by Thomas M. Braniff
Are you considering joining an "agency network" (sometimes referred to as a "cluster")? As with any important decision, there are advantages and disadvantages to be considered. The purpose of this article is to outline a process to assist you in making that decision.
For more than 15 years, our firm has been involved in planning and creating numerous agency networks, drafting network operating agreements, and providing advice to agencies considering network participation. We also provide advice to independent agencies that are members of networks, and have assisted agencies in getting out of this type of arrangement.
For the purposes of this article, we define an insurance "agency network" or "cluster" as any two or more autonomous insurance agencies sharing certain resources and/or working in a cooperative fashion under a formal organizational structure in order to gain certain financial, influential, and/or economic benefits, without sacrificing the integrity of individual agency identity or the ownership of the business generated through their individual efforts.
Characteristics of Agency Networks
Our experience has been that true agency networks include at least the following characteristics:
· Member agencies retain their individual identity and business structures.
· A core entity is created to manage the affairs of the group.
· Ownership of all business placed through the network remains with the originating agency.
· A formal contractual relationship exists between and among the participating agencies, specifying the duties and responsibilities of each member to the network, and the network to the members, as well as the compensation structure.
· A formal management system exists that involves members overseeing the decision-making process regarding the activities of the network.
· There are no penalties or buy-out provisions if a member elects to withdrawal from the network.
Benefits of Joining a Network
There can be numerous benefits to joining an agency network, especially for small to medium size agencies. These include:
· Increased access to competitive markets
· Preferred commission schedules
· Increased clout with carriers due to aggregation of the network's production
· More favorable profit sharing and production growth contracts
· Networking with peers to assist one another as trusted advisors
· Increased profitability resulting in increased agency value
The benefits listed above are relatively easy for a quality agency network to achieve. A network can provide other potential benefits, depending on the complexities of each agency's ownership, differences in the character of business handled by members, and the degree of fear over loss of independence. These benefits include:
· Perpetuation planning, including buy-out provisions in the event of death / disability
· Centralization of accounting and other backroom functions
· Uniformity of management operating systems
· Group E&O coverage
Potential Drawbacks to Joining a Network
Joining an agency network can also have drawbacks. Some problems we have encountered include:
· A certain amount of independence is sacrificed in any membership undertaking.
· True networks are managed by the members, which can result in lengthy delays in decision making.
· A portion of the members may wish to pursue a benefit or program that other members may not wish to implement (e.g., forming a premium finance company, developing specialized programs, etc.).
· A single member's poor underwriting practices or otherwise bad loss experience can spoil the entire network's profit sharing bonus.
· By necessity, another layer of accounting is required to track the commissions and other revenues generated by the group.