Agency Adviser
| Burand's Insurance Agency Adviser |
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| December 2007 | |
| Resources and Information for the P&C Insurance Industry | Volume 12, Number 6 |
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Publicly Traded Brokers' Growth Creates Opportunities for Other Agents & Brokers The publicly traded brokers= organic growth rates have been known to be poor for a very long time. This has been documented in many articles and publications. A closer look at their results, though, reveals
their organic growth is much worse than what has been reported. To the
best of my knowledge, publications have been depending on the results
the brokers have reported as "organic growth."
Why is P&C
Insurance Answer: Because consumers (and some agents) focus on price.
When people have to spend money on something intangible, something they
do not really want to buy and do not fully understand in terms of value,
they are not going to want to spend any more money than necessary.
Unfortunately, insurance fits this mold all too well. A Great New Book!
Consultative Brokerage: A Value Strategy, by Rob Ekern, brings to
light some of the most significant issues that are currently facing
producers and their firms in the development of larger accounts. Rob
provides a tremendous roadmap that answers the question, “How do we grow
our book of business through real differentiation and a value
proposition?" This book's pages are filled with practical, workable and highly profitable techniques that all successful producers must master. Here are some of the topics that Consultative Brokerage: A Value Strategy addresses:
Consultative Brokerage: A Value Strategy is filled with over 60 charts and descriptive displays. This material has been over a decade in the making, it has stood the test of time. Now, it is available to help you and your team learn such things as:
Whether you are a new producer, a seasoned broker, sales manager, internal client servicer or even an insurance company professional, the information contained in Consultative Brokerage: A Value Strategy is critical to your success. It will provide you with a value platform from which you can build a very successful practice. This book is available through Rob's Web site at www.crekern.com. |
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Publicly Traded
Brokers' Growth Creates The publicly traded brokers= organic growth rates have been known to be poor for a very long time. This has been documented in many articles and publications. A closer look at their results, though, reveals their organic growth is much worse than what has been reported. To the best of my knowledge, publications have been depending on the results the brokers have reported as "organic growth." There are two very significant problems with this. First, the brokers do not use the same definition of organic growth. Second, many of the factors brokers include as organic growth have absolutely nothing to do with real sales! As a result, their organic growth rates are vastly overstated. Agents and brokers that understand this can immediately identify major opportunities to write new business and even obtain high quality employees. For a more in-depth look at the brokers= organic growth rates and the prices and deal structures they are using for acquisitions, I reviewed their data purely using the eight publicly traded insurance brokers= 2006 results as shown in their own shareholder 10-K annual reports filed at www.sec.gov. The table below shows consolidated results for the eight major publicly traded brokers on an unweighted basis (in other words, I did not weight the results by revenue). As shown, they have achieved very impressive top line growth of 11% in 2005 and 9% in 2006. This is phenomenal considering NWP growth was 0% in 2005 and 3% in 2006. If one looks at their reported organic growth rates, the rate typically reported, the organic growth rate is really not much more than the inflation rate. In other words, their organic growth is apparently being attained through exposure growth and increasing prices, not by selling any more insurance. This means that virtually all of these brokers= commission growth is being attained by acquisitions, something I am sure most readers already know. However, even this is an overstatement. When the same definition of organic growth is used for all brokers and that definition is, "Growth specific to increasing retail insurance sales," these poor results plummet further.
As shown in the chart above, some of the brokers include things like currency exchange rate gains as organic sales. Others include interest income. Some include sales by inter party companies. In these situations, the broker owns either a company or their parent company owns other companies and these other companies feed the brokerage sales. The broker does not actually have to go out and make a sale. The other major category some brokers include is real organic growth not related to retail sales. These sales are related to insurance company sales or wholesale brokerage sales or subsidiary sales, but they are not related to actually selling more insurance to more retail clients. When these non retail sales items are removed, again using only the brokers= publicly available documents, their organic growth in 2005 was 0% and only 1.6% in 2006. This means that for all practical purposes, these brokers, on average, cannot even keep up with the industry=s premium growth without acquisitions and other revenue sources. In fact, if industry NPW growth was used as a proxy for industry inflation and therefore subtracted to identify the real organic growth rate, these brokers would, on average, have negative real, retail sales specific organic growth. This is why acquisitions are so critical to their business plans. Furthermore, the situation may be even worse because some brokers are not as specific as others in their public documents about what they include as organic growth. For those that do not provide any detail, my guess is their real results are not any better than those shown above and if they had provided this detail, the overall results would probably be even worse. An interesting question, not answerable with the data available, is: are the brokers buying agencies that are themselves wasting assets or if changes after the acquisitions are stifling growth? Regardless of the answer though, the brokers= miserable organic growth provides ample opportunities for agencies and other brokers. The opportunity for others is this: these brokers cannot have such bad organic growth rates if they are not bleeding business. If someone is bleeding business, what are you doing to take advantage of the situation? Most agents are not going to grow significantly by writing only spanking brand new accounts that have not existed in their town before. They have to write accounts someone else is already writing. Is it easier to take over accounts written by high quality agencies that have very good retention rates or is it easier to take over accounts written by agencies bleeding business? You now know who is bleeding business. What are you doing to get your share of accounts leaving the brokers? Another opportunity is getting high quality employees. Nearly every agency is short employees and if the biggest brokers are bleeding accounts, they are going to be bleeding employees. What are you doing to build relationships that will get those employees to come to you? Note: As mentioned, the brokers do not all define organic growth the same nor are all these brokers as specific in their public filings about what constitutes organic growth as some of their competitors are. So while I have made my best effort using publicly available data to identify what each has included as organic growth so that it can be compared on an apples-to-apples basis, it is feasible these organic growth numbers still include growth that is not related to actually selling more insurance. Why is P&C Insurance Considered a Commodity? Answer: Because consumers (and some agents) focus on price. When people have to spend money on something intangible, something they do not really want to buy and do not fully understand in terms of value, they are not going to want to spend any more money than necessary. Unfortunately, insurance fits this mold all too well. When it comes to purchasing insurance, most consumers usually do not know the difference between one quote and another other than price. One quote could provide all risk coverages and another other could be a basic form, but the only difference many consumers would see is the price. Agencies have the power though to bring the value back to insurance by helping their clients break the commodity mentality. The two easiest ways to do this are to improve product knowledge and to use coverage checklists. Improve Product Knowledge Technical product knowledge is even more critical in a soft market because someone can always beat your price. This is especially true in our current soft market when some accounts can be rewritten midterm for 20+% less. Such dramatic price decreases even minimize the importance of great service because for 20% less, a client might be willing to accept a little less service when the savings are so great. The soft market though is an absolutely great opportunity to focus on coverages and your knowledge of those coverages. For example, if a client has an opportunity to save 20% by going elsewhere, the client might be interested in knowing he or she can get a lot more coverage from you and still save 15%. If you are skilled in understanding coverages and are able to communicate the importance of those coverages, that client will likely take your offer. Sometimes the differences in coverage are easy for the insured to see. When one quote provides no liability and another quote does, it is not going to take much convincing to get the client to buy the better coverage. But first, the producer must read and understand the coverages involved in order to advise the client of these differences. Sometimes the coverage differences are easy for the insured to see but at first seem insignificant until a producer explains the importance. For instance, if an agent is working with a contractor, it may be very worth the agent’s while to point out differences in fence coverages. This is a black and white issue that may not seem that important, but they are to a contractor who has a lot of money invested in them. The producer who can point out these differences has the advantage. If the policy covering fences costs an extra $500 on a $30,000 premium, it may be enough to make the sale. Sometimes the differences in coverages are not easy to see or explain. For example, as many agents in New Orleans will now attest, business income and business interruption are not 100% synonymous. They are closely related, but they are not the same and this has caused many problems for people trying to recover from Katrina. Agents that did not understand the distinction were unable to explain it to their clients (and those agents are now most likely faced with E&O claims on the subject). If the agents had better educated their clients, the insureds may or may not have purchased something different—but having better educated clients would have probably prevented some E&O claims. Additionally, they would see the producer as a professional providing a valuable product, not just a commodity. This gives the producer an advantage. All it takes is knowledge about what you are selling. Use Coverage Checklists Coverage checklists are more than a tool for providing professional service. As an E&O instructor and an E&O procedures auditor for the two major E&O insurance carriers, I have seen how the proper use of coverage checklists can significantly reduce agencies’ E&O exposures. In fact, one carrier estimates that 40% to 60% of all E&O claims in New Orleans could have been prevented had agents been using coverage checklists. As an additional benefit, coverage checklists also increase sales. Unfortunately, after speaking with hundreds of producers and CSRs throughout my years in this industry, I have found that less than 5% of all producers and CSRs use a coverage checklist. Why is such a great tool so rarely used? The two most common reasons are: 1) “The insured will not give me the time to complete a coverage checklist.” 2) “What do I say if they want to me to explain a coverage I don’t understand?” The first response simply shows that the producer has never asked because producers who do use coverage checklists have found that their clients will almost always give them the time to complete it. The second response circles back to the importance of product knowledge, but even if a producer does not know the answer, this is a simple sales situation of advising the client you will research the coverage specific to their situation and get back to them tomorrow. Whatever the reason, it boils down to the fact that if producers are not discussing coverages and they are not focusing their sale on the nuances and benefits of the product, they are focusing on price. If they are focusing on price, they have changed the perception of insurance from an investment to a commodity. Stop selling a commodity. Anyone can sell a commodity. Cartoon characters, Neanderthals, and reptiles can sell a commodity. Are you better than a reptile? Learn your product and use a coverage checklist to provide your clients with the value they would expect from an investment.NOTE: The information provided in this newsletter is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information. Burand & Associates, LLC is an advocate of agencies which constructively manage and improve their contingency contracts by learning how to negotiate and use their contingency contracts more effectively. We maintain that agents can achieve considerably better results without ever taking actions that are detrimental or disadvantageous to the insureds. We have never and would not ever recommend an agent or agency implement a policy or otherwise advocate increasing its contingency income ahead of the insureds’ interests. A complete understanding of the subjects covered in this newsletter may require broader and additional knowledge beyond the information presented. None of the materials in this newsletter should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this newsletter. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations. If you wish to be removed from this mailing, please e-mail AgencyAdviser@burand-associates.com. |
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