Agency Cooperatives Can Boost Bottom Line

By | March 24, 2003

Whether you are trying to access major carriers’ markets for hard-to-place risks, find a way to brand your agency, or tap into the expertise of other veteran agents, a cooperative may be the way to go.

Clusters, networks, huddles—cooperatives go by many names and there is a bewildering array of models available to the small or medium sized agency looking to grow. About 10 percent of agencies are part of a co-op, according to the 2002 Agency Universe Study, a biennial demographic survey of the independent agency system conducted by the Independent Insurance Agents and Brokers of America (IIABA).

That number has been pretty steady since the Agency Universe Study began in 1992, noted Madelyn Flannagan, IIABA vice president of education and research. While the 2002 Agency Universe Study did not demonstrate any growth in co-ops, Flannagan said the next study due in 2004 would probably show such a trend.

“We’re getting a lot of calls about [co-ops] plus mergers and acquisitions,” Flannagan said. “I think we will see agencies looking at different marketing arrangements during this hard market.”

The common problem agencies face is the struggle to grow and find markets to place risks in the now solidly hardened environment. The question of how best to go about that is where the road forks in a dozen different directions.

“It’s a real task for an agent to get through all these business models to determine which is the best fit for their needs,” said James Hull, an agency consultant since 1980. “They do it out of fear. ‘I’d better do something,’ they think. But they haven’t done their homework. They need to totally evaluate and understand what they’re getting into and how much work it’s going to be for them. Will it be more work for them to get a placement?”

The are a few questions every agent should ask about any cooperative arrangement, Hull said. What specific products and services are offered? What are the financial implications of membership? Does the co-op offer perpetuity arrangements?

Hull also advises that agents ask for a list of current members who can be contacted, a profile of the systems that will connect the agent to the co-op (including a list of the service standards), and a list of the companies and the types of agreements, special programs or unique products.

“What you are trying to do,” Hull said, “is access the value of the investment that you are making and the liabilities that you may incur as a member of the group.” Hull, president of J.R. Hull Co., is conducting a survey of different co-ops for a client.

A Texas cluster
A group of competing independent agents in Austin, Texas, would often meet for lunch for friendly discussions about business matters. Soon, the discussion turned to how they might join forces so they could all do better. Within months, Combined Agents of America (CAA) was born.

CAA chairman Tom McCorkle, the owner of San Antonio-based McCorkle Commercial Insurance Agency who was brought in with the original Austin group, said they didn’t want to merge because each agent wanted to maintain his book of business and retain autonomy over operations.

By funneling their premium volume the member agencies of CAA are able to get appointments with many of the top-rated insurers doing business in Texas, and 16 of the top 20 carriers in the country. In 2002, CAA’s 28 members generated over $300 million in premiums, compared with $40 million when CAA began in January 1998.

The keys to CAA’s success, McCorkle said, are allowing members their autonomy and making sure the agencies approved for membership are of a high caliber.

“We don’t interfere with each other’s day-to-day business,” he said. “We don’t have any agency guidelines or management rules. You continue to do business the same way as before. And since we share information with each other, we can look to each other and CAA to get ideas about what one agent might be doing that’s working.”

This kind of hands-off style can only prevail because joining CAA is not easy. McCorkle said CAA has a due diligence period of about six months during which an applicant’s business plan, financials and loss history are thoroughly examined.

Moreover, new members must be recommended by a current member who is assured of the prospective agency owner’s integrity and ability to run a profitable book of business. “Our screen is harder than The insurance company screen,” McCorkle said.

McCorkle would not disclose the membership fee, which he characterized as “small.”

In addition to market access through CAA, the group asks for direct appointments for its members as well. CAA also has a non-compete agreement in place, which encourages member agencies to cooperate and help one another and CAA members share profits.

And CAA has proven even more valuable in the hardened market, McCorkle said. “Thank goodness for Combined Agents of America. If we had not been combined. some of us would have lost some business. We really do better in a hard market than in a soft market.”

Clustering in California
Another cluster with a profit-sharing plan is United Valley Insurance, based in Fresno, Calif. In business for 20 years, United Valley places $250 million in property/casualty business for its members annually, according to the group’s vice president, Neal Stanley. He estimates that figure will top $300 million this year.

United Valley’s mid-sized agencies individually produce a range of $4 million to $25 million annually, and all remain independent. United Valley is a stock company and no member is allowed to own more than 15 percent.

“We don’t have a big dog agency here,” Stanley said. “There are smaller clusters that have one agency that is more dominant and others fall under that particular agent’s contract. We’re a bit more democratic. We want to make sure we set high standards of performance.”

Like CAA, United Valley’s members retain control of their agencies and their unique identities. “If you look at some others, they’re more like a franchise. We are not a franchise nor do we require our members to use our name with theirs. We also get our members appointed with most of our carriers directly, and we have over 40 standard company appointments.”

United Valley also has a separate retail agency and a staff of 35. Through this retail agency United Valley is able to offer perpetuation for agents looking to retire and without a successor to take on the book of business.

Beefing up with networks
Another model is that offered by Grass Valley, Calif.-based Networked Insurance Agents (NIA), owned by Mike Lewis. NIA charges its 540 “affiliate” agencies, most in California, a $175 monthly fee.

An infusion of capital from Strongwood Insurance Holding Corp. will allow NIA to pursue its goal of reaching 2,000 affiliates in 18 to 20 states in the next five years, Lewis said. NIA limits affiliation to agencies with $5 million premium volume or less.

NIA’s advantage over other co-ops is that it offers added value to carriers by outsourcing, Lewis said.

“We’re not only giving access to markets but … in the hard market we’re experiencing now,” Lewis said, “we’ve outsourced job functions to insurance carriers to lower their cost of doing business.

“We touch a risk on behalf of the agency and on behalf of carriers instead of just acting as a pass-through,” Lewis said. “In this marketplace, they’re not interested in just doing business with someone because they joined a cluster. We add value, contrasted to a traditional cluster.

“Many of those are just joining together to appear to have mass of volume. All they’re really doing is joining together to show volume under one designated carrier. In reality, we think the cluster concept is going to be under a lot more strain under a hot market. Where’s the beef? Where’s the value?”

In good hands with brand advertising
Other co-ops are primarily a vehicle for creating a brand identity, such as Massachusetts-based Allmass, a huddle of independent agencies formed in the wake of Allstate’s exiting the Massachusetts market in 1989.

Nearly 50 Allstate agencies were left wondering what to do when the direct writer pulled out. They decided to retain their autonomy as agencies but pool together funds to market the Allmass concept. This included print, TV and radio advertising in the greater Boston area, Cape Cod and Wooster, according to Allmass president Nick Argeros, owner of Argeros Insurance Agency in Redding.

Allmass now has 23 member agencies, and the group marketing has saturated the market, Argeros said. After a transitional period, much advertising is now done at the individual agency level, but the hard work of establishing the Allmass identity has already been done.

“Allmass is perceived by the general public as being more than what it is,” Argeros said. “It is perceived by the public as a big, massive agency where the reality is you’re dealing with an independent agency that’s part of a cluster. If I just hang a shingle out there it doesn’t carry as much weight.”

Making an impact
In the final analysis, says consultant Hull, agents shouldn’t let fear rush them into hasty decisions. Agents should determine what model they feel most comfortable and will help their agency grow.

“Look to make an impact on both your growth and productivity so the association will result in an increase in profit and value of the firm,” Hull said. That’s the bottom line.

To comment on this story, e-mail koreilly@insurancejournal.com.

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