Companies saw the premium volumes and positive loss ratios produced by these aggregations and decided to take part. Agencies of all sizes saw the merit of combining their production with others to gain access to more companies and maximize their commission and profit-sharing compensation.

Today, many billions of dollars of written premium are generated through agency aggregations.

There is no such thing as a model agency aggregation. They're each unique and changing each day to meet new market challenges.

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The groups' structures vary in four main areas:

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               1. Brokerage or Large Agency
               2. Ownership of Business
               3. Percentage of Up-Front Commission Earned, and
               4. Percentage of Contingent Commission Retained by the Aggregator.

Continue on for a closer look at the impact of each:

Many large aggregators provide a master E&O policy and an in-house accounting and agency management system. (Photo: iStock)

Brokerage or large agency

The majority of aggregators are very much like a large agency in that they restrict their members to only placing their business through companies contracted through the aggregator. Only a very few aggregators are brokers, who seek to augment and supplement their members' direct contracts.

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Business ownership

Several aggregators have the same wording in their contract as exist in most company contracts regarding the member agent ownership of renewals. However, the majority of aggregators assume partial ownership or restrict movement of the business.

Percentage of up-front commission earned

Commission splits vary widely, from 50/50 for commercial accounts that require a great deal of hand–holding by the aggregator, to a more standard 90% commission going to the member agent.

Brokerage operations usually will have a larger portion of commission going to the aggregator, but it is withheld on a fraction of the agent's book whereas the smaller percentage charged by the Large Agency type of aggregator applies to the member agent's entire book of business.

Lately, aggregators are acknowledging that they have a limited amount of value to add to certain transactions and are placing maximums on their annual retained commission.

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Percentage of contingent commission retained by the aggregator

Many aggregators will pass through 100% of the incentive commissions while others are retaining as much as 50% of bonus commissions. The majority of aggregators share contingent commissions. However, many aggregators place stringent requirements on their members to qualify for a share of the contingency commissions, so that only a small percentage of their members enjoy a financial benefit.

Some aggregators pay a pro-rata share of the contingent commission with individual agencies qualifying if their agency's loss ratio is less than 100%. Contrasted with that are those aggregators whose base qualification for their members is a 55% individual agency loss ratio combined with a specific growth and overall premium volume criteria.

The challenge ahead for aggregators

Many companies no longer will allow aggregators to flow all of their business through one code, looking to achieve greater accountability. Conversely, aggregators are frustrated by companies who now want to "micromanage" the member agencies, regardless of the overall aggregation's underwriting and growth results.

The moat to create an agency aggregation is not remotely close to the $3 million that Insurance Partners invested 30 years ago, before starting to show a profit. With the current low cost of entry, the field is crowded, and there will be an inevitable shake-out in the near future.

Twenty-five years ago, the average member agent had a strong independent agency background. Today, the average new agency member is fairly new to the industry and is coming from a captive agency company. Member agency recruitment, which once passively fulfilled need, is now heavily based on creating desire. There is seemingly a scarcity of member vetting, which might be due to aggregator management compensation that is based largely on membership growth. Tension is now being felt as digital-oriented management squares off against an industry that demands accountability through personal relationships.

As the percentage of our industry's business placed through aggregators rises, the scrutiny from regulators will also logically increase.

The Excess and Surplus Lines market now places a smaller percentage of the insurance market than the amount placed through agency aggregators. The E&S market has done a fairly good job of piecing together self-regulation through WSIA (AAMGA/NAPSLO) and quasi-governmental "stamping offices." Perhaps aggregators need to form similar national organizations and work with state regulators and the NAIC to head off problems. Several aggregator contract provisions have already gained the attention of regulators concerned about individual insured's rights. There is movement toward self-regulation with Insurance Network Alliance, which started in 2016.

In 1970, most large companies had two scales of commission reflecting the many "general" agencies that existed. Those general agents were the aggregators of that day. During the '70s, most of the general agency relationships were dissolved, so much so that by the early 1990s almost everyone thought aggregation was a new and inventive concept. History probably won't repeat itself, but to remain viable aggregation must continue to evolve.

Based in St. Paul, Minn., Jim Holm is a five-decade veteran of the P&C industry, and a pioneer in the field of agency aggregation. He can be reached by sending email to [email protected].

The opinions expressed here are ther writer's own.

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