Carrier Distribution: The Future of the Independent Agency System

You’re a CEO of a regional insurance carrier. You learn a national broker (or a private equity backed agency) has acquired one of your largest and most profitable agents. You quickly discover the business model of the new owner is to evaluate the “strategic importance” of each of the insurance carriers in the acquired agency. Unfortunately, your company is not on the list. They begin to move your book of business to other carriers systematically. The former agency principal with a 40-year history with your company explains there is nothing he can do – it’s no longer his decision. All the time and money invested into that agency is gone.

Sound farfetched? Not really. With the current rate of agency consolidation, this could happen many times in a year. Replacing a large, profitable book of business isn’t as easy as “let’s appoint some new agents.” Selecting new agents takes time. Time to educate and hold the new agents’ hands as they get familiar with your people, products, appetite, and systems. It’s understood that new business performs worse than renewal business from a loss ratio perspective. It will take valuable time to get that profitable book of business back to where it was before it was lost in the acquisition.

Some issues are facing the insurance industry that are driving agency consolidation: high multiples being offered, the influx of capital, and the number of interested buyers that see insurance agents as stable investments with predictable returns. One undisputable fact is the average age of agency principals and producers is quickly heading toward retirement age. This reality is forcing more and more agency owners to face the reality of what to do next – internally perpetuate or sell to an outside third party. Agency consolidation is going to continue – plan on it.

So as the CEO of that regional insurance carrier, what can you do to proactively address this unavoidable trend?

The independent agent relies as much on their carriers as they do on their ability to get and retain their customers. A quality, healthy carrier/agent relationship is a partnership where both recognize the importance of each others role in the process. As part of that partnership, there is an opportunity for insurance companies to:

  • become much more aware of their agents’ short- and long-term ownership plans
  • bring resources to their agency plant including:
    • helping develop perpetuation plans
    • preparing agents to buy or sell an agency
    • helping buyers meet sellers
    • providing company valuation assistance
    • identifying financing to consummate deals

There are a few insurance companies that have successfully implemented these types of programs with their agents. Think about the possibilities if you develop intelligence on which of your agents are considering selling and which of your agents are ready buyers that will transition a book of your business without disruption. This knowledge moves you from the victim that finds out about an acquisition and scrambles to save a book of business to a proactive business partner that helps two agencies maximize their plans. It also preserves your good book of business with a quality agent.

If your insurance company is currently doing nothing or very little in this area, how do you start making a difference?

Don’t feel you need to recreate the wheel to have a meaningful impact. There are some outside resources you can bring to your agents that will have little or no cost to the insurance company.

Education – Provide webinars & seminars on topics such as perpetuation planning, selling an agency, tax implications of buying or selling, etc. Guess who attends these events? You got it – agents that are looking to buy or sell. This information can be the first step in identifying agents that are interested in making a move with their agencies.

Agency Intelligence – Most insurance companies have field representatives talking to agents daily. Begin to include discussions on long-term plans for agency perpetuation. Obviously, this is a sensitive topic and may require particular attention from higher-level executives. Some carriers have designated an individual whose sole purpose is to engage agents in these discussions. Position these dialogues as a value-added service to the agent to help them achieve their objectives.

Line Up The Resources – Identify the firms with the expertise that will help agents navigate the challenges around their business plans. If an agency is a buyer, what companies can help them get an objective, cost-effective valuation to assist them in deciding the viability of a deal or purchase price? If an agency is going to sell, who can advise them on what to do now to maximize the value of their business two to five years down the road when they are ready to sell?  When an agency is ready to buy, where will they get the financing?

Time is not on your side. Start having conversations with your agents to understand their plans and put the resources together that will help them execute. By being part of this process, you’ll be better informed and able to influence the inevitable agency consolidation in a way most beneficial to the insurance company.

Mike Strakhov is the Executive Director of insurance lending at Live Oak Bank, Wilmington, NC. Reach him at michael.strakhov@liveoak.bank or 910 550-2884.