Riding a crest of benefits business on two coasts

Virginia-based agency's diversification boosts revenues, smoothing the waves in the P-C market cycle

By Len Strazewski

Catch a big wave and ride it back down. Wait for the next one and the one after that. Just avoid going under.

That may be a sweet life for a surfer, but for a property/casualty insurance agency, the periodic rate cycles of commercial property and liability insurance make strategic planning nearly impossible, and the risk of “going under” becomes very real every time the cycle bottoms out.

For many agents, the ups and downs of rates and the annual ritual of policy renewals remains a fact of life in the commercial insurance business; but at Armfield, Harrison & Thomas, Inc. (AH&T), a commercial lines agency with offices in Leesburg, Virginia, and Seattle, Washington, smooth sailing is now the norm, thanks to steady and determined diversification into employee benefits sales and services.

For more than 10 years, the agency has been building a specialty in employee benefits and human resource services to complement its expertise in technology risk management, manufacturing trade associations and nonprofit institutions such as local governments and school districts, says John Love, senior vice president and principal in Leesburg.

The diversification and expansion started as a simple exercise in cross-selling, using the existing relationships with property/casualty insurance clients as a door-opener to life and health insurance sales, he says. But it soon took on a life and a revenue stream of its own.

“In the early 1990s, the agency had firmly established itself as a leading property/casualty insurance agency in its fields of expertise,” Love recalls. “But we weren’t taking advantage of our client relationships and cross-selling opportunities. When we had inquiries related to life and health, we referred them to another agency.”

In 1995, AH&T hired its first employee benefits producer in its Leesburg office, generating a modest $200,000 in commissions in the first two years. In 1997, the agency began cross-selling to its roster of property/casualty insurance customers and saw its employee benefits prospects multiply.

In mid-year 1999, the agency opened its Seattle office and caught a wave of new business that has yet to crest. Employee benefits commissions jumped to $2 million by the end of the year, fueled by a jumbo client with 10,000 employees, generating $1.6 million in commission revenue.

“We caught lightning in a bottle,” Love recalls.

Steve Uno, assistant vice president and employee benefits producer in Seattle, says the early success pointed the agency into a new growth strategy that could be nurtured with the right tactics and investment in expertise.

Selling employee benefits demands more than simply brokering renewals, he says. Many agents and brokers sell life and health insurance products, but the most successful industry leaders provide both insurance products and pricing and the administrative services to support the employee benefits within their clients’ organizations.

“At the end of the day, it breaks down to successfully managing both your internal and your external relationships,” Uno says, reflecting on the agency’s need to develop internally the services that could be marketed externally to existing clients.

The agency expanded rapidly, Uno and Love say, attracting producers from both large national insurance brokerages and smaller specialty agencies. The firm also looked beyond sales to technical support, hiring account managers with employee benefits experience, a claims manager and technical specialists.

In 2005, the agency also expanded its employee benefits programs to include retirement plan services for clients with 401(k) or other defined contribution retirement plans.

AH&T now has a staff of 131 people, including 32 in the booming employee benefits division. About 105 employees and 20 of the employee benefits staff work in the corporate headquarters in Leesburg and 26 staffers—half of them handling employee benefits—work in the Seattle office.

The firm has more than 3,000 corporate clients with employee counts ranging from as few as two to more than 5,000. Premium volume tops $140 million and about two-thirds of commissions still come from property/casualty insurance sales. The remaining third is derived from employee benefits sales, but that percentage is on the rise, says Love.

“Our employee benefits division has grown from 1% of the firm’s revenue to 33% of our revenue in the past 12 years and contributed to our 300% overall growth during that time frame,” he says.

Love expects that the portion of revenue generated by employee benefits is likely to grow to more than half the firm’s total revenue in the next few years as health care costs continue to escalate and the agency continues to cross-sell its property/casualty insurance clients and expand the range of services it offers.

“There are lots of reasons why employee benefits business stimulates growth, not the least of which is the steady increase in health care costs and premiums,” Love explains. “But also, the commission structure is advantageous. Employee benefits commissions are usually five times the rate for a similar volume of property/casualty insurance and, depending upon the time of the cycle, can be as much as 10 times the rate.”

Having a benefits department has also improved relationships somewhat with the agency’s multiline carriers that market both P-C and employee benefits and track agency volume on a consolidated basis, such as CNA and American International Group, Love notes. However, the agency did not benefit as much as other more traditional property/casualty agencies might.

“Because we are highly specialized in specific industries for our property/casualty operations such as technology, nonprofits and manufacturing, we don’t work with too many carriers that require production on the benefits side,” he says.

How does it all work today? Property/casualty producers still provide many of the leads and introductions to employee benefits producers in the two offices and may sit in on initial meetings, but the employee benefits division has its own account management and support staff.

The employee benefits producers can guide the customers through plan design options, pricing and renewal bids, but also can direct the customers to administrative support equal to the services provided by the big employee benefit consulting companies.

For example, AH&T provides customers access to customized employee benefits portals developed by Zywave, Inc., in Milwaukee, Wisconsin. The “MyWave” portals are comparable to more expensive custom-build online services provided by the large employee benefit consulting companies. The portals are designed to help clients better manage their insurance and benefits plans, lower their company medical risk profile and increase efficient use of benefits by employees, according to AH&T.

The portal sites—which can be designed to look and read as though they were developed and operated by employers—help deliver up-to-date industry and legislative information, employee education, survey and communication materials, risk management tools, as well as data tracking and reporting, the agency principals say, though AH&T supplements these resources with its own staff expertise.

Technology, however, isn’t sufficient to put the agency on the leading edge of employee benefits, Love notes. AH&T also provides its own expertise to help clients manage the evolving complexity of employee benefits, human resources and related regulatory compliance.

In addition to traditional producers and account service staff, the agency employs an employee benefits claims manager with legal training in the field, a compliance manager with experience in the complicated regulatory issues that vary by state and jurisdiction and a human resources specialist who can assist clients with benefits administration, records managements and employee communication.

Property/casualty producers are no strangers to regulatory concerns, but the world of employee benefits has its own rules and regulations, many of which require strict administrative procedures and compliance, Love adds.

“In order to appropriately service the employee benefits side of our clients’ business, we have to understand their administrative needs,” he explains. “As employee benefit plans become more complex, our clients’ administrative workload just gets bigger and bigger. It becomes part of our job to help them manage that administration and provide the expertise they need to navigate these concerns.”

Uno agrees. Human resource and employee benefits departments tend to be overworked and understaffed, he explains, and any assistance an agency can provide only serves to strengthen the relationship between the companies.

“The human resource departments of our clients vary in size and resources, and one of our first tasks when we obtain new clients is to assess their needs and see how we can help with our own resources and expertise,” he says.

“We need to help them find out what is bogging down their operation: benefits administration, human resources management, compensation, whatever, and see how we can help.”

In the Seattle office, Virginia Sly is on the front line of one of the most complicated areas of employee benefits troubleshooting—regulatory compliance.

Sly, a Certified Employee Benefits Specialist (CEBS), is a paralegal with more than 15 years of experience working with law firms in insurance defense cases and providing compliance support for a large national insurance broker. As compliance manager at AH&T, she oversees client support involving some of the most persistent regulatory concerns, including COBRA compliance (managing health care continuation for terminated employees) and IRS Form 5500 (employee benefit plan disclosure filings).

“Most of these issues are not obvious and intuitive to our clients,” she explains. “All employers who offer health benefits deal with COBRA compliance on a regular basis, whenever workers leave their employ. But such basics as who is ‘terminated’ and covered under the law is not always clear.”

The Form 5500 can also be a nightmare for small employers who have just reached the threshold of 100 employees and must file for the first time. “These employers must deal with plan design descriptions and categories that they never had even considered before,” she says.

Sly’s latest project involves sifting through District of Columbia law regarding salary reduction features of employee benefit plans for a Washington, D.C-based client. The conflict between state, local and federal law is an issue for which few small employers are equipped, she says.

“I try to be helpful but also try to bring added value to our relationship,” she says. “The human resource departments of many of our clients can be very thin considering their various burdens and responsibilities, and by providing expertise we distinguish ourselves from our competitors.”

Compliance education also creates more marketing opportunities. Sly coordinates a series of one-day seminars for clients in her areas of specialty, another opportunity for producers to meet and learn about the evolving needs of clients and prospects.

Peggy Fallon is the latest addition to the firm. Fallon joined AH&T in the Leesburg office this summer to provide expertise in human resource services—an important adjunct to employee benefits services.

A former corporate employee benefits manager and third-party benefits manager, Fallon brings extensive employee benefits and human resources services to the agency and provides both technical support to the employee benefits producers in the office and administrative services to clients.

“I previously worked for an AH&T client company and got to know John Love as the broker who handled our property/casualty insurance,” she explains. “So I got to understand the AH&T commitment to service firsthand.”

Fallon also lends a hand with COBRA and Form 5500 compliance issues and employee benefits claims and administration, but also provides guidance on the diverse issues that relate more to personnel management than employee benefits, such as Family and Medical Leave Act administration, office ergonomics and employee communications.

Her latest project involves assisting a client with an employee newsletter that not only can help communicate employee benefits plan design information but also can help build community within the client company.

Fallon says her consulting projects also strengthen the relationships between the agency and their clients. “We want our clients to know us year-round, not just during renewal season,” she says. *