Expanding the Pie

We have all heard the old adage that to succeed we need to do one thing and do it well. That might be one formula for success, but it is not the only one.

There are two main types of growth—vertical and horizontal. Vertical growth is selling a limited number of products to many clients. Horizontal growth is selling a wide array of products to a limited number of clients.

A good example of horizontal growth is the trend of banks entering into the insurance business. The banks have a hard time adding new clients, so a good way to improve their profits is to add products. Insurance is a natural additional product since it is associated with financial matters and all clients need some type of insurance.

Which is best?
So is it best to do just one thing well, or is it better to be versatile—a “jack-of-all-trades?” The answer is a firm “it depends.” Both approaches have pros and cons.

Vertical growth or niche marketing is usually associated with higher than average profit margins because of built-in efficiencies. Selling the same product to the same type of client usually allows the staff to be much more productive compared to the typical agency.

With vertical growth, sales are rapid and it is a numbers game. The organization must be prepared to do quotes and handle lots of paperwork quickly. This type of firm is often highly profitable. Agencies that specialize in program business, health insurance and automobile insurance are examples of vertical growth.

Mono-product firms however, are tall, slender towers that can easily topple if anything upsets them. If an agency sells only one product and that carrier closes down the program, the agency might also be closed. Regulations can also be a deathblow to these firms. California’s proposition 103, implemented over a decade ago, had a profound affect on how business is done.

Horizontal growth firms on the other hand are built more like a sturdy pyramid. There is often a base product and then several layers of lesser-sold products. The loss of any one product would hurt the firm, but it should survive. The typical independent agency or direct writer that truly sells all lines of insurance would be a good representative of horizontal growth.

The profitability with horizontal growth will vary based on the products sold. If an agency can sell a client three products with just a little more effort than selling one, then the firm can be quite profitable. For example, a client has just a basic package policy through an agent, but the agent demonstrates that gaps exist and the client needs additional coverage. The client then adds EPLI and D&O policies to the existing package policy. This can often be done with minimal additional work.

If however, the additional products require the same amount of work, or more, as the first product sold, then the firm will have just average profitability. Perhaps the client might want the agent to add a second operation or write the workers’ compensation policy. Although the work is less than with a new client, a fair amount of work is still required, thus the profitability is not as high.

Pick the blend
For many agencies, the real solution is to do a few things and do them well. Good horizontal growth does not mean to sell every product to anyone. It does mean that a firm should have some diversification.

We generally recommend that our clients have some diversification through selling a variety of products to current clients and developing a few niches as well. We like our clients to have a good mix of personal lines, commercial lines and life and health products for sale. It might not be as profitable as a firm that only sells CGL packages to high tech firms, but it is more stable in the long run.

Most of the readers of this article are involved with property/casualty insurance. Some will be mono-line, such as those that sell only automobile insurance. Others, such as agencies that focus just on commercial lines, will have some diversification if they sell package, auto, workers’ comp, D&O, EPLI, etc. The diversification improves if the clients span several industries.

Diversify over several niches. Many agencies will benefit if they select several types of clients or industries and then sell them several types of products. This is a safe way to be a niche market player. It is also what many firms do without planning for it! This is because producers tend to sell what they feel most comfortable with, which is often a similar product for similar types of businesses. Referrals also add to this niche building, since the referral is often similar to the existing client.

The world of insurance is comprised of a variety of agents and brokers. Each successful firm has their own formula for growth. The blend of personal lines, commercial lines and employee benefits that we often recommend to some of our clients is not the solution for everyone. A quick review of resources such as markets, sales force, service staff and potential client base can provide a general direction for a firm to take. Don’t be afraid to ask for assistance from the carriers or outside consultants.

Is there a way to diversify even further by offering more products to current clients—but not get spread too thin? Yes!

Add products
Firms that currently sell health insurance should consider selling workers’ comp. Agencies that focus on automobile insurance should sell their clients homeowners insurance. Personal lines agencies can expand into small commercial accounts (BOP) because many of their clients will have small or home businesses.

What is the best way for a typical property/casualty commercial lines focused firm to grow horizontally? Two words—Employee Benefits. More and more firms are adding an employee benefit package that may include health insurance, vision, dental, life and 401(k) plans.

There are some other areas that agencies should explore to expand the pie. Payroll services and HR consulting services can be very valuable to an account. HR consulting and payroll can be services that the agency outsourcers. In fact some insurance companies have jumped on this trend and now offer products and services that cover workers’ comp, payroll services, health insurance and other employee benefits. Also, consider a claims management service for clients as well.

The insurance agency can become the source for one-stop shopping to many clients. When the same firm is handling workers’ comp and employee benefits insurance, it is not a far leap to handle payroll, 401(k) plans and HR administration as well. Having just one firm to handle these necessities will streamline many tasks for the client. This is a great way to win not just customer loyalty but customer advocacy.

The numbers can be very impressive. For example, an agency that generates $1,500,000 in commercial lines commission with an average size of account of $1,500 will have 1,000 clients. As a goal the agency may desire to sell group health insurance to 20 percent or 200 of its existing clients.

A group health insurance policy for 25 or less lives will generate about $180 to $240 in annual commission per employee. Assuming that the average client has 15 employees, a group health insurance policy will translate to $2,700 to $3,600 in additional commission per client. If the agency reaches its goal of selling to 200 clients, then the agency will add $540,000 to $720,000 in annual commission! These numbers are conservative since some firms will add vision, life and dental plans as well.

Sales Force
The next question is where does a P/C agency find a good group benefits producer? The beauty is that there may be no need for a separate sales force within the agency. An agency that wants to sell a group benefits package, especially for 25 or less lives can access a
professional sales team through a general agency that specializes in this field. For 50 plus lives some of the insurance companies will assist in the sales process. All the producer needs to do is to get a census done and forward it to the group benefits general agency.

Although the general agency can offer assistance with the sale, the producing agency is still responsible for the servicing of the accounts. This could be accomplished by adding an employee benefits CSR to the firm, when the volume dictates. Otherwise the producer and P/C CSRs will need to service the accounts, in the meantime. Keep in mind that there is not as much service as commercial accounts and the insurance company handles claims.

Some agencies have taken the approach of forming a strategic alliance with a group benefits agency. The track record using this method is not always favorable. Usually both firms are energized for a while, but at some point both agencies gravitate towards protecting their own interest and the exchange of leads diminishes from a gush to a trickle. There are also issues related to account ownership and commission split that may prove difficult to resolve.

There are great advantages of developing an internal sales force. A dedicated employee benefits producer will focus on rounding out the agency’s accounts. Some commercial lines producers may see the goal of adding on an employee benefits policy as an added burden or
even a threat to retaining the CL account. Having an in-house producer, who is known to the staff, will add to the comfort level in cross selling accounts. Usually the commercial lines producer passes the lead to the in-house benefits producer to do all the work.

Dedicated employee benefit producers are usually kept very busy just mining leads from the existing client base. Some firms insist that the P/C producer should be active in the sale of a group benefits policy to an active client. It is too easy for the client to say ‘no’ if the current P/C producer is not involved. The client is usually more receptive if a principal or the P/C producer is involved.

No matter which approach is taken, failure to take advantage of employee benefits is just like leaving money on the table. Even a low level of effort, such as leaning on a general agency or an insurance company to assist in the sales process can dramatically add to the bottom line and to the income of the referring producer.

Also, the more involvement an agency has with its client’s insurance needs, the more secure that account will be in the long run. A firm that offers many services to their clients will have a distinct advantage over the mono-product firms. Clients will see the advantage of having just one firm handle their insurance and other administration needs.

Conclusion
There is no perfect blend for an agency to follow for their book of business. It all depends on the goals, expectations and personality of the agency owner. The shape and form of the agency and the book of business will flow from there.

Be creative! Expanding the pie will not require that much effort for the rewards that can be reaped. Focus on smooth transitions and easy changes at first. The key is to enjoy what you do and the clients will follow!

Bill Schoeffler and Catherine Oak are partners in the international consulting firm Oak & Associates based in Northern California. The firm specializes in financial and management consulting for national and international agencies, including valuations, mergers, acquisitions, clusters, sales and marketing planning, as well as perpetuation planning. For more information, call (707) 935-6565, or e-mail catoak@sonic.net.

Topics Agencies Workers' Compensation Property Casualty