A question we often get at AgencyEquity is, “What is the best agency network to join?” The problem with this question is that different options serve different needs. What may be good for one agency may not be good for your agency. Some may want a turnkey system that provides them with everything they need to run their agency, while others may want to take advantage of the carrier appointments offered by the group. Given the numerous factors to consider when joining a group, I will outline several key points that prospective members should investigate before making a decision.
Note that agency networks are also known as a “cluster,” “aggregator,” “alliance,” or even a “franchise.’ However, in recent years, the term “Network” has become more of a general term for all these types of organizations.
How Much Will It Cost?
In most cases, a group will charge you an initial fee to become a member. This is usually a one-time flat fee, such as $5k or $10k. Some groups may not charge an initial fee, but their ongoing costs or exit fees may be higher. The key is to consider all costs, including the initial fee, monthly fees, commission splits, and exit fees (the fee charged when you leave the group). The “Exit Clauses” section of this guide provides more detailed information on how exit clauses work and their potential costs.
What are the ongoing fees for an agency to be a member of a network? In some cases, the ongoing fee may be a flat monthly fee, or it may be a small percentage of your total commissions. For example, say a group takes 5% to 10% of the total commission volume of the agency. In that case, if the carrier pays 15% commission, 10% would amount to 1.5% of this, and your agency would net 13.5%.
A flat fee is suitable for established agencies with established revenues. It can also work well for a well-funded agency startup planning rapid growth. If you are not well funded and don’t expect to grow very fast, giving up a small percentage of your commissions may be the way to go. It’s best to do a 5-year projection and see which option is best for your agency.
Who Pays the Commissions?
Some groups receive all commissions directly and then pay their agency members once they receive and assign these commissions. Others have commissions paid directly from the carrier to the agency. Another method is a combination of these two, depending on each carrier. If you care who you get paid by, then this is a question you should ask the group before you join.
Profit Sharing and Contingencies
Profit sharing occurs when the group receives underwriting profits from the carrier and then shares them with its agency members. This is a big advantage of network membership, as pooled profit-sharing percentages are significantly higher than what an agency can achieve independently. When you’re investigating which network to join, ask what percentage of the total profit is shared with its members.
In addition to profit sharing, some networks may receive a bonus commission, particularly on new business. Carriers occasionally do this to help drive more business of a profitable line of business. You may want to ask if the network passes on the full commission to the agency.
The Agreement
While many of us have developed a habit of signing a contract without reading it, most especially on small ticket items, not reading your agreement would be a huge mistake in this case. Furthermore, it’s always best and well worth it to have any group agreement reviewed by an attorney. Not doing so can leave you in a tough and unpleasant situation if there is a clause you don’t understand. Your agency will likely make millions throughout its existence, so paying an attorney for a few hours should run less than $1K and will prevent you from signing something you never intended to sign. You may also be able to negotiate some terms in your favor; however, some groups may not be willing to amend their agreement. The larger your agency, the more leverage you will have. Startups may not have much leverage, but it doesn’t hurt to ask.
When reviewing the contract, check the commission splits and policies on contingent commissions (bonus commissions and profit sharing). Some networks take a smaller cut of your commissions, but there’s no limit to how much they’ll take. This might work in your favor if you have a small book, but as your book grows, it will become a bad deal for you. If there’s a cap on commissions, you know the maximum amount you’ll have to pay in a given time period. Some have a fixed monthly rate, regardless of your commissions. Always read this specific clauses and make sure you understand them.
Feedback from Current Members
Prospective members should always do reference checks with existing members. Once you find your compatible groups, contact about 3 to 5 members of each group. Most websites have a listing of the members, but some don’t. If they don’t, then look up the group’s license on your state’s insurance department website. Most states have a listing of all the appointed producers under the group’s agency license. You can also do a Google search for these agencies, as many list their affiliations on their websites. The group may provide you with a list of references. Still, it may be better to conduct reference checks with a random group of agencies to avoid any bias of the selected agencies provided to you.
Appointments or Access?
Some groups have each agency appointed directly, while others give access to the group’s appointment. Some may have a combination of direct appointments and access, depending on the carrier. A direct appointment shows the agency name on the declarations page, and access shows the group name on the declarations page. Ideally, direct appointments are better (jointly appointed to your agency and the group). If having direct appointments is an issue for you, consider asking the network this question.
Services Offered
Beyond appointments or access, other groups include benefits like Agency Management Systems, E&O insurance, raters, in-house staff, training, and several other perks. Keep in mind that the groups that offer more will likely charge more, so be sure to evaluate how much you want and need from the group. If you want the freedom to do more on your own, then find a group that limits its offerings to carrier appointments. If you’re looking for a turnkey solution, consider a group that offers more. The additional cost may be well worth it, especially if it saves you money on expenses you would otherwise have to pay for yourself. Additionally, having an in-house staff can help you close more deals, making it worthwhile to pay for and utilize these services if they align with your needs.
Always verify an organization’s offerings when you do a reference check with their member agencies. If support is important to you, ask existing agencies about the extent of such support, especially if you are going to depend on that support. Regardless of your needs, always check how well a particular organization will meet them.
What Carriers Are Offered?
When researching a group, make sure to find out which carriers they are appointed with and which ones will appoint you directly (if that is an option with that group). It may be a good idea to include any carrier appointment in the contract that you currently depend on or will depend. Sometimes a group may have a carrier, but that carrier may not be willing to appoint new agencies. Get all this information up front and in writing before joining.
Exit Clauses
Some groups charge a fee for a member to leave the group, especially if they don’t charge any upfront fees to join. Groups that charge upfront fees without an exit fee clause can make it easier to leave. Though it is less common, some groups may have both entry and exit fees. Prospective members should read the group’s contract, have it reviewed by an attorney and pay particular attention to the exit clause.
While no agency should join to leave, exit clauses can be different for each network. Don’t be caught off guard by the exit clause when you need to leave; plan by understanding what it contains. Sometimes it may be worth paying more upfront to gain freedom on the backend. Remember, groups that allow for freedom are easier to hold accountable.
Ability to Sell Your Agency
Will the group allow you to sell your agency on your own so you can maximize the agency’s selling price? This feature may depend on the exit clause discussed in the previous section. Also, if you sell, does the buyer have to continue the membership? If so, it can be harder to sell, and a seller may not get their full potential price because of that restriction. Some groups may only allow for a buyout option with a fixed selling price, while others may ask for the right of first refusal. The more flexibility you have in selling your agency on your own, the greater the chance you will have of getting a higher selling price. This is a significant restriction to know before joining a group.
Restrictive Organizations
In recent years, there have been online websites and groups that take over everything for you, from back office to support to taking over your employees. Let’s examine both separately.
Online organizations can, to some degree, be the equivalent of an agency network, though several differences may exist. When dealing with these groups, it’s even more crucial to thoroughly review every section of this guide and address the relevant points with them. Sometimes, things may be so automated that your only option is to agree to the terms and conditions already built into the site. While every group is different, online services have been known to own the policies or accounts you place with them. There may be other conditions, such as owning the data or having the right to market to your other insurance lines and accounts. While each network may be different and have such clauses, these organizations are not your traditional networks and may more likely have more restrictive clauses.
All-inclusive organizations literally take your agency over, yet may offer you a lucrative deal to do so. They take over your employees and provide you with an array of services. You may essentially be the equivalent of a producer. If this is what you want, these groups can be for you. But having an attorney review their agreement is crucial in this case, as you can lose everything. Some of these groups may appear to be a regular network, but they are a lot more than that. The question is, do you want a lot more and do you want to give up control?
Setting Your Expectations
While agencies should find the group that best meets their needs, if your expectations are unreasonable, you may find yourself without a group. Almost every agency network is a for-profit enterprise that provides valuable services to its agency members, and it cannot possibly do so without making a profit. While some agencies may be open to negotiations, those seeking unreasonable terms will make themselves undesirable, causing the group to lose interest. Being an island on your own is a challenging way to run an insurance agency in today’s environment. Remember always to keep it professional and cordial, and never cross the line, thinking you will get more, because it may do more harm than good.
By asking these key questions and following the suggested investigative steps, you will be able to select and join a group that offers your agency benefits that will grow your book with the support of a network.
