Some organizations offset the dilution by negotiating extra money from carriers, but most do not do so effectively. This is a great example of people wanting to believe so much in something that no matter what the facts show, they will very often not see the truth: They are really less profitable with more carriers.

Even if the offset is adequate, having extra markets is pointless for 90 percent of agencies. The only reason so many extra markets are necessary in most agencies is because the agency is not working hard enough to proactively find the best new clients. Instead, the agency needs many markets to handle whatever comes its way. They need a market for every Tom, Dick and Mary that calls blindly. When an agency is reactive, never knowing what will come in the door, many more markets are required than when an agency is proactive. Being proactive creates a focus. With more focus, agents need fewer markets. And guess what? According to Best Practices, more focused agencies grow faster.

Agents know that carriers need a minimum premium to maintain a relationship. By clustering, agencies can achieve that minimum easier. However, the same is true from an agency's perspective. Agencies only can operate efficiently when they do enough business with a carrier. One reason agencies with fewer carriers are more profitable is they are more efficient.

This market is so soft that agencies that do not get more efficient will suffer. Simply having access to more markets will only make the situation worse.

Pros and cons of additional services

Some agencies are being lured by promises of value and growth generated by additional services, such as loss control. Personally, I am all for agencies offering loss control to every single client. But how many accounts really need loss control? After analyzing hundreds of books of business, I believe it's fair to say that the vast majority of commercial accounts written by the average insurance agency, even ones with $7 million to $10 million in revenue, do not need loss control. Too many of the accounts written, even in the larger agencies, generate less than $1,000 commission and often less than $500 commission. How important is loss control to a $1,000 commercial account?

Many agencies signing up for clusters are doing so because the cluster offers such services. Most of these agencies probably do not have more than 10 or 20 accounts that are true candidates for loss control and even then, some will not care.

Does it make sense to give up control or pay part of your commissions for a service that probably will not make an iota of difference? If you have not fallen too far into the honey trap, analyze your book of business and identify exactly how many accounts really can and will use loss control or the other services being touted. Then examine the other alternatives. A few carriers have good loss control consultants. In many cities, independent loss control consultants can be hired by the job. Does it make sense to turn over all of your company contracts just for a service only applicable to a few accounts?

Additionally, what exactly would you do with those services if you had them? I hear a major complaint that the producers in big agencies that have loss control will not use it. Often this is because they do not know how to. When a knowledgeable producer uses loss control, the result is art. They make great sales. But these producers have made a considerable effort to learn how to use the
service effectively. Are you going to make this effort for the few clients you have that can use it? If not, why buy it?

Administrative bliss?

Every agency owner came to that position so they could deal with IT, accounting and HR, right? Getting rid of these headaches may be the most seductive promise made by clusters and consolidators. No doubt, none of these functions are fun for most agency owners and yet all are necessary, especially IT. Some clusters make a big improvement on IT but most often, many IT problems are user related. In other words, the people in the agency just need to learn their system better. Joining a cluster is not going to solve the problem.

Moreover, outsourcing firms can perform IT and accounting tasks for less cost than signing contracts and giving up control of your contracts. Sometimes their cost is even less than what you are likely paying your employees for doing the same job.

Selling is the bottom line

Once you get your new tools and markets, now what? For example, if you had a market to write engineers, loss control services for engineering firms and the time to write those accounts because you are no longer doing IT or HR, how many engineering firms are you going to write? How many are in your market? Do you have access to them? Do you have the technical knowledge to write engineering firms correctly? I see this all the time. Agents get a market and loss control, but they really do not know how to put it all together.

Even with all of the tools and markets, someone still has to sell. The tools make selling easier, but the tools will not do the work for you. If you were not being proactive before, what will change that will switch your agency from reactive
to proactive?

The reality is never as lovely as our fantasies. Honestly ask yourself if all of these new tools will really make a difference. Will you and the agency's producers actually use these tools? Make a list of all of the accounts you will most likely write because these tools are absolutely the only factor that has kept you from writing them previously. If you do not personally know all of the new accounts you will write, you will need a marketing plan. Otherwise, you will have a neat shop with lots of tools and the phone will not ring any more often. How will you get in front of these more
sophisticated clients?

If you do buy into these arrangements to get new tools, companies, loss control, administrative services and so forth, what simultaneous commitment are you making to use those tools often and effectively? If you're scared, cannot find growth and are looking for salvation, take a deep breath and think things over before making any rash decisions that lead your agency right into the Sirens' trap. If these markets and tools will definitely enable you to write hundreds of thousands of dollars of new commissions with very specific prospects, then they may be a great opportunity. If not, these deals are likely a solution to the wrong problem.