution focus by helping smaller agents, even offering the right individuals the chance to “start” an agency with the group. Sevigney Group is located in a different geographic area than Grindstone and offers a different selection of services.
From an insurance company standpoint, the consolidation of distribution has created some strategic challenges. Aggregation provides a means to overcome some of the entry barriers faced by new entrants to the insurance business. Strategically it improves distribution and keeps it local. The consolidation of distribution puts the people who can make decisions further and further from the consumer. Aggregations realize economies of scale while keeping distribution local. These two aggregators are examples of helping to meet the goals of insurance companies while keeping local agents alive and thriving.
One of the fundamental factors driving both Grindstone and Sevigney Group is the owners’ commitment to ensuring that all members benefit from participation. Buzzy Holmes, Paul Tracy and Len Sevigney share strong business ethics business ethics, the study and evaluation of decision making by businesses according to moral concepts and judgments. Ethical questions range from practical, narrowly defined issues, such as a company’s obligation to be honest with its customers, to broader social and values above reproach re·proach
tr.v. re·proached, re·proach·ing, re·proach·es
1. To express disapproval of, criticism of, or disappointment in (someone). See Synonyms at admonish.
2. To bring shame upon; disgrace.
n. . They are trusted in the insurance industry and have earned and maintain that trust in test after test. This is an important fundamental in founding an aggregator.
The Virtual University article offers tools to evaluate different aggregators and to assist you in deciding a strategic direction for your agency. Peter did a wonderful job of creating these evaluations and gave us all some concrete tools with which to work in making a decision. The tools clearly lay out your options and help you delineate differences and evaluate your “fit” with different organizations.
Based on the paper, I have even developed a consulting package to help groups of agents set up an aggregator, and I am currently helping some groups to set up alliances. I have worked with one group since before it was founded and have built my model with their help. I also have a revenue-sharing arrangement with them for the consulting package that helps them recover costs and allows us to access them for some additional support and advice.
Some aggregators also include agency perpetuation per·pet·u·ate
tr.v. per·pet·u·at·ed, per·pet·u·at·ing, per·pet·u·ates
1. To cause to continue indefinitely; make perpetual.
2. options into their strategic planning scheme. The aggregator entity can sometimes improve the agency’s ability to finance a perpetuation or sometimes there are members of the aggregator that can provide the perpetuations for some of the members without options.
Justified or not, insurance companies continue to demand more from their agents. Aggregation improves and stabilizes distribution revenue and allows agents to share expertise and financial results as well as success and victories. It also provides an excellent forum for improved strategic planning and focus.
Aggregation is a way of capitalizing on improved economies of scale for everyone without losing the “small organization” customer service and philosophy. Companies receive more distribution points and fewer contact points. Agencies and their agents retain autonomy but gain clout with their carriers. Insureds continue to be served by local caring contact points. Communities retain local businesses rather than having a mega-agency move in and take the owner out of the store. Everyone wins, and with the improved perception of aggregators over time, no one appears to lose. Maybe this is one option you should consider as you think about the future.
ASK QUESTIONS BEFORE AGGREGATING
* MANAGEMENT: Who will manage it? Parity of philosophies? Levels of involvement? Levels of independence and interdependence in·ter·de·pen·dent
adj.
Mutually dependent: “Today, the mission of one institution can be accomplished only by recognizing that it lives in an interdependent world with conflicts and overlapping interests” ?
* INSURANCE CARRIERS: Mix of markets between agencies? Access and opportunities to additional markets? Closure on your current relationships? Health of other agency’s relationships? Carrier stability?
* FINANCIAL: Deferred interest in the value of your book? Of your agency? Will participation of another agency impact your ability to retire? To perpetuate per·pet·u·ate
tr.v. per·pet·u·at·ed, per·pet·u·at·ing, per·pet·u·ates
1. To cause to continue indefinitely; make perpetual.
2. ? How will participation in the group impact incentive compensation?
* OWNERSHIP OF EXPIRATIONS: Who owns your book (in part, or in full)? How does book ownership level with current contracts with producers, managers or owners? What will the impact be on current and future business? Will your actual realization of value be compromised in some way, even if your book ownership is left intact? Will the aggregator have a stated “economic interest” if you sell or leave the group?
* EXIT STRATEGY: What is the plan for terminating the agreement? How might future mergers and/or acquisitions be impacted by being part of an aggregator? If you choose to terminate, what will the cost be and how long might it take to terminate? How are existing markets affected at termination of the agreement? Will you retain access to the markets
you gain through the aggregator if there is a termination? Have others in the group terminated? If so, what is their experience? Are there any clauses, such as “first refusal,” that might impair im·pair
tr.v. im·paired, im·pair·ing, im·pairs
To cause to diminish, as in strength, value, or quality: an injury that impaired my hearing; a severe storm impairing communications. agency sale opportunities or value? If the termination is before the end of the year, what happens to incentive compensation?
* PERPETUATION: Are perpetuation plans mandatory or optional for members of the aggregator group? How does this affect your plans? Does the aggregator have “first refusal” or any rights in the perpetuation of your agency?
* E&O: Is E&O carried by the group or by individual agencies? How are agencies and producers protected as part of this larger group? What effect does another agency’s E&O liability have on your agency; are you protected?
* VOLUME AND QUALITY COMMITMENTS: How do the volume commitments compare between your current situation and under the aggregator agreement? How will current and long-term loss Long-term loss
A loss on the sale of a capital asset held less than 12 months that can be used to offset a capital gain. ratios be impacted? Are there penalties for higher than normal and/or rewards for low loss ratios?
* COMPENSATION: Ultimately, what will you receive in compensation after commission splits and other fees required by the aggregator? Are you better or worse off being part of the aggregator? Can you sustain your business without being part of the aggregator? Is there other support available through the aggregator that you might not be able to afford on your own, such as technology assistance, marketing support, sales assistance or training?
* GROWTH POTENTIAL: Will your firm grow more rapidly? Are there alternatives that are as valuable as aggregating, such as independence, online markets or merger?
* CUSTOMER SERVICE: How will client service be impacted? How will your community image change?
* BRAND: Will you continue to operate under your current name? How will you identify to the public with the aggregator group? Are there any restrictions on your participation in IIABA’s Trusted Choice program? Can your agency’s name be used within the aggregator group to promote itself and attract others?
* EMPLOYEES: Will staff morale be affected? Will your producers match the profile of the aggregator’s needs? Will your own in-house education initiatives be impacted? How will compensation, policies and procedures Policies and Procedures are a set of documents that describe an organization’s policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental change?
* SERVICES: If you’re paying fees, what services do you receive as a result? Are you required to use aggregator services, or is it optional?
* OTHER TERMS: Do the contract terms address all the issues you might encounter, such as dispute resolution, confidential treatment of proprietary information, notice clauses, governing law, indemnifications, procedures for amendments, and assignment rights, among others?
* OBJECTIVITY: Are you being objective? Are you basing your decision on data and is the decision supported by professional advice? Are you making subjective reasons for joining an aggregator?
Howard E. Candage, CPCU CPCU Chartered Property Casualty Underwriter
CPCU Cardiac Progressive Care Unit
CPCU Custody Pending Completion of Use , CIC CIC
circulating immune complexes.
CIC Circulating immune complexes. See Immune complexes. , is a consultant to the insurance industry, advising agencies since 1996 in training, planning and management, agency valuation, mergers and acquisitions, perpetuation plans, aggregator groups, and working with attorneys as an expert witness and in mediation mediation, in law, type of intervention in which the disputing parties accept the offer of a third party to recommend a solution for their controversy. Mediation has long been a part of international law, frequently involving the use of an international commission, . He has a background both as an insurance company regional manager and as an owner. His offices are based in Portland, Maine. He can be reached at howard@hecandage. com or by calling 888-809-8605.
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