Does it really matter which insurance advisory firm I use?
By Todd Hufford | COO
Can we talk candidly? Do you have your beverage of choice handy? Ok, let me pull back the curtain for you a bit.
Did you know that there are over 38,000 insurance firms in the United States? There are only about 5,000 banks, and I don't mean bank locations. Chase is one of 5,000 here. Our industry is dominated by very small businesses that we call agencies. A vast majority of those small firms simply write home and auto insurance, and maybe some small commercial accounts. Now since we are talking about your business, and you likely have 50 or more employees, you are probably talking to a different "set" of agents. In Indiana’s market there are probably two to three dozen prominent names on the Property and Casualty side, and maybe a dozen and a half prominent names on the Benefits side that you will actively see. These names aren’t the only ones in action, but they represent over 70% of business.
As an industry, we are pretty friendly with each other. Like any other industry, we have our trade associations and requisite conventions where we interact and get to know one another. I have had many opportunities over the years to develop friendships with my competition. There are some really good people out there who are smart and do a good job (When able, I make sure the best ones carry business cards that say Conner Insurance above their name). However, like any industry, we have our fair share of bad apples. These practitioners move from firm to firm and eventually find their way out, thankfully. For some reason, they seem to linger longer than I have seen underperformers last in other industries.
The insurance distribution industry is now extremely fragmented, having been consolidating for years. A decade or so ago the banks started purchasing insurance agencies, and in the central Indiana marketplace you saw Regions, Old National, Wells Fargo and First Merchants all grow insurance operations through acquisitions.
Bank executives across the country were attracted to the renewal nature of the revenue, as well as the fact that insurance products aren’t as sensitive to interest rates as traditional banking products are. So, for over a decade banks were the primary acquirer of independent agencies. In the past few years, however, banking regulations and culture have made operating insurance agencies undesirable. Many have sold their operations; if you have been paying attention, there have been no less than four agencies jettisoned in our local market alone.
The next big players on the insurance distribution acquisition scene have been publicly traded firms and even more aggressively, private equity firms. The sophistication and gusto that PE firms approach our industry makes the bank acquisition season look like child's play. PE firms are far and away the largest acquirer of agencies nationwide. This has been good news for baby boomer owners who have been looking for a retirement “off-ramp” since the financial meltdown.
With money, however, comes strings attached. While not every firm acquired by private equity will have these characteristics, please keep these trends in mind when you are interviewing advisory firms.
PE owners need to improve margins in the businesses they purchase, and they will usually go about it in several ways, each with a negative impact on you.
1) Seasoned professionals are moved out:
Most often, the oldest and most senior agents are paid the most. Either through commission structure changes or direct termination, many seasoned and knowledgeable professionals are finding themselves having to start over late in life. This “Brain Drain” is something I don’t believe our own industry is talking enough about.
2) Insurance Professional or Salesman:
In days gone by, our industry provided significant training to new insurance agents. If you were a new agent in the 50’s-80’s, you were flown out to the corporate headquarters of an insurance company for weeks at a time to engage in a very intensive learning school. A small fraction of new agents today are educated before they hit the streets. This poor preparation and lack of a team behind them fosters salesmanship instead of true advisors who can properly consult your business.
3) Corporate Mentality:
As national out-of-state buyers purchase local insurance, there is consequentially a more corporate feel to the operation. With a local firm you have owners on the ground who, like you, face all the same challenges as a business owner. That experience provides great insight when they and their team consult you on your business needs and issues. Large national firms are locally staffed by individuals who often have never owned or operated a business. They have very little real world experience in the similar issues you face. Though smaller, your local insurance firms are staffed with experienced individuals who have similar experiences to you. They have felt the pressures of making payroll, they wring their hands when they know they have to terminate somebody, and they struggle to stay up on the tax issues of the day.
Let me end by saying this: 80-90% of how well, or how poorly, your insurance program is structured is dependent upon your specific advisor. He or she is the one who takes the time to meet with your CFO, your head of HR, your Operations team, and maybe even your outside legal and tax counsel. This person or team can doubtlessly be an effective extension of you, if you let them. Their knowledge, experience, relationships with carriers, negotiation skills and overall business acumen can ensure you have the right policy, correctly structured, in the time of need.
Our advice? Make sure you know who will be servicing your account once the salesman “lands” you.