By Paul J. Di Stefano, CPA, CPCU, and G. Edward Kalbaugh
First National Bank of America purchased the agency around the corner for 3.5 times revenue. Why didn't the bank approach your agency? Very likely the bank didn't know your agency was for sale. Perhaps that's because you're not prepared for potential opportunities such as the fictitious one in our example. Few agencies are. Many agency principals don't fully understand the concept of "positioning for opportunity."
In today's fast-paced, highly competitive environment, agency principals spend much of their time working in the agency. Most don't put enough effort into working on the agency. This focus on day-to-day operations at the expense of planning and positioning is very often counter-productive. There is too much focus on efficiently doing the wrong things. Larger issues of the marketplace go unnoticed.
In the 1950s and 1960s, for example, independent agencies flourished as the dominant distribution system for insurance companies. When automation was introduced in the 1970s, however, independent agents and their companies were unable to leverage automation technology as effectively as the "niche" companies. Consequently, the leading niche companies became the dominant captives and direct writers.
In the 1980s, insurance capacity contracted in response to an economy fueled by heavy borrowing and overspending. The "hard" insurance market that followed lulled many agencies into a false belief that accelerating sales and income were the norm. Many agency plans and models were based on this belief. The financial hardships that followed forced many agencies to sell, merge or reduce staff.
As reality set in, the 1990s began with initiatives to become more competitive. Insurance companies began to improve internal efficiencies, reduce commissions and introduce alternative distribution networks. At the same time, capacity increased as alternative forms of risk funding were introduced. This combination has led to what many believe to be a "perpetual soft market."
In all probability, the insurance marketplace will encompass more change in the next decade than in all three previous decades combined. Fueled by information technology, change is accelerating indiscriminately, creating immense opportunity for some while leaving others to struggle for survival. With the Internet emerging as an economic force impacting all agency transactions, the playing field is being leveled and barriers to entry are breaking down.
These conditions are causing an examination of the traditional insurance infrastructure and are revealing the weaknesses of an over-complicated industry. While the traditional infrastructure is perpetuated by an outdated and highly politicized regulatory environment, certain change is inevitable.
Capital is more widely available. Pricing and underwriting are being automated through "smart" databases and driven to the point-of-sale. Insurance products are becoming simplified and, at the same time, differentiated to satisfy specific niches or requirements. Consumers, enlightened by a variety of purchasing experiences, are driving personal insurance products toward commodities while requiring "service-on-demand."
Business insurance is being tailored and packaged from "off-the-shelf" components derived from "virtual" data.
Banks and securities firms, with their large customer bases, are insinuating themselves into the insurance industry. Entrepreneurs, armed with technology, are realizing that access to capital is no longer a barrier to developing insurance products, and are quickly becoming "quasi-insurance" companies through captives or rent-a-captives. At the same time that niches are being formed to address special needs, networks are also being formed to aggregate premium and achieve leverage.
What is the role of the insurance agent or broker in this emerging environment?
The same as it has always been, and more. And that will mean different things to different agents. The insurance industry will offer more diversity and opportunity then ever before, but it will be up to those with ambition and foresight to take advantage. To ensure the highest potential for success in this new agency environment, agencies must remain positioned for opportunity in order to effectively leverage change. Important positioning requirements include the following 15 areas:
1. Maintain access to capital
For most agencies, this simply means maintaining a line of credit to cover new operating expenditures, such as a new computer system or facility improvements. But if opportunity involves an acquisition or other high-value investment, then other sources of funding may be required. This might include acquiring funds from private or public pools of capital or even seeking an investment partner, such as a bank, insurance company, or major agency network.
2. Know your agency's value
When opportunity knocks, are you better served by guessing at your agency's value or by being well-informed? Not only is knowledge of your agency's value critical to successful deal-making, it is an important ingredient in assessing your agency's progress from year to year. Once defined, your agency valuation should be updated regularly.
3. Operate efficiently, but with enough capacity to absorb opportunity
Most agencies cannot operate effectively above normal capacity over an extended period of time. Workload peaks and valleys usually average about 85%-90% capacity in healthy agencies. Those agencies that adjust to operate at the 85-90% capacity range can easily absorb the impact of increased workloads brought on by mergers, acquisitions or new programs introduced within the agency.
4. Leverage "Smart Systems" and the expertise of highly trained "knowledge workers"
Numerous studies have shown that high-performance organizations are set apart by their ability to leverage information. This may require finding information "protected" by gatekeepers or simply dormant in agency databases. Accessing this information may also require upgrading mission-critical automation and creating a "sharing environment" where information is treated as a key resource available to competent people who know how to use it.
5. Become the "expert" in one or more product niches
Specialization is one of the keys to success. You simply can't be "all things to all people." Don't spend time trying to correct all your weaknesses. Use that time to leverage your strengths. Create the ability to exploit opportunities in the marketplace--gaps in coverage, pricing adjustments, fee-based consulting, alternative account acquisition strategies.
Risk Management Specialists, located in New York, for example, has grown its agency in six years from scratch to $20 million by specializing in niche programs that address such needs.
6. Drive new business relentlessly and tie compensation of management and personnel to performance
The primary purpose of agents and brokers is to sell insurance products and services. The purpose of everyone else in the organization is to support sales, either directly or indirectly. Ultimately tie performance throughout the agency, including bottom-line profitability, directly to the effectiveness of sales.
The days of routinely offering payment for simply coming to work are over. If you want to achieve high performance, compensation must be aligned with individual goals and objectives that support the goals and objectives of the organization. Everyone must be responsible and accountable for his/her own performance and that performance must be quantifiable. Results count.
Consider introducing pay-for-performance programs, such as OpportunityCOMP, offered by Harbor Capital Advisors, Inc.
7. Deliver "standard-setting" service to clients
In this hectic, fast-paced society, time is becoming our most treasured resource. Save your clients time and effort. Find ways to do more for them. Make them want to depend on your service. And don't go by the benchmarks of others. Set your own standards. Among those standards should be the requirement for service staff to cross-sell. The "Better Way" program, implemented by the Rollins Agency of Tuckahoe, New York, for example, has resulted in retention climbing from low to high 90s, and dramatic expansion of its life and health business.
8. Develop relationships with strategic business partners
Today more than ever, you can't do it alone. Cultivate relationships that bring added benefit. Think long-term and don't be fearful of commitment. Think less about tactical issues such as control and ownership and more about strategic issues such as growth, profitability and shareholder value.
Consider joining agency networks, such as Satellite Insurance Agency Alliance of Keene, New Hampshire, for example, that offer alternative models for increasing your agency's business. Offer banking services, such as those provided by the Independent Advantage program from Independent Financial Services of Westerly, Rhode Island.
9. Balance the account portfolio to offset risk
Understand your agency and your marketplace well enough to understand your current and potential vulnerability. Develop strategies to offset them. For many agencies, this may require expert help, simply because effective assessment depends on extreme objectivity and broad perspective, as well as specific knowledge and skills.
Are banks now writing personal lines in your marketing area? Does your competition use worksite marketing for group sales? Are your top accounts at risk from alternatives such as self-insurance and captives?
10. Market your agency
You're not the best if nobody knows it. Marketing your agency means creating awareness and desire in the marketplace. This requires highly focused effort, sustained over the long-term. There are no shortcuts to effective marketing. It includes everything pertaining to your image, including advertising, promotional materials, stationery, facilities and even the company you keep. As with R&D, marketing deserves a line on your income statement and a place in your budget.
11. Manage change
This means more than just reacting to the minor changes in day-to-day business. To manage significant change you must anticipate it, plan it, create it and leverage it. You must be proactive. This also means you must have deep understanding and perspective about your agency, the changing insurance marketplace and the business and regulatory environment that affects your agency.
12. Plan continually
Every agency, whatever its size, should have a three-year and a one-year written business plan. The three-year plan addresses the long-term strategic issues. The one-year plan addresses the short-term tactical issues. Both should be updated continually and both should be communicated throughout the organization. Each person in the agency should become an effective planner.
13. Develop a perpetuation plan and an exit strategy
An agency well prepared for long-term perpetuation has more value than one not so well prepared. Perpetuation planning requires help from a qualified expert. It entails an agency and estate appraisal, consideration of your agency's legal and business structure, a thorough review and evaluation of your personal plans, designation of your successor and development of specific business plans. The sooner you start, the better your options later.
14. Seriously consider merger and acquisition opportunities
Consolidation of agencies will continue at the current rapid pace. Opportunities will arise to acquire a competitor or to merge your agency with another, where the cultural, operational and strategic fit are apparent. It is important for agency principals to be aware of merger and acquisition opportunities and to take advantage of those opportunities when appropriate.
15. Develop a relationship with an industry consultant
The financial and management consultant is a potentially valuable resource in implementing a corporate development plan. An experienced consulting firm can make you aware of potential merger or acquisition opportunities, introduce you to new markets and programs, and align you with strategic partners. In short, an experienced consulting firm can assist in positioning your agency to take full advantage of opportunity.
Do these ideas suggest there is only one positioning strategy for agencies?
Definitely not! In fact, just the opposite is true. Attention to the items covered here will strengthen the agency, no matter how your positioning strategy is designed. Proper positioning helps any agency to fulfill a particular business model while remaining nimble enough to modify it or to take advantage of another, different model.
Review this list, determine how well your agency measures up to the suggestions covered and then set in motion your own improvement actions. Each of the foregoing ideas for positioning will be individually addressed in forthcoming articles from Paul Di Stefano and Edward Kalbaugh. *
The authors
Paul J. Di Stefano and G. Edward Kalbaugh are managing director and director of management advisory services respectively of Harbor Capital Advisors, Inc. Harbor is an investment bank and consulting firm providing financial and business advisory services to agents, brokers, carriers, banks and other firms engaged in the insurance and financial services industry. Phone: (516) 427-2732. E-mail: harborcapitaladvisors@banet.net
©COPYRIGHT: The Rough Notes Magazine, 1998