Third in a Series of articles on Combined Agency Groups
Insurance agency networks have proven to be a durable part of the industry’s landscape. However, since their beginnings in the early 1970’s, the networks have changed in how they are structured and what they offer to members.
Agency networks today structure themselves in one of two ways. The original networks followed a distributed management model, and some still manage themselves that way. Under this model, there is no central management structure. The members of the network own it and have access to the network’s markets, but they operate independently. Attorney and former insurance agent Tom Braniff describes this as a “true network”: “It’s managed by the members with equal votes for each one,” he says. “No one member is in charge with political power over the others.”
The other model features a centralized structure, either by agreement or in fact. Some networks are run by a centralized management company. Braniff has set up these companies in the past for networks. The management company pursues carrier appointments for the entire network.
Sometimes, one member of the network becomes dominant. Al Diamond of Agency Consulting Group says owners of the smaller agencies in tis situation cannot afford to retire. Consequently, they become servicing agents for the dominant agency. There many not necessarily be a contract formalizing the one agency’s role, but in practice that agency runs the show.
According to Diamond, the centralized model is more profitable because it eliminates redundancies. One player submits risks to carriers, negotiates, monitors production, and so on. Because agencies operate independently in the distributed model, each member duplicates these efforts.
Diamond describes a structure that he calls the “virtual insurance agency.” It combines a traditional structure, where every agency has an equal vote, with a professionally managed, centralized structure. In a VIA, several small- to medium-sized agencies combine into a formal corporation. The members own the corporation, with no one dominant member. The members elect a board of directors, which hires professional managers to run the business.
Diamond says that the size and professional management of VIA’s allows them to perform tasks, such as recruiting and training, that individual agencies cannot do on their own. It also frees agency principals from chores, such as technology acquisition, that take them away from selling. He believes that eventually every state will have at least one VIA.
Along those lines, networks may provide benefits and services beyond market access and higher profit-sharing. According to Phil Tuccy of Insurance Group Consulting, modern networks are offering benefits such as discounts on agency management systems. SIAA, one of the largest networks, offers centralized marketing, online portals for finding the right market for an account, and business consulting services. The Iroquois Group offers human resources services, agency assessments, book transfer programs, and financing programs.
Some networks use sticks, rather than carrots, to keep members. Larry Manning, president of Pacific Interstate Insurance Brokers, notes that some networks inflict severe penalties on agencies that decide to leave. These can take the form of exit fees, requirements to purchase their books of business from the network, or market restrictions. “Several include a provision wherein the affiliate may not seek an appointment with the cluster’s markets for a period of two to three years,” he said. Other networks are less restrictive.
Diamond says, “There will always be small agencies banding together.” Agency networks are likely to be part of the insurance distribution system for years to come. It is just as certain that they will continue to evolve and adapt to changes in the markets and economy.
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