Posted on 07 Sep 10
This week we spoke with Al Diamond, president of Agency Consulting Group. We have spoken to Al several times over the course of the last year about asset protection, producer compensation, and today we discussed the concept of the Virtual Insurance Agency (VIA), its evolution, structure, and benefits, as well as the power it offers insurance agencies. Basically, a VIA is an organizational option that permits small and medium sized agencies to continue to operate under their own identities while having all of the assets and opportunities of large agencies.
Annie George (AG): Al, let’s discuss how the Virtual Insurance Agency came into being.
Al Diamond (AD): “The VIA is the next step beyond clustering. It takes the benefits of clustering and mergers and combines them so that smaller insurance agencies who had been members of clusters or who are considering forming a cluster can maintain the integrity of their own businesses while being a part of large corporation in which they have a stake.
“Clustering originated in the 1980s primarily to combine the agencies’ marketing efforts – for the placement of business. Yet for a long time, both the agency members and the carriers involved always questioned the depth of commitment of a cluster. Insurers suspected that clusters were formalized brokerage situations and that other individual agency contracts continued to exist, potentially resulting in negative selection to the cluster carriers. While the cluster carriers presented exclusivity to the cluster members, many cluster members also maintained other contracts as individual agencies.
“Additionally, we saw that the really successful clusters were going way beyond just combining the marketing side of the business. They actually consolidated some of their operations, centralized some of their processes, such as client servicing and claims handling, in order to lower expenses and generate more profit for the agency owner. When we saw this taking placing, in addition to getting the typical complaints from the insurers that didn’t want to participate in the cluster for fear of being negatively selected against, we consolidated the concept in what is now known as the VIA. We asked insurers if they would have a problem if the agencies came together and actually merged. A physical merger would take place in which the only carriers represented were those in the merged entity so the insurers felt a lot more comfortable.
“Once we converted a few clusters into this new concept, we found some magnificent things happening. Not only were they marketing together but they started using one another’s resources. Typically the mark of a cluster is that every agency that’s a member remains independent, they run their own business, run their own shops, they are either fat or thin based on their operational expenses. They either generate growth and a lot of premiums or revenues or are stagnate and declining. They really have no call or benefit to having other people involved…they are just marketing with the same carriers. When they came together in this new concept, the Virtual Insurance Agency, they suddenly used one another’s skills and talents.”
AG: How is a VIA structured? How does it operate?
AD: “It’s basically a mega-merger, a “marriage” of small agencies that merge into a single operation in which each agency maintains its identity, has its own profit center, location, and staff. Instead of owning a few hundred thousand dollars of equity in a small agency whose future may be questionable, the VIA member owns shares of stock worth the value of his original agency in a business that’s worth millions of dollars. The VIA member becomes an officer in a multi-dimensional, multi-talented organization that can insure anyone from the corner grocer to a multinational conglomerate.
“Each agency becomes a profit center for the VIA and each owner becomes a part of the talent pool available to any other VIA profit center. While the VIA shares certain administrative activities in a centralized format (automation, an accounting and finance department, marketing, claims, etc.), several functions are left to the profit centers to fulfill. The most important of those functions are sales, market penetration, and direct customer contact.
“The agency doesn’t have to publicize that it’s part of a VIA. Similar to McDonald franchises all over the country, each agency has to stand on its own but it’s a part of a larger organization with the buying and staying power of that larger organization. You have the ‘golden arches behind you”, so to speak.”
AG: Are you seeing more and more VIAs in light of the economy and soft market?
AD: “Absolutely. Where they are cropping up is with small and medium sized agencies that don’t want to sell out but are feeling the pressures of the insurance companies on the one hand and the lower commissions and contingency rates they’re receiving on the other end. The VIA is a way of regaining profitability. It’s also a way for small agencies and beginning agencies to break into the business. They can be a part of VIA as a start-up operation.
“Additionally, the VIA is a great way of perpetuating agencies. The VIA member has a guaranteed perpetuation plan. It’s a corporation, with a stock price every year based on its future earning potential with each member a stockholder. If something should happen to one of the agents, he has a perpetuator who will buy him out and the VIA will put in a successor if the agent doesn’t already have one. The local agent doesn’t have to sell out to the VIA if he has a son or daughter to take over the helm, or would like to pass down his ownership interest to someone else. He can do so. But if he doesn’t, this provides him with a verifiable and a great way to perpetuate the business, usually at a stronger price than if he was independent.”
AG: Does any agency, based on size, for example, have more say than another in the VIA?
AD: “Everyone is equal in the VIA, which is a significant difference over the mega clusters or service centers that have come about and are controlled by one agency. The hallmark of the VIA is that it’s controlled by a board that is representative of the owners. No individual agency has any more power of authority than anyone else. A growing agency or profitable agency will make more money for themselves every single year, but the VIA isn’t run by any individual agency or a combination of two or three.”
AG: Are common profits shared?
AD: “No. Another hallmark of the VIA is that it’s not there to make a profit off itself, it’s there to lower the expenses of its participating owners and put more money into their pockets. Some have turned the VIAs into profit-making organizations but the original intent of the VIA is to make as much money as possible for the individual agencies who own the VIA. Therefore all dollars are passed back in the form of lower expenses to the local agents. The best example of this is with an agency management system and the money saved due to sheer volume and resulting discounts in setting up desktops at various location, etc.”
AG: What are the other benefits to the VIA members?
AD: “You have a lot more thrust and power with insurers. Normally you have fewer companies within the VIA but they will do more for you. We’ve engineered redundancy with the companies so that there are always two carriers for the product that the VIA wants to place. Because there is so much volume with the insurers, the VIA gets the best contract in terms of commission and contingency. And your loss ratio is guaranteed because the agencies are spread out geographically so that no individual disaster or catastrophe can affect the entire group. And because loss ratios are sensitive not only to losses but to premium size, once you reach $2, 3, 4, 5 million worth of premium with the company, if you have a good book of business, you will increase your contingency potential.
“A VIA also allows you to put in place professional management far in advance of when most agencies would be able to do so. The owner or owners typically run an agency with $1 million of commission or less even though they are primarily insurance agents. One of the first things you see with a VIA is the placement of a professional business manager. Usually, it begins with a marketing executive that will ensure completion of submissions, pre-underwrite risks to assure most efficient handling by carriers, and quote and prepare professional proposals for its producers. The VIA will also offer centralized administration that will permit agents to eliminate redundancy (and expenses) if they so choose.
“Another benefit is that the members are using each other’s skills, as I mentioned before. You have someone who is a specialist in HVAC, for example, and another agent who normally doesn’t write that type of business but now has the opportunity to do so. He will call upon his fellow VIA member to help him with the specialty and in turn others will call upon him for his area of expertise. It’s a very healthy experience.
“The final benefit, which really doesn’t affect the individual members as much as the industry as a whole, is that it’s a great breeding ground for creating new producers and owners. Most small agencies don’t have the money, the time, and effort available to bring in producers and evolve them into the next generation of owners. A VIA through its strategic plan does so automatically. We bring young people in, we show them how they become owners by generating revenue or enhancing the profits of the organization, and we bring them into ownership capacity over a 5 to 10-year period.”
AG: How does one get involved in VIA?
AD: “We get calls from cluster groups telling us that it’s not working the way they expected. They call and ask how they can solve their problem. We’ll meet the entire cluster, show them the VIA concept and the benefits. The chances are good they will move into a VIA. Additionally, associations or multiple agencies have called us who want to work together.
Individual agencies also call us to see whether a VIA is a solution for their specific situations. We’ll organize a meeting of agents within the geographic area who have similar qualifications and problems who could use the same solution and then we introduce the concept. Once the concept is introduced, we analyze each individual agency to make sure there is common culture, common underwriting behavior. This is key to the VIA being successful. We don’t want to be bringing in an agency because it desperately needs the others to survive, as it can’t find markets on its own. This is not a bailout for failing agencies. This is a way for good, strong but smaller agencies to come together and remain intact within the independent agency system through this type of organizational change.
“Typically a VIA begins with 5 and 10 agencies and through the course of the years it expands, because other fellow agents see what they’re doing and ask to come into the VIA. Each is entertained based on the culture and whether it’s a good fit for VIA. We have created VIAs from two to 140 agencies.”
If you’re interested about the benefits a VIA can offer your agency, you can contact Al at: 800-779-2430 or via email at email@example.com. You can also visit www.agencyconsulting.com for more information.