If You Want The Sweetest Music You Need To Pay The Piper

When we put our Composite Group Issue together last year it was put to print before 9/11. While the Issue was released in October, our comments pointed to the fact that insurance companies were reacting to the hardening market exactly as they had fifteen years earlier and throughout their historical hard/soft market cycles during the 20th Century. The market cycle had become so long that a whole new set of underwriters were panicking and over-reacting to the market by shutting down capacity instead of gradually increasing their pricing to regain underwriting profits in a manner that returned them to profit conditions while not shutting down markets for the insurance buying public and their agency force.

Then 9/11 occurred. We won’t rehash the obvious. The reaction was as terrible as we could have imagined, both in human and emotional cost and in industry cost. The reinsurance market dried up. Property insurance, already experiencing increased rates and restricted availability, shut down completely in some sectors and required restrictions and coverage that were never considered before.

A year later we are recovering from the debacle. The insurance industry will recover. But it will take some time. The conditions that caused the markets to harden in the early part of 2001 accelerated like a roller coaster in the months after 9/11. We are just now sorting out the survivors and recovering the financing that is required to once again permit businesses to insure themselves and carriers to make money providing that coverage.

Now the good news.

While this has been happening and the agents throughout the US have been scurrying to maintain coverage for their clients and to achieve coverage for a heavy flow of prospects seeking new agents, pricing has been increasing, insurance continues to be sold (yes, with restrictions and deductibles) and professional agents who do not sell price have been reaping the benefits.

If you compare our 2001 and 2002 Composite Groups, it appears that Group 1 has grown by 8.6%, Group 2 by 5%, Group 3 by 6.6% and Group 4 by 5.3%. However, we have always been paranoid about guaranteeing the privacy of our respondents. We do not keep any identifier of agency so we do not know if the same agencies respond from one year to the next. These are not “controlled” groups. So we polled the few hundred agencies with whom we have direct relationships and

have found that they have grown by double-digits in every size group. Growth in our related agencies has been from a low of 7.7% to a high of 20.3% with an average of 14.1%. This growth represents strong retention and strong new business.

For those of you who have not yet begun accurate retention calculations, the formula is:



This formula acts on four conditions: commission retention, premium retention, customer retention and policy retention. The pairs (commission/premium and customer/policy) are meaningful comparisons with one another to ‘red flag’ issues in an agency. The formula takes all increases and losses into account when determining retention. Another way of looking at retention is the example of an agency with $1 million in commissions at the end of the year that does not write ANY new business in the next year. Calculating everything that affects the $1 Million during the subsequent year realizes a true retention percentage.

Using this concept, it is not unusual in a hard market to achieve 110% or 120% retention based on rate increases and your ability to maintain your clients. This is what we encountered when polling our agency friends this year. We found from a minimum of 93% to a maximum of 128% retention of commissions.

And this hard market is far from over.

The results of the combination of 15 years of suppressed premiums combined with the insurance losses of 9/11 suffered by the reinsurance communities and the on-going depression of the stock market will elongate the projected hard market from a turn in 2004 to at least 2005. That’s not bad news! This means that the agencies who have close relationships with their carriers (strong volume, good loss ratios and good personal relationships) will still be able to write new business (granted, at higher rates and, perhaps, more restricted coverage). Everyone will be interested in entertaining your review of their insurance in the next year because they are being told by their agents

to expect less for more at renewal. If your clients are well controlled, you will be able to retain them (also at higher rates), meaning strong growth and strong profits for a number of years to come.

On the other hand, if you have had a contentious relationship with your underwriters, you will find that relationship deteriorating as their home offices force them to pick a few agencies with whom to do business (those who are viewed as long-term relationship potentials). If your volume has been deteriorating or flat (especially if you have annually re-committed to growth) or your loss ratio has been higher than the carrier’s office average, you will probably not be able to either retain clients or write much new business. Insurance companies are definitely picking their partners (the ones for whom they will provide markets today and who will be with them I the future).

We predict another round of acquisitions as the markets dry up and agencies find that they can only succeed in the market by forming business combinations. We have seen a resurgence in inquiries about the Virtual Insurance Agency (the mega-merger that permits small agents to retain their independence as a part of a large, participant-owned agency corporation) and a continuation of merger and acquisition activities.


We’d like to thank the many agencies supplying data to Agency Consulting Group, Inc.’s Composite Group database through our Benchmarking Program. We have committed to continue providing this service to the industry at no charge as a pay-back for the support of the agencies and Associations to Agency Consulting Group, Inc. over the past 17 years. And automation and the internet has made it possible to collect data more easily and to provide the Quick Analysis that so many agents have requested even more reasonable – all while still GUARANTEEING your confidentiality. We do not maintain ANY agency identifiers within our database.

Here’s how benchmarking and the Composite Groups are changing.

Many Associations and private groups have requested more specific Composite Groups that the generic groups reflected by size regardless of their geographic area. So we have offered them the ability to create State Composite Groups (for Association groups) at NO COST by an association sponsoring the collection of data. No, they will never see your data. If your association elects to participate, you, as a member, will have a unique password that will permit you to enter your information into your Association’s State Composite Group database. If you desire a Quick Analysis returned to you by return e-mail, that service will be provided for a very nominal fee. Only those agency association members who have participated by providing their data will be given access to the specialized state database (to add incentive for agents to supply their data). Of course these databases will also be combined into the massive Agency Consulting Group, Inc. National Composite Group Database that already numbers several thousand agencies. We are adding a “prior year” category to permit us to begin reporting growth trends of both revenues and expenses. We are also providing a Balance Sheet Input Form to permit us to provide you average Liquidity Ratios.

Every year, Agency Consulting Group, Inc. brings its clients and agency friends new products and services to help better manage their businesses. Please tell your Association Presidents and Executives about this service to add value to their membership and to provide needed benchmarking data to the industry. See Benchmarking and all of our other services at