by Bobby Reagan, December 2002

National Underwriter

In taking a look at the state of the insurance distribution system as we start 2003, the perspective that we are in a position to offer is not necessarily a reflection of a cross-section of the agency/brokerage business as a result of where our time and attention is generally focused.  The annual research that we do through the Best Practices Study and the Study of the Leading Banks in Insurance is focused on high performers.  Our strongest relationships are with organizations like the Council, Assurex, Intersure, and others that are primarily populated with the more successful insurance agents and brokers.  Our consulting practice is generally comprised of mid-sized to large independent firms including over 50 of the 100 largest in the country.  We have the opportunity to work with many of the best.

Well, how is life for this group of agents and brokers?  It's very good.  As a matter of fact, some would say it's never been better.  Overall, these agents and brokers are seeing revenue growth and increases in productivity, profitability and shareholder value far surpassing anything that they have experienced in the past.  Things are good and there is even a cautious optimism about the future.

Unfortunately, this level of prosperity is not being experienced throughout the distribution system.  Many, if not the majority of agents and brokers are seeing improved operating results, which are largely, if not totally, driven by a tight property and casualty market.  For these agents, revenue growth is single digit with little, if any, actual growth in market-share and no improvements in service capabilities, quality of staffing or strategic positioning.  Sadly, many agency principals are concluding that their marginally improved operating results are a sign of their improved viability and are rewarding themselves by taking out the additional profits being generated.

Within the insurance distribution system, there is a widening gap between the haves and have nots, or in today's marketplace, the very prosperous from the mildly prosperous.  The material gap in operating performance is apparent, but what is more important are the differences in operating characteristics that are creating the performance gaps.  In our opinion, the difference in performance is driven by significant differences in the competitive positioning of these organizations (i.e., the top performers have a competitive advantage).

Superior competitive positioning results from a number of factors including the following:  (1) greater clout with insurance carriers and access to more of them; (2) breadth of products and services provided and superior ability to respond to client needs; (3) ability to attract, retain, and motivate the brightest and most capable employees; (4) a strategic focus (not trying to be all things to all people); and (5) more professional management and leadership, which is probably the reason that they have the first four factors.

Interestingly, superior competitive positioning is not unique to larger agents.  Although size naturally results from successful operating characteristics, we have seen a lot of smaller but dynamic agencies that are headed up just as we have seen larger agents that have lost their focus and competitive position.

To those whose results are good but not great, you ought to begin by reading the book by Jim Collins called Good to Great.  Drawing on his central theme, I would suggest that you take a close look at the quality of your people, the wisdom of your strategic focus and your ability to execute.  As Collins states, "Good is the enemy of great."  Don't be satisfied with what you are doing today - elevate your performance.

For those that are truly prospering today, I would refer you to a story in the Bible about a dream of seven fat cows and seven thin ones.  Fortunately, Joseph was able to properly interpret that dream for Pharaoh.  I don't pretend to be Joseph, nor in a position to prophesy the future but I do know enough to warn you about how you are dealing with your current prosperity.  Times are good today but we are going to be facing some challenges in the not too distant future.  The property and casualty marketplace is going to soften (and probably in a lot less than seven years).  Even before it softens, insurers and insurance carriers are going to look to eliminate some of the commission increases that agents are currently enjoying.  The future of the healthcare industry is a bit frightening when you consider possible government intervention or continued elimination of insurance carriers which will have material implications on the distribution system.  The insurance industry will also be affected by the economy; the prospects or reality of war; and the implications of terrorism on insurance as well as on those that are insured.

In light of all of these challenges, current prosperity needs to be looked at as a great business opportunity, as opposed to a personal windfall.  The bumper crops (profits) need to be used for strategic purposes including:  building up your balance sheet, investing in new producers, adding additional capabilities, opening up new offices, improving technology, and overall, reinvesting in the future of your business.

Even for the most successful, it must be remembered that success is an asset that can be built on or it can be squandered.  The future will have its challenges, but for those who are willing to reinvest their prosperity, they will find that they are better positioned than their competition to address those challenges and will further distance themselves in superior operating results.  For the strategic, for the focused, for the high performers, the future of our industry has never looked better.  It will be fun in the coming years to see who rises up to be a part of that bright future.