My last two posts have been about what it will take for agents and agencies to survive and thrive in the future. Those posts were primarily concerned with technological and marketing issues. There is another important part in any plan for the future of an agency that should also be addressed by its owners. It is the question of what will happen to the agency when they no longer want to be involved.
Unless an owner plans to die at his or her desk, they need to be thinking about and coming up with an answer to this question. That answer will either involve the creation of a perpetuation plan or a decision to sell the agency to an outside third party. Unless steps are taken to develop and carry out a perpetuation plan long before the time an owner wants to leave, when that time comes the owner will have no choice but to sell to a third-party, many times at a discounted price. This is because, as pointed out by Rob Lieblein of MarshBerry in a recent article, the perpetuation of an agency’s ownership is a “process not a transaction.”
Developing and implementing a sound perpetuation plan requires long range planning. Younger agents must be hired, trained, and mentored so they will be able to step in and run the agency when the owner is ready to retire. The agency’s business must be structured so that there will sufficient cash flow at that time to permit the new owners to buy out the old owners without having an adverse effect on the continued growth of the agency. Mr. Lieblein states that this can take 5 to 10 years. He then points out that once the plan is in place, the old owners must be willing to let go or they will see those younger agents leave for greener pastures with a consequent loss of agency morale and business. Click here to read Mr. Lieblein’s full article and see the seven steps he says that agencies which want to create a sound perpetuation plan need to follow.
If your agency has not yet created a perpetuation plan, you are not alone. A 2011 MarshBerry survey found that almost 70% of independent insurance agencies did not have such a plan. There is still time to act. What better way to start a new year than by doing something that will enable you to retire when you want, while at the same allowing your agency to continue as a testament to your hard work and business skills.
TO ALL MY READERS, BEST WISHES FOR A HAPPY AND PROSPEROUS NEW YEAR!
Last week I posted an article asking if your agency was ready for the future. It referred to two recent reports that discussed the future of independent insurance agents and what it would take for them to survive and thrive in the future. A common thread running through the three “core capabilities” that the authors of one report thought all such agents would have to acquire was the increased use of technology. (Click here to read the article and for a link to the report.)
Central to the increased use of technology was the creation of a website. According to a recent study done by the Agents Council for Technology, independent agents have already grasped that fact. One hundred percent of the agencies who participated in that study with a majority of business in commercial lines and 88% with a majority of business in personal lines had a website. Over half of the agencies without a website intended to create one within the next year.
However, there was a wide disparity in what those websites could do. Less than 40% of such websites offer online quoting or customer ratings and testimonials. Only 10% offer customers the ability to make payments, obtain ID cards, access policy information, or perform other self-services. Less than 45% of them provide in-depth insurance content. The list goes on. (Click here to see a summary of the survey’s findings and here to read the complete survey.)
I recommend reading the survey to find out what other agencies are doing and then decide what changes to your agency’s website make the most sense for it. You may also want to take a look at this month’s cover article in IA Magazine for ideas on what other agencies have done to make their websites stand out from the crowd. One of the agencies profiled in that article is Cowart Insurance Agency in Lawrenceville. You can read about the changes it recently made to its website and how that has affected its business. If you need help in deciding what will work best for your agency or in implementing the desired changes, Project CAP on the national level and Agents Go Digital here in Georgia can provide such assistance.
Based on my experience earlier this week, I also recommend finding a reliable internet service provider, as access to the internet is now almost as basic a requirement for doing business as having a telephone (or at least a mobile phone). My internet service was on and off for the first three days this week and I could never get a good explanation for the problem or when it may be fixed. That lead to a lot of frustration and anxiety on my part, as I had work that needed to be done and could only be done using the internet. (It also is the reason why this article was posted today instead of earlier in the week.) That is a position in which no business person wants to find themselves.
Two recent reports by analysts for the Japanese investment bank Nomura and the U.S. consulting firm McKinsey & Company have created quite a buzz in the insurance industry. Both reports had negative things to say about the future of independent insurance agents, especially with respect to the sale of personal automobile insurance. Both reports conclude that the average consumer now views such insurance as a commodity. For the analysts at Nomura, this meant that the direct writers, such as Geico, and the captive agents, such as State Farm, now have the upper hand in selling that type of insurance because they can, in the case of direct writers, spend money they would otherwise be paying agents on advertising and lowering premiums, and in the case of captive agents, lower premiums by bundling products under the same brand name. According to the Nomura report, independent agents are in danger of becoming obsolete with respect to the sale of automobile insurance. (Click here for more on this report.) (Click here to read about a product developed by Travelers Insurance to combat this trend.)
The Nomura report draws on the research done by the consultants at McKinsey & Company for its report, “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution.” In that report, the consultants point out the problems for independent agents created by the increasing use of technology by insurance companies to predict risk and communicate directly with potential customers, both of which have reduced the role traditionally played by independent agents in the insurance marketplace. They conclude that this reduced role will inevitably lead to a change in the commission structure for independent agents making it harder for them to survive.
Many commentators have cited this report as signaling the beginning of the end for independent insurance agents. However, that is not what its authors think. Instead, they state that “Local agents are not in danger of extinction, but the role they play will continue to evolve. Those that can adapt to a new set of circumstances will thrive.” The authors think that homeowners and small commercial insurance products will still be largely sold through independent agents due to the fact that they present more complex risks than personal automobiles for which the insured will want the advice and assistance of an insurance agent.
The report goes on to outline what changes an independent agent will have to make to survive and thrive in the future. While there is no single business model that will guarantee success, the authors point to three “core capabilities” that they think all agents who want to survive and thrive will have to develop. They are: (1) defining and reaching a target market, (2) obtaining greater expertise about the insurance needs of their target market, and (3) increasing operational efficiency and scale. The report also discusses six business models that the authors think are likely to evolve and be successful in the future. They range from traditional commercial lines agencies that target large accounts in specific industries to small virtual agents who devote most of their time to sales using technology to communicate with their customers and potential customers.
The report concludes with a series of questions that the authors think insurance companies should be asking themselves about their agents. These questions range from how do agents add value for their target markets to how can agents be rewarded for the service they provide while allowing the company’s products to remain price competitive. The agents who can provide positive answers to these questions and who can successfully develop the core capabilities described above will be more likely to survive and thrive in the future. (Click here to read the full report.) (Click here to read one independent agent’s thoughts on what the report means for her and other such agents.)
In a post on this blog in late October about whether an insurance agent had a duty to report wrongdoing by others, I mentioned that I had heard a rumor that the Georgia Insurance Department was developing an online portal for agents to use to make the reports required of them by the statute discussed in that post. I recently learned that such a portal has been created by the Insurance Department, but it is only for the reporting of “information to the Insurance Department pertaining to the enforcement of state law and regulation regarding certificates of insurance.” If an agent has knowledge of a “fraudulent insurance act” that does not involve insurance certificates, they should still use the address provided in my earlier blog post for reporting that information to the Insurance Department.
In addition to explaining how to report suspected problems with insurance certificates, the online portal provides additional information about what the Insurance Department considers to be a violation of the law and regulation on insurance certificates. Most of the examples of such a violation provided have been discussed in my previous posts about the law and the regulation, but there were some surprises and one trap for the unwary.
The biggest surprise for me was this example, “Use of Description of Operations section of a certificate to include any information other that a brief explanation of the operations of the insured; this section is not to be used for describing the insurance policy.” I have seen many insurance certificates that use this section to provide information about the insurance policies in question. That should no longer be done. Along these same lines, the Insurance Department now says that “Requiring that a summary of a policy provision be added to the certificate which varies from the precise and complete language of the provision” is a violation of the applicable law and regulation. If an agent receives a request for an insurance certificate that does either of these two things, he or she can now point to the online portal to show why they can not issue such a certificate. Click here for the portal and to see more examples of what can not be done with an insurance certificate.
The trap for the unwary involves the final example given of what constitutes a violation of the insurance certificate law and regulation. “Use of an edition of an ACORD or ISO form other than the current approved editions” is that final example. The regulation issued by the Insurance Commissioner earlier this year states that “Superseded editions of ACORD and ISO certificate of insurance forms shall also be deemed approved, however, as long as ACORD and ISO permit their use during periods of transition.” The problem with this exception from the rule requiring the use of the current editions of those forms is that, at least for ACORD forms, there is no longer a “period of transition” between a newly approved and superseded edition. The new ACORD “Certificate of Liability Insurance”, form 25, has an effective date of January 1, 2014. On and after that date, as far as ACORD is concerned, that is the only approved form for a Certificate of Liability Insurance. However, it is my understanding that most agency management systems will not have been updated to permit the use of that form by that date and some may not be updated for months after that date. Click here for a list of agency management systems that shows the most recent version of ACORD forms in use in those systems.
A comparison of the currently approved edition of ACORD form 25 and the edition that will be effective on January 1, 2014 reveals only three slight changes to the language of that form, none of which have to do with the existence or substance of the insurance polices referred to in it or the disclaimer language regarding those policies. Let’s hope that the Insurance Department will not worry too much about the continued use of outdated ACORD 25 forms after January 1. In the meantime, agents should be contacting their agency management system vendors about the need to update the system to use the new ACORD form 25 as soon as possible.