In short, if you haven't yet thought about the development of your own succession plan, you're already behind the curve.

This sense of unpreparedness speaks to a larger issue: The pressing need for the insurance industry to redouble its efforts toward attracting, recruiting and mentoring young talent. The industry's pathway to its future can no longer be a rope bridge: If the insurance business is to perpetuate itself and thrive, training the next generation of those who will someday lead it is critical—and a shared responsibility at both the carrier and agency levels. Owning up to that sense of responsibility—to yourself, your family and the industry—starts with deciding who your successors will be.

It's time to ask, when you are gone, what will your legacy be? Will you prepare for the future by willing years of institutional knowledge and insight (and in many cases, a successful agency worth millions in annual premium) to a responsible person or persons whom you deem appropriate to follow you, or will you spend your remaining years hoarding it and watch it pass into history?

To put it more bluntly: They're your assets. Do you want them to survive you, and benefit both your loved ones and your business?

If you chose the former, the time is now to start adopting the mindset of succession.

AN OUNCE OF PREVENTION

“I have a very close friend, about 70 years old, who sat down with me and said he's scared shitless,” says Chris Paradiso, owner of Paradiso Insurance in Stafford Springs, Conn. The agency's annual premium volume sits at around $15 to $16 million, with a mix of 60% to 62% commercial, 38% to 40% personal.

This principal, adds Paradiso, was not one he counted among those who would be afraid of anything. “He says to me, 'My kids are all older, they are successful. My agency has done extremely well. If I die tomorrow, I've screwed my wife. My kids aren't a factor in my agency. My wife knows nothing about the insurance world. What am I going to do to her?'”

The revelation put succession squarely on Paradiso's radar. “It really caused me to think,” he says. At age 40, “I'm younger than him, but if something happened to me, what did I just do to my kids?”

He soon sat down with a business attorney. His goal: “I want to keep my main person in my agency for as long as I'm here, and I want to create a succession plan so that I don't just die and my agency gets sold at an auction market.”

While some of his peers asked why he'd consider thinking about giving up ownership to Stephanie Fanelli, the office's manager and head underwriter of commercial accounts, he emphasized that preparing for such an event—as his attorney advised—was not just prescience, but sound business strategy.

“I talked to other agency owners and they think I'm crazy,” he says. Paradiso gives their opinions little credence. “She's 38 and she's been in the industry for 18 years, loves the industry and can run my agency. I believe in her. If I'm not here and my kids are here, my kids can learn from her. She's the perfect fit.”

Excess funds were set aside in the event that something should happen to Paradiso and Fanelli should have to step up as head of the agency—and a replacement would have to be hired for her current position. “If something happens to me, you have two people to replace: myself and her, as her role will change,” he explains. “We have had detailed discussions of this and how my income will continue to be paid to my children and my wife.”

On Jan. 1, the paperwork was finalized. The plan, Paradiso says, is highly detailed, clearly outlining his wishes for what will happen to his agency: “I don't want my kids (6-year-old twins) to come in here someday and have everything handed to them and [possibly] ruin the thing.” Two of his closest friends will serve as trustees, keeping an eye on his business' cash position.

“Young agents need to realize that things can absolutely happen to them,” Paradiso says. “A succession plan means that you love somebody and want them to be taken care of. We can absolutely die at any time.”

Age 70, he believes, is too late to start thinking about it; rather, he says, principals should begin considering it in their 30s.

“If you don't have a succession plan, you need to think really hard why,” Paradiso says. Often, he adds, “I find people just don't know what to do with their agencies.”

Indeed, the Independent Insurance Agents & Brokers of America (IIABA) gets as many as 40 calls a week from agencies that don't know what to do about their own perpetuation—especially as the agency ownership population ages, says Madelyn Flannagan, vice president of agent development, education and research. “I always refer them to a professional because there are all sorts of tax implications they need to examine,” she notes. It's best that they speak with a tax professional to answer the latter questions.

For newer agencies and start-ups, says Flannagan, succession is more top-of-mind: “Over the last five years, independent agencies are more likely to make it a part of their whole structure of business.”

One trend she's seeing is agencies collaborating with other agencies in informal “clusters” or “huddles” for both shared efficiencies and perpetuation planning. These firms enter into an agreement with other agencies to share back-office expenses and to identify people they might like to sell to or use to perpetuate their agency.

GIVING UP THE GOLD

Ken Crerar, president of the Council of Insurance Agents & Brokers, exhibits little patience for those who think succession efforts are someone else's problem—or even an option.

“An agency that doesn't have a good succession plan has done a really bad job of leading that agency,” he asserts. “They've built half a house. And shame on you.”

The amount of young talent at an agency, he points out, plays into the valuation of that agency. Is it investing in its future, or not? “People who are serious about this are making investments in talent. Period,” Crerar says. “They're out there aggressively talking about themselves and teaching [young recruits] the business.

“Be serious about it,” he adds. “Get out there and talk about what you're doing. There are a lot of firms that whine about it and want that done for them, and that's not going to happen. It takes a real concerted effort.”

One of the biggest reasons that agency principals often put off executing their own succession plans is simple inertia, says Al Diamond, president of Agency Consulting Group Inc. in Cherry Hill, N.J. The firm, founded in 1980, is a consulting practice dedicated to the needs of independent agents throughout the U.S.

“Do you know how easy it is not to think about death until after it happens?” he asks. Agents, he points out, are often focused on closing the next deal, not concentrating on their futures. And who wants to hand over that business to someone else when the profits are rolling in?

“When you're making money,” he says, “it's not so easy to give up the gold.”

Diamond is all too familiar with the thought processes of agency heads, and he knows well the very real crisis the industry will face if more is not done on the perpetuation front. He just completed an 18-month, 50-seminar tour in 26 states on the subject of succession and perpetuation planning for a major carrier, covering a few thousand of their agents.

Source: The Big I's 2012 Agency Universe-Future One Survey

The response, he says, has been highly positive, spurring proactive measures by many of the participating agencies to execute plans ranging from contingency buy/sell agreements (in the event of an unexpected death or permanent disability without internal succession), to internal succession plans, mergers and external-perpetuation plans. The majority of agency-ownership transfers in the U.S. are still made internally to family members or to other staff members, he notes.

Developing a thoughtful succession plan, he explains, is about having a solid, thoroughly vetted outline in place when the time comes for the principal to pass the baton, regardless of age.

As soon as one becomes owner of an agency, he says, “you need to ask yourself, 'What happens if I get hit by a truck and die?'” The principal, he says, can't protect his business, his employees or his heirs unless he has a succession plan in place, even if it's just a contingency buy/sell agreement.

Next, he says, “you need to ask, 'What happens if I get hit by a truck and I don't die?'” When Diamond's firm does contingency buy/sell plans, that scenario has to be taken into account.

“Life insurance is certainly available to cover the potential of death of a principal, but disability insurance was never made to protect an agency asset—nor will it keep the employees working or your clients in place,” he explains. A well-considered contingency buy/sell, he adds, has a provision for a quick and orderly assumption of ownership duties by your agreement partner (for a short time or until the agency is transferred), even if the agency owner becomes disabled.

Diamond recommends that agency principals in their 40s and 50s would do well to start looking at the youngsters in their agencies and decide whether it's time to start grooming them to take over. When you reach your early 60s, he adds, “even if you don't plan to retire until you're 75 you should be in the throes of doing a written succession plan.”