Clustering and The Virtual Insurance Agency

Every year, Agency Consulting Group, Inc receives calls from agents looking to informally cluster with one or more other agents for a variety of reasons. The primary reason agents cluster is to share markets. Agents have known for years that carriers are not excited about brokering business from outside the insurance agency. The companies presume that if you are brokering business for another agent it is because the originating agent lacks a market that will accept that business. The companies you work with know and trust your underwriting judgment, but they are less trusting of the underwriting of an agent who has no carrier relationship with them.

A cluster is a form of organization that openly recognizes the agents who will be permitted to place business with the cooperating insurance companies. For carriers, this is marginally preferable to the invisible brokering of business from agent to agent. The company has the option of investigating and processing each agency in the Cluster to assure that the agents’ historical business quality is strong enough to be entertained in a business relationship. Agents in a cluster may be able to provide a carrier a sufficient volume of business by clustering while the individual agents would not be able to provide the same volume to satisfy the company.

In an environment in which the carriers desire stronger growth, a cluster is a viable answer. However, the agents within the cluster risk disapproval by the carriers if the carrier becomes restricted or if the loss ratio of the cluster sours. The primary feature of a cluster is that it is temporary. The agents within the cluster might jointly “own” the cluster as a separate entity, but they maintain the separate integrity of each of their agencies. From the insurance companies’ prospective, each agency should remain separate because the cluster owners do not have sufficient trust or relationships to make the business combination permanent. The agents feel they can always go back to doing business as a separate insurance agency with their licensed carriers.

The owners of a marketing cluster believe that all they need to prosper is access to the markets in the other cluster owners’ possession. Each maintains a bookkeeper or accounting department. Each maintains an agency management system. Each handles customer service with his individual service staff. Each continues to write new business through active marketing or through passive referrals. But, one common change is that they become more reluctant to compete, or they stop competing completely, with the other cluster agents.

Maturing clusters eventually realize that combining administrative efforts, systems, management and service can make them more money than the availability of common markets. When this occurs the cluster becomes more complex, and it becomes more difficult to break it apart. However, the question arises, “Why are we organized to protect ourselves from a break-up more than to enhance the productivity and profitability of the insurance business for our owners?”

Maturing Clusters

When the owners of a cluster realize that one accounting department with a few people can manage what five or ten bookkeepers manage individually, and they can do it for much less cost, then it becomes a natural event to convert this function to a central function of the cluster managed by the best financial manager in the group. The cost of the accounting function is distributed among the cluster agencies, and this saves money for every agent. Unfortunately, we often reach this point when one or more bookkeepers leave. The functional combination appears to be a way to avoid new hires. Human nature dictates that necessity, more than opportunity, results in organizational maturity and change.

Similarly, the cluster members find that one agent is more attuned to marketing submissions to the carriers than others. They yield that task to that agent and share revenues from their successes with him. A central marketing function has been born.

The advent of Personal Lines Centers, Commercial Service Centers and Life and Health Centers in clusters has arisen as another way to play to the strengths of some cluster members over others while permitting all members to continue to write all lines, even if they are not individually staffed to service all lines.

As the cluster matures you can actually see the lines between agencies blurring. When the cluster agents help each other or take over certain roles, the cluster revenue stream loses its simplicity. One agent may form the relationship with a client, but another may lend marketing support. Still another may be the service hub for the client, and even another location might support the accounting for the client in question.

The Virtual Insurance Agency (VIA)

The VIA takes a maturing cluster to its logical conclusion, a mega-merger of all of the agencies into one corporate entity with several owners based on the values of each owner’s business as it converts into the VIA.

The key to the VIA is that each participating agency becomes a profit center for the generation and retention of a book of business. The owner responsible for that profit center earns their income from the success of that profit center. The owners responsible for each location are the stockholders of the VIA. The agents trade their agencies for stock in the VIA.

Many VIA’s begin as a central market facility. All carrier appointments become appointments of the cluster. Profit Center managers may still have their preferred markets, but they are now legitimately appointed with all carriers. The VIA uses the power of this business combination because it is far stronger than having common markets.

Revenue growth is the goal of each of the VIA owners. Their revenue growth results in greater income for them as Profit Center Managers. However, the expense reduction that results from centralized and specialized agency functions often generates more profit for each of the owners than through revenue growth. Professionally managed service centers cost less and are far more productive than supporting a full service and administrative staff at each agency. The administration and service functions of the VIA are centralized and centrally managed as is its automation and administrative functions.


Many mature clusters end up merging as the owners realize the economies of scale they can achieve. The owners’ roles are diluted, and they essentially become producers. The owners get paid for their books of business and enjoy a piece of the excess profits from the combined agency every year.

The VIA is established to maintain each office as an owner’s location and as a profit center for the organization. Each owner is responsible for their profit center and earns income from the production and profitability of their specific profit center.

If you have a group of agents who wish to cluster, who are informally clustered and would like to mature into the next level of organization or would like to consider a VIA, please call us at (800) 779-2430. We will visit you to meet with the entire group and identify your priorities as well as which form of organization would best suit the short term and long term goals of the owners.