By Phil Zinkewicz
Independent insurance agents in the property and casualty arena have had a love-hate relationship with insurance companies for decades. On the one hand, in good market times, companies are agents' sources of sustenance; and companies that recognize the value of agents as a distribution system and treat their agents accordingly provide for a relationship devoutly to be wished. On the other hand, there have been market conditions--and we are in the midst of such conditions today--where companies have tended to squeeze agents with commission cuts and market restrictions.
One response to these pressures has been for agents to form their own companies. The New Jersey-based Proformance Insurance Co. is one such agent-owned company, and it was formed by several independent insurance agents who were frustrated with the overall insurance climate in the state. Another agent-owned company is Great Lakes Casualty Insurance Co., formed last year by Michigan agents for much the same reasons.
The New Jersey operation, which is based in Freehold, started up three years ago as an insurance company owned by 26 New Jersey-based insurance agencies that decided they could capitalize on their expertise and compete with the national carriers which had put the state's insurance scene into turmoil. The mission had the approval of the state department of insurance.
Proformance immediately received approval to write all lines of insurance coverage, including automobile, homeowners, excess liability and package policies. "Deluxe coverages and competitive rates are Proformance's main objectives," said John R. Prideaux, Jr., president. "Our modest, upscale products offer agents and consumers a competitive choice. Homeowners coverages can be written with values of $140,000 and above, and agents have binding authority up to $1 million. In addition, there are no restrictions on coastal properties.
Proformance also offers immediate binding for automobile policies to their agents. "For years, agents have been told that there is no money to be made writing automobile insurance. Our goal is to educate agency personnel and to tell them this is not true. You can make a profit on good auto business," said James V. Gorman, chairman of the company.
According to Gorman, who is also chairman of Proformance's parent company, National Atlantic Holdings Corp., the company did $25,000 in business in 1994 when it first opened, $7.4 million in 1995 and $25.3 million last year. Agency participation has increased to 40, and Gorman is projecting $38 million to $40 million in business this year.
Moreover, according to Gorman, Proformance is out-performing the traditional insurance marketplace. While the industry average in terms of payment of claims is 75 cents on the dollar, Proformance is paying 68 cents on the dollar, he says. In addition, the company has moved from last place in the market when it first started to the number 26 spot among 50 insurance companies operating in New Jersey.
Gorman can take pride in the success of the company to date. When it first started, he put up $1.6 million, half of the $3.2 million start-up dollars needed, and the agencies involved put up the rest. The company, he says, is writing business at about 10% less than the competition and he adds that the growth of the company is traced to these characteristics:
* The agencies involved can take fewer commission dollars because, as stockholders, they share in the profits.
* They can tailor their business to meet the needs of the state because they understand the local idiosyncrasies.
* The company writes policies only for New Jersey residents and features packages for home, car and business exposures. The package features one policy, a proposition which is attractive to insurance buyers, according to Gorman.
Great Lakes Insurance Co. was formed last year with more than $2 million invested by 90 Michigan insurance agents. Their agencies represent more than one half-billion in annual premiums. According to Don Eve, an independent agent in Flint, Michigan, and a founding director of the firm, the company was formed to create a competitive insurance product for Michigan families. "We are losing our family customers to the direct writing companies as soon as their teenagers begin to drive," says Eve. Great Lakes Casualty will compete not only for the families with youthful drivers, but for the young married couples as well."
Fritz Lewis, chairman of Great Lakes Casualty, says: "I believe that agents and the public will benefit from this company. I think the public welcomes any competitive advantage we can offer them."
The parent of Great Lakes is Newco of Michigan, Inc.; and Mike McBride, president of Mason McBride, Inc., is on the board of the new company and was instrumental in its development. "We've raised the necessary capital and we will probably write our first policy sometime in the fall," says McBride. "We're concentrating on personal auto for young families. This is a market that has not been addressed by the national carriers."
McBride said that one of the latest surveys done in Michigan showed that 70% of auto business done in Michigan is in the hands of the direct writers. The remaining 30% of auto business is written through independent agents and of that most of the policyholders are 45 and over.
"Agents just didn't have the competitive product to approach the young family market," said McBride. "We believe that our company can provide a stable and competitive market to attract that audience."
McBride said that agent-owned companies are not new. "There have been several agency-owned start-up operations, but not of the magnitude we are seeing today. It is the current insurance climate that is bringing about this new trend."
It is expected that national insurers will be watching this new trend very carefully, says McBride.
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The author
Phil Zinkewicz is an insurance journalist with 25 years' experience covering international insurance and reinsurance. He was the insurance editor of the Journal of Commerce, and writes for many London publications.
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