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Agency Networks Aid
Agency Net Worth

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.

Factors Critical to a Network’s Success

Some of the factors or characteristics of successful agency networks include:

• A well thought-out organizational structure and a formal operating agreement that are prepared by a qualified attorney. Preferably, the attorney should be familiar with the operations of an insurance agency, as well as agency network issues. Some of the provisions to be included are:
  • Membership requirements / qualifications
  • Management structure / decision making process
  • Financial commitments of members
  • Mutual covenants
  • Termination / withdrawal provisions
• Agreed upon rights and responsibilities regarding income / expenses / bonuses
• Reliable accounting / data management of the network’s records
• Consistent and professional communication among members regarding opportunities / problems
• Mutual respect, compatibility, and compliance among members

Due Diligence in Selecting a Network

One of the first steps in determining if joining an agency network is right for your agency is to develop a list of the reasons you are considering doing so, as well as the benefits you expect to receive, both now and for the long term. It is also important to focus on the managerial and administrative functions you do not wish to surrender. You should obtain information regarding:

• Current member agencies, including branch locations
• Premium volume and loss ratio information
• Insurance providers represented
• Profile of the book of business (e.g., is it concentrated in any industry; does it focus on commercial or personal, etc?)
• Copy of the operating agreement
• Your agency’s representation on the network’s board of directors
• Decision-making process
• Compensation and expense sharing system

Essential Provisions of a Network Operating Agreement

The following is a list of some key issues that should be addressed in the operating agreement among the members of an agency network:

• Duties and responsibilities:
  • Individual member agencies’ responsibilities regarding servicing, billing, and collecting and paying account currents, etc.
  • Establishment of procedures relative to the handling of profit sharing and contingency bonuses, including the formula to be used in computing distributions.
  • Adherence to all company agreements held by the operating entity
  • Timely payment of insurance company balances
  • Maintenance of minimum E&O coverage limits, and naming the operating entity as an additional insured
  • Observation of all operating rules and procedures
• Termination provisions:
  • Termination for breach of operating agreement
  • Right to withdrawal with appropriate notice
  • Notice period in the event of termination /withdrawal
• Mutual covenants:
  • Confidentiality of individual members’ information, both during the term and after termination
  • Non-solicitation/non-piracy among members, both during the term and for at least 24 months thereafter
  • Non-solicitation/hiring of another member’s employees
  • Restriction of member agencies “brokering” with (or for) non-members agencies
  • Restriction of member agencies joining any other agency network
• Transfer of member agency ownership:
  • Prior notification to the network if a change in an agency’s ownership or management control is anticipated
  • Approval process for continuing as a member if ownership or management control of an agency changes

Other Collaboration Agreements

Other options include “franchisor” or “aggregator” organizations. Unlike agency networks, these agreements generally involve an override or profit element for the individual or entity that controls participation in the group. Such organizations provide some of the benefits of a network, but do not provide the mutual support among member entities and an equal voice in the management of the group, which are characteristics of true networks. Franchisors or aggregators do however represent a valid alternative to relieving some of the market pressures independent agents experience. Many of the decision criteria discussed in this article with respect to joining a network would also apply to becoming involved with a franchisor or aggregator.

Though “brokering” relationships between agents may involve collaboration, they do not qualify as agency networks. These arrangements involve a voluntary sharing of commissions for business placed by an agent that does not hold a particular insurance company appointment, through an agent who does have an appointment with that company. Laws and regulations vary from state-to-state with respect to the legality of “brokering,” and the notification the two agents must provide to the policyholders. This type of arrangement is often times unknown to the insurance carrier and is generally governed by informal understandings between the two agents. This method is frequently seen when market capacity crises emerge, and agents have little or no options for meeting the immediate coverage needs of their customers.

Conclusion

The purpose of this article is to present a broad overview of some of the primary issues and questions to be answered when an agency is considering membership in an agency network. To some degree, every agency network is unique. Membership in a network involves benefits, restrictions, and responsibilities. It is important that all parties fully understand these in advance.

This article was originally published in the Summer 2011 edition of Resources Magazine.

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