Strength in Numbers

Today’s demands on independent agents are plentiful: competition, risk management, compensation disclosure, quality markets and carrier’s demands for premium quotas, to name a few. Such demands could be one reason some agencies today have increased their use of market access providers.

There is a growing use of market access providers, according to Madelyn Flannagan, vice president of education and research for the Independent Insurance Agents & Brokers of America (IIABA), of Alexandria, Va., the nation’s largest independent agency association. “A growing number of independent agents are aligning with franchisors, clusters, aggregators and other networking organizations to access markets and in many cases to arrange other business services,” Flannagan said.

But when it comes to deciding which market access provider suits the needs of an agency, there are many options agents must evaluate to find the right solution. There’s no one-size-fits-all when it comes to agency options such as clusters, aggregators, networks, franchisors, electronic wholesalers, and electronic insurance exchanges, and others.

So, why might it make sense for agents to consider doing business with such groups? Well, for starters, market access providers, networking organizations — or by whatever name they are called — are serious players representing serious premium volume.

“In terms of their cost of doing business, carriers prefer to deal with organizations such as ours rather than individual agencies who operate outside of a franchise system,” said Shawn Lowry, president of Brooke Franchise Corp. based in Overland Park, Kan. Brooke maintains more than 750 franchise locations and aims to exceed 1,000 locations sometime this year.

“Although it sounds ambitious, we think we can achieve our objective,” Lowry said. Kan. Brooke provides franchisees with access to carriers, but requires franchisees to sell only through the franchisor’s contracts — about 500 admitted and non-admitted carriers.

Lowry cautioned that “the number of independent agents is shrinking.” One of the reasons for that development, Lowry says, is that “carriers would prefer to deal with firms such as ours than, say, 1,000 small independent agents outside of a franchise or cluster-type operation because of the time and money involved.”

“Small agents — who cannot supply enough premium volume to satisfy a carrier’s quota — are wise to affiliate with an organization like ours,” said Brent Humes, chief operating officer of aggregator Networked Insurance Agents, in Grass Valley, Calif. Networked, which has 1,100 affiliated members, has doubled its membership total since 2002, and reported that premium volume during the past five years rose by 23 percent annually. Today, Networked reports about $175 million in personal lines, commercial lines and excess and surplus lines premiums.

“I get the sense that more agents are working with clusters, because how else could smaller agencies like us get respect from standard markets,” said Geoff Johansing, vice president of Cass & Johansing, a multi-lines agency in Pasadena, Calif., whose agency is a member of cluster Professional Resources Insurance Agency (PRIA). “The big companies hardly look at you unless you can meet their premium quotas,” he said. PRIA puts together about $25 million in annual premiums in commercial lines and expects to get into personal lines, Johansing noted.

One size doesn’t fit all

Groups that band together to access bigger and better markets — whether termed aggregators, clusters, franchisors or networks — come in different shapes and sizes. No one group is the same in its style of operation, products or services offered.

For example, Shared Agency Services (SAS) is a cooperative or cluster, owned by 58 independent agents in Georgia for the purpose of accessing more markets. Jim Durmer, co-founder of the cluster, says SAS posts some $800 million in combined written premiums.

SAS, PRIA and other clusters are insurance marketing groups formed to share markets, but an insurance network like The Leavitt Group is “a bit of a different animal,” according to Mark Leavitt, affiliation marketing director of Cedar City, Utah-based The Leavitt Group.

In contrast to a cluster, The Leavitt Group consists of some 90 affiliated independent agencies, and the parent — Leavitt Group Enterprises — owns a majority interest in each of them. The Leavitt Group writes $1.5 billion in annual premiums and maintains 115 locations nationwide.

“In each case, an affiliated agency holds a minority share of ownership (often around 40 percent), and we own the rest,” explained Leavitt, whose firm focuses mostly on commercial lines but also handles personal lines and employee benefits.

Like Leavitt, Networked’s Humes emphasizes that his firm is not a cluster. “A cluster combines markets and members often give up their independent company contracts,” Humes explained. “In our case, our member agents retain their individual appointments and they’re able to augment their business by accessing the markets we have in commercial lines (i.e., professional liability), personal lines and E&S.”

According to Humes, members of aggregators like Networked maintain their independence and continue to own their own books of business. “In contrast to the approach of some clusters, our agency members can keep their contracts that they already have with other carriers,” Humes said. “In addition, our agency members have access to our network of carriers and products.”

Compared with clusters and aggregators, franchisors including Brooke and Keystone Insurers Group are yet another breed. With Brooke and Keystone, franchisees own their own business.

“We’re kind of like the McDonald’s of the insurance world,” said Brooke’s Lowry. “Individuals and small-to-medium-sized agencies are buying Brooke franchises and carrying the corporate name and logo because of our successful business model.”

Keystone President David Boedker says that franchisees always keep their own names, but over time they must incorporate the franchisor’s name in their business cards, letterhead, logo, signs, etc. Keystone allows franchisees to use individual markets that the franchisor doesn’t represent, “but within six years they must place at least 80 percent of their property/casualty business through Keystone,” Boedker explained. Keystone accounts for more than $850 million in written premiums with 60 percent being commercial and 40 percent personal lines. Keystone operates with some 50 different carriers.

Electronic exchanges

Electronic insurance exchanges such as MarketScout offer agents another option. MarketScout provides independent agencies with access to various coverages, some are underwritten internally and some are linked to posted third party specialists. Business sent to third-party specialists doesn’t necessarily produce income for MarketScout, “but it does help our agent users and, as such, MarketScout has accomplished its mission of being a one-stop insurance exchange,” says MarketScout eInsurance Exchange President Richard Kerr. MarketScout boasts 58,000 registered users and assists agents with more than 300 hard-to-research and hard-to-reach business classifications.

InsuranceNoodle, an Internet-based distributor of small business insurance, produces some $60 million in small commercial —business owner policies, workers’ compensation, professional liability, directors and officers liability/employment practices liability, umbrella, commercial auto and surety.

“We offer both admitted and non-admitted products on the same Web-based system as well as providing full online service (binders, certificates of insurance, endorsements),” said InsuranceNoodle CEO Kathy Emmerson. “We don’t know of other wholesalers offering service features online.”

Emerson said about 2,500 independent agents use InsuranceNoodle through a secure Web site that enables them to submit business. “They can see various companies’ appetite for business in a particular location, fill out applications online, and get multiple quotes within 24 hours,” she said.

The members’ profile

Just as the profiles of insurance networking organizations vary, so do the types of agencies they hope to attract.

Networked’s membership consists mostly of agents with no more than $10 million in annual premium volume, Humes said.

Tom Hays, chairman of Southern California cluster United Agencies, says his group looks for “agents who have been in business a minimum of two to three years, that are experienced running their own agency and generate at least $2 million in annual premium, with a good loss ratio.” United Agencies generates about $200 million in written premium, and works with about 50 markets.

Keystone looks to partner with independent agencies that have revenue streams of $500,000 to $8 million. Translated to written premiums, franchisees range from $4 million in property/casualty volume to $50 million, Keystone’s Boedker said. He added that Keystone concentrates on suburbia, “not heavily populated metropolitan areas,” and agencies with solid financials and pure loss ratios not exceeding 55 percent in five years.

Keystone franchisees “are successful on their own, but they want to partner with a like kind of group of peers,” Boedker said.

PRIA member agencies are all family-owned and operate multi-lines agencies, each generating under $25 million in annual premium volume.

According to The Hartford’s Wayne Spooner, the size of a cluster the insurance giant might work with is less important than the group’s philosophy, effectiveness and geographical fit. “It could be a group of three to five small-to-medium-sized agencies serving clients in two or three nearby states or a larger cluster with more than 50 agency members spread across several states,” Spooner said.

Spooner noted that The Hartford also does business with other types of insurance marketing groups, including franchisors Brooke and Keystone, aggregator Networked Insurance Agents, electronic insurance wholesaler InsuranceNoodle, and others.

More than just market providers

Insurance marketing organizations do supply access to additional insurance markets, but many also deliver additional services to their members.

California-based Networked maintains a centralized staff of underwriters that works with both the agent and the insurer. “What we do is assume partial roles serving both the agent and carrier,” Humes explained. “In essence, Networked Insurance Agents provides a central marketing and account placement department for the agency and for the carrier; it’s an extended underwriting and sales/marketing team,” he said. “We do work on behalf of the carrier and agent that they don’t have to duplicate. It’s a dual role, designed to create a value-added touch that can reduce the cost of doing business, both to the agent as well as the carrier,” Humes continued.

Brooke also provides its franchisees with more than just access to carriers, according to Lowry. Brooke offers document and cash management services through its processing center in Phillipsburg, Kan. “Consolidating these activities creates economies of scale that make document and cash management more affordable and accurate,” Lowry said.

Individual franchisees typically do not have the resources to hire financial, regulatory, marketing, public relations and human resources experts to help them run their businesses, Lowry said. “However, as a group, franchisees gain access to this expertise without paying anything extra.”

Brooke Credit Corp., an affiliate of Brooke Franchise Corp., provides financing. Lowry says proceeds could be for the start-up of a Brooke franchise, the acquisition of an existing agency for conversion into a Brooke franchise, or for other core business activities such as agency expansion and producer recruitment. Brooke Credit’s portfolio of insurance agency loans exceeds $400 million.

MarketScout also offers various ancillary services to its agents such as accounting, financing, and general agency management support. “We’re not a bank, but we can assist our agents with financing,” Kerr said. “Our goal is to enable the small independent agent to depend upon us for just about anything they need, be it a new market, financing for expansion or help in building infrastructure.”

United Agencies’ 12-member corporate staff serves, among other things, as the intermediary between members and the carriers on matters including negotiating the carrier contracts and provides a centralized agency management system. “That makes it easier for our member owners to concentrate on growing their business rather than having to deal with non-insurance related duties,” Hays explained. United Agencies’ Intranet and e-mail services also enable a member to access marketing and underwriting information from cluster employees and fellow members.

Joining the ranks

Brooke, United Agencies and other insurance networking organizations don’t simply sign up any agent who wants their services.

“We spend millions of dollars in the recruitment of quality sales professionals for our program,” Brooke’s Lowry said. “As part of the application process, we require personality testing, insurance skills testing, proof of top-level production, background checks, prepared business plans and an in-person interview with our underwriters.”

United Agencies’ Hays says that “the majority of our members come to us from personal referrals. We usually conduct a telephone interview and if it feels mutually positive we then have a meeting with a committee of our corporate officers.”

Keystone looks at the last three years of a prospective franchisee’s financial statements, and requires agencies to have a minimum of five years of experience with pure loss ratios of less than 55 percent on all business.

Last but not least is the matter of networking organization fees and expenses — they too vary widely.

Brooke collects an initial franchisee fee of $165,000, and the franchisee retains 85 percent of the monthly revenues.

Keystone franchisees pay a one-time franchise licensing fee of between $5,000 and $20,000. The precise amount depends on factors such as the number of Keystone franchises in a given state. For example, Keystone franchises pay higher fees in states where the franchisor has the most franchises.

Franchisees also pay Keystone a monthly fee based on the franchise’s total gross written premium. As an example, a franchise with $10 million in property/casualty premium would pay about $1,000 a month, Boedker said. The minimum is $500 per month.

Networked Insurance Agents members pay a minimum monthly fee, typically between $150 and $225 per month, with the amount varying by state. Networked does not charge policy issuance fees, even on excess and surplus lines business. Members receive at least 65 percent of the commissions they earn.

United Agencies members pay no initiation or annual fees. Instead, the cluster charges members a percentage of the commission that they earn, “on a declining basis,” said Hays, who declined to get into specifics. “If your readers want to know the particulars, I would welcome their calls.”

SAS’s Durmer acknowledges that “it’s pretty expensive” to join his cluster. Also declining to go into financial particulars, Durmer said there’s a flat $5,000 fee to join SAS. “But when all is said and done, new members end up paying $60,000 to get in.”

MarketScout doesn’t charge fees, but earns income through the exchange. “We get income on about 40 percent of what comes through the exchange, most notably on a range of admitted and non-admitted placements varying from workers’ compensation to products liability and energy business to personal lines,” Kerr said. In many situations MarketScout serves as a binding managing general agency.

The right choice?

Joining an insurance networking organization may be good for some, but the partnership may not come without its risks, says at least one industry representative.

First, “as a small agent, you want to build your business,” says Kate Diehl, legislative advocate, Property Casualty Insurers Association of America, Des Plaines, Ill. “But if you’re associated with a cluster or similar organization, your business is pooled with other members, and if you later decide to go out on your own, you may not be able to show how much premium volume you produced for a particular carrier.”

Second, agents should find out whose errors and omissions liability policy might apply if a disgruntled cluster customer decides to sue the agent or the entity. “The agent needs to know whether his or her errors and omissions liability policy would be on the hook in such a situation, or whether the cluster’s coverage applies,” she said.

Topics Carriers Agencies Property Casualty