Young Ownership Challenged by Carriers Unwilling to Hand Out Contracts to Start Ups
For the last 20 years, at least, consultants, associations and publications have been worrying about the future of the independent agency system because the average age of agency owners has been in the late 50s. The same happens to be true with farmers and many other business owners. The reason has less to do with a shortage of young people in the industry and more to do with the fact that typically people first have to pay a lot of dues in order to become a business owner. And then after becoming an owner, they have a tendency to hang on for a long time, which skews the average owner’s age nearer to retirement than to the vim and vigor of youth.
As the average size of the agency increases, the average age is likely to increase as well because it takes longer to accumulate the wealth necessary to become an owner of a larger agency. Additionally, some forward thinking carriers used to help promising young people open up new agencies. Now a person with no book faces a near impossible task of getting a direct carrier contract to start up an agency.
So even if that dire future depicted by articles suggesting 57-59 year old agency owners are marching toward a cliff with no young people following in their footsteps, causing the entire independent agency system to collapse were true, it would not be because there is an inadequate number of young people wanting to be agency owners. The fact is that agencies are too large and companies too tight with their contracts for many young people to become agency owners. It does not matter how many young people the industry attracts, the issue will not be resolved unless there are more agencies that are smaller in size facilitated by carriers that are less parsimonious with their contracts.
This relates to a much larger issue relative to agencies’ futures. The industry is facing a huge cultural change that is far more important than the age of agency owners. The independent insurance agency industry was designed on two principles. First, the agent would offer multiple companies’ products. Second, the agencies would generally be small shops, usually with no more than one very good producer, that being the agency owner. Depending on whose numbers are reviewed, it is possible that only 50 percent of all agencies are now in this category.
A one-man production shop needs a good producer far more than it needs good management because there is relatively so little to manage. Furthermore, these one-man shop agency owners quite often did not have the personality required to build larger agencies. For many reasons, they wanted to keep their agencies small. Some just wanted a simple life. Some simply wanted, for all practical purposes, a job without a boss. Some did not want to deal with the headaches of managing people. Regardless of their reasons, the vast majority of tens of thousands of agencies were small, little shops.
Carriers’ contracts and business models were based on doing business with hundreds and even thousands of such shops. Originally, given the lack of technology, there was no choice. Carriers needed many more agencies with a small geographic distance between their agencies. But another key factor was that large insurance companies could wield their way over little agencies. Carriers liked this advantage and to this day, their business models are often still built on the assumption they have a strong upper hand in the relationship.
But then agency technology entered the picture. It required size to truly realize opportunity relative to the cost. Carriers began requiring ever more volume, volume that a one-man shop has a difficult time supplying. So over time, agencies have become larger and larger, but the basic premise has not changed. This is why so many agencies still have one really good producer and several other producers who really do not produce. They just take care of business so the accounts do not leave. There really is not much true management in place. It is why so many agencies, even large brokerages, cannot grow organically. The industry was not designed and truly has not adapted to a true multi-producer sales model.
Many of today’s agency owners grew up maybe wanting larger agencies, but never really wanting to proactively manage larger agencies. Their love is still production, client relationships and company relationships. Their passion is the anathema of managing daily operations, reading contracts, learning agency management systems, dealing with drama kings and queens, and managing financials. Most important, they truly dislike having to manage producers who in their opinion should manage themselves.
So the problem facing the agency system has nothing to do with age. The problem is a cultural legacy not designed to emphasize the management of agencies larger than one-man shops. This culture is still holding sway in an environment where one-man shops or even two-man shops are slowly being extinguished, excluding agencies that don’t have their own company contracts. The industry is forcing the proverbial round peg into the square hole.
The problem is not just in agencies. Companies have not yet figured out they no longer hold the upper hand to the extent they used to do. In the past, they segmented what they did with large brokers, knowing those brokers truly had the upper hand. They could do this because there were only a few brokers in this category. Today, there are many agencies and aggregators that are larger than most property/casualty insurance companies. Many of these entities are still learning to use their size to their advantage, but they will, and the companies are completely unprepared. It really reminds me of a mad doctor creating a monster and that monster killing his creator. In this case, the carriers demanded more and more volume and now there are some entities that have built all the volume anyone could dream of building. These entities can now dictate terms to many carriers, if and when they choose. This industry’s culture is not prepared for this event.
Since agencies lack a culture designed to operate effectively as full corporations, and insurance companies lack a culture designed to operate with large agencies acting as full corporations, it is no wonder the industry is so inefficient. (When I worked at IBM 25 years ago, the firm was more advanced than many agencies, and even some of the largest agencies, today.) It is no wonder agencies and companies no longer have the partnerships they shared when the culture and size were more suited to nurture such partnerships.
In every crisis, opportunity exists. For agencies, the decision has to be made whether the agency will primarily remain a one- or two-man shop focused more on selling with minimal true management efficiencies or whether the agency will adopt a more professional management structure that actually manages sales and producers. This will require the top producers, including the agency owners, to relinquish much of their operating control.
For carriers, the opportunity is to determine exactly what kind of relationships they want with their agents. If they really want huge volume with a few agencies or brokers, then they had better be ready to deal with a few dozen entities that have tremendous power. If they want to maintain considerable power by dealing with many small agencies, then a much more efficient operating model will be required and they should probably consider reinventing the old Aetna model for facilitating agency start-ups. Either strategy properly executed will yield good results. But trying to attempt great results using the historic culture on huge agencies is certainly a recipe for failure. The carriers that recognize this reality and can act soon, will be years ahead of their slower competitors.