Every year some insurance producers leave their employer agencies for “greener pastures.” This is normal and natural and bears no negative reflection on either the producer or on the employer. Although many times the departure is less than friendly. Whether the producer feels (s)he can earn more money, get better support, enjoy better benefits or any other number of reasons, nothing stops them from moving to another employer to earn a living producing new insurance clients for the new agency/employer.
The difficulties arise when the producer believes that (s)he has the right to take clients from the former employer to the new employer without the former employer’s agreement.
A Matter of Employment
First we need to cover the subject of employment. Whether a producer is paid a salary, a commission or a draw is of no consequence to either employment status or to ownership of the ensuing business. An insurance producer may be an employee or an independent contractor, but the differentiation is not dependent upon whether the employer chooses to pay the producer on a W-2 or on a 1099. That specifically addresses the issue of payroll tax allocation and benefits distribution. The key to whether the producer is an employee or an independent contractor is whether the producer works only for the specific employer or can (and does) place insurance business with a variety of agencies or brokerages or general agencies – at the discretion of the producer.
In other words, if a producer only works for the agency in which he has a desk or office, to which he comes to and from work every day, for which he carries a business card, whose marketing gets him/her leads, whose insurance company contracts the producer uses for quoting and placing business – that producer is considered an employee of the agency and, barring specifically granted ownership rights, the producer’s generated business belongs to the agency.
Why is this important?
Agency Value Related to Book of Business Ownership
The value of most insurance agencies is primarily comprised of the value of their books of business (the continuing revenue flow of its clients). If every producer could simply walk away and transfer the insurance clients to another agency at will, there would be virtually no value to any produced insurance accounts in an agency. The departure of books of business would not necessarily result in the loss of administrative employees, facilities, automation costs, marketing and advertising costs and other overhead. This would diminish profit potential, the core of value, much more than just the diminishment of top-line revenue.
Roles and Control of Clients
Most insurance agency clients are attracted to the agency because of the quality of the front-line producers that form the relationship between the client and the agency. However, that producer creates the link between the insurance buyer and the agency in a sales capacity. The agency acts as the administrator, servicer and advisor of coverage and supplies the carriers that license the agency to provide their products to the public. Once the insurance products are provided, the producer moves on to introduce the agency and its products to other prospects and the rest of the agency staff and insurance companies provide the on-going service and administration to the client. Often the producer remains a part of the relationship between the agency and the client but rarely the only (or even the primary) relationship. But regardless of the importance of the relationship the death or loss of a producer without other reasons or enticement would rarely lead to the loss of that producer’s clients. The insurance client values consistency and the carrier relationship far too much to simply move because a producer is no longer at the agency.
Insurance agencies have historically employed three types of employees, administrative, service and production. The agency represents the ‘mother ship’ for its employees to provide products and service to its clients. The agency holds the contracts for products with the insurance companies. It provides and maintains the database agency management system that permits the staff to register, administer, change and renew insurance products for its clients through the insurance companies. It provides the product training for its employees and the claims support on behalf of its licensed companies. It provides marketing support to market and price both new and renewal accounts for delivery to the clients. It provides and pays staff for all of the agency’s day-to-day services to its clients.
While both service and production employees are responsive to client needs, the production employees have primary responsibilities for the sale of insurance products to agency prospects and the establishment and management of strong relationships on behalf of the agency with its clients. Internal contacts with the service staff and external contacts with the production employees combine to retain clients for the agency. Even when a member of the production staff leave an agency, the agency maintains the responsibility for managing the on-going and continuing client relationships by using other production staff.
Non-Piracy and Non-Compete Protection
Agencies differ in the number of contracts they have with different varieties of insurance carriers and involving different product lines and different pricing structure. The movement of a producer from one agency to another shouldn’t interrupt the service and insurance coverage provided to the clients by either agency. The departure of a producer from one agency to another doesn’t prohibit or forbid him from pursuing his career by soliciting and forming relationships with new prospects through a new agency employer. The movement of a part of an agency’s client base by a producer to a new employer disrupts the original agency (and sometimes the insurance company) relationships with its clients, for which the producer has been compensated every year to maintain on behalf of the original employer-agency. The producer was compensated annually to maintain confidential information about the clients on behalf of the original employer. A non-competition period of between two and three years is common practice during which the agency is expected to convert the personal relationship of the agency with the clients using other production personnel. Because of the creation of confidential information about the clients during the producer’s tenure, the prior employee is prohibited from accepting conversion of the insurance products from the clients with whom she/he was paid to maintain strong relationships with his/her prior employer. At the conclusion of that period it is assumed that the “playing field” has been leveled and any information generated by the former agency producer for his new employer is fresh and created without benefit of previously generated confidential information, so the prohibition against the former employee competing for the agency’s clients is ended.
While Non-Competition refers to the confidentiality of information about clients for which the producer had direct sales relationships, Non-Piracy refers to the protection of the agency’s other insurance accounts for which the producer may not have had direct relationships but about whom the producer may have had access to information confidential between the agency and the clients.
Insurance agencies must protect their only asset, their books of business. Without that protection, they will make a living for the agency owner but not provide the owner with a retirement benefit in the sale of the asset, itself. Too many agencies play freely with “ownership” rights to parts of their books of business. However, the value associated with those books of business relate to the profit and earnings that are derived from that business, not simply from the revenues associated with that business. You may give away or sell parts of the books of business, but it is harder to separate and diminish the relative expenses that would still be incurred even without the client base that supported those expenses.
If you have producers, make sure they understand (and sign an agreement) that provides that the book of business belongs to the agency and that their compensation is their benefit for their work effort.
If you choose to make any producers your successors, don’t give or sell them parts of their own books of business (if you do, be prepared for them to care more for their clients than yours). Incent them through the potential ownership of the agency. Provide minority ownership rights to stock as they prove more valuable to you. Sell them more stock or rights to the stock as your perpetuators. Do NOT sell them rights to parts or all of “their” books of business. If you do, you immediately acknowledge that the books of business could be “theirs”, not yours. Our contention for continued value in insurance agencies is that the books of business generated in any way in the agency forms the basis of value of the agency asset that will eventually be your retirement value.