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 Big “I” National News

P&C Trends
A Sobering Reversal in Small Business Growth
Independent agencies are diversifying business, focusing on sales to cope with growth challenges.

A recent survey by the National Small Business Association (NSBA) indicates a rough road ahead for the growth of small businesses. Independent agencies are responding to a national downward trend in small business revenue by diversifying their books of business and ramping up sales.

The NSBA survey reveals a complete reversal in business growth between August and December 2008. In August, 48% of small businesses reported revenue increases and 30% cited decreases, while in December those numbers were essentially reversed at 38% and 45%, respectively. Whereas 57% of those surveyed in August expected their businesses to grow in revenue in the next year, only 31% projected growth when asked the same question in December.

Due to the soft market, many independent agencies already experienced revenue challenges prior to last summer and did not see the fluctuation in profits that has affected other small businesses in the last six months. Mark Gandolfo, operations manager of Smithwick & Mariners Insurance, Inc. in Falmouth, Maine, says his agency’s growth outlook has not changed much since August – revenue is still projected to be flat or up only slightly.

“Costs are continuing to rise, and just maintaining the agency puts a damper on profitability,” says Gandolfo. “We are also finding that customers are eliminating some insurance coverage to save on premiums.”

Gandolfo’s agency is responding to growth challenges by stepping up production and relying on its existing customer base. Smithwick & Mariners is a major provider of marine coverage and insures the 475-member Maine Lobstermen’s Association. However, the agency also offers a variety of personal and commercial lines products which it markets to its loyal marine customers as a way to diversify and build business.

Keith Kaetterhenry, president and owner of Baer Insurance Services, LLC in Madison, Wis., also believes a diverse book of business is essential to continued agency growth. His agency is projecting 14% growth in the coming year and saw 11.4% growth in 2008, only slightly below its original goal of 12-13%. Kaetterhenry attributes this success to the wide variety of products offered by his agency.

“You want to be knowledgeable in every area, but if you get your book of business too heavy in one area, you could struggle in today’s market,” Kaetterhenry says.

Both Gandolfo and Kaetterhenry emphasize the importance of a single factor to business growth – hard work. Gandolfo says his agency is constantly on the lookout for the best products and has committed itself to excellent customer service, while Kaetterhenry views prospecting new clients as key to his agency’s success.

“This marketplace requires more activity,” says Kaetterhenry. “We’re always looking to increase revenue, but it’s not going to happen sitting still.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.

L&H Trends
A Frank Conversation about Long-Term Care Insurance
Involving dependent family members can make addressing difficult issues easier.

One of the most difficult aspects of being an insurance professional is educating customers about the financial realities of unfortunate life events. Whether the discussion centers around what happens when an uninsured or underinsured motorist seriously injures you or what kind of standard of living dependents will have in the event of the customer’s premature death, it can sometimes be an awkward issue. However, as financial sales professionals have learned, rather than trying to sell a product, it is better to begin the conversation with, “Have you considered what would happen in the event of your death, disability, etc.?” Quite often the response is a vague answer, such as, “Social Security, or my company life insurance or disability insurance.”

Seasoned financial services producers know that when an individual is unwilling to have an honest discussion about these types of possibilities, it is often useful to have an interested party involved, such as a spouse. Long-term care insurance may be the most important topic in which to include a spouse. First, despite all of the discussion in the media, there are still many people who believe Medicare covers long-term care needs. Second, those who know Medicaid is the government program that provides benefits  may not know the income and asset criteria that must be satisfied in order to qualify for benefits.

In instances where the customer does not want to consider the topic in a meaningful way, it’s important to have his or her spouse there as well as any adult offspring who may one day provide long-term care. The discussion should also include the following statistics:

• About 44.4 million Americans (21% of the adult population) act as caregivers.
• An estimated 17% or 18.5 million households in the U.S. contain at least one caregiver who provides care to someone age 50 or older.
• 83% of caregivers are related to their care recipients.
• A typical caregiver is female (61%) and spends an average of 20 hours or more per week providing care to someone age 50 or older.
• The average age of all care recipients older than 50 is 75.
• More than half of care recipients (55%) live in their own homes.
• More than nine out of 10 care recipients age 50 or older take prescription medication.

A more inclusive conversation with the prospect’s dependents will quite often result in a difficult dynamic and outcome. When money is an issue in purchasing long-term care insurance, the adult children may be quite open to helping to pay for the coverage. When the client has significant means to pay the premium, but is unwilling to, point out that Medicaid will only pay after assets are “spent down” and can also lien the estate at the time of death to recover paid. Many times the adult children may be hoping for some inheritance for the grandchildren’s college expenses.  Having meaningful LTC protection can allow affluent individuals to make lifetime gifts to pay for college expenses.

Independent agents need to have these types of conversations to help their clients achieve meaningful objectives – and they’ll thank you for doing it.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.

Forms & Substance
Insuring Property in Storage
Keep insureds informed about what their homeowners policy covers.

The Big “I” Virtual University’s "Ask an Expert" service recently received the following question about coverage for property in a storage facility:

"Our insured has to place items in a self storage facility for approximately six months while his new home is being built. Does the homeowners policy cover these items or do we need to obtain more specific coverage?" 

As long as there is a homeowners policy in place on the current residence, or a tenant's policy if an apartment, the insured should be OK. Agents should still  review the form, but most homeowners policies cover personal property anywhere in the world. There is typically a limitation on property usually located at another residence, but that doesn't apply to a storage facility.

Subject to certain restrictions, personal property owned or used by an insured is covered worldwide. While often misinterpreted as limiting all off-premises personal property coverage to 10% of the coverage C limit, the HO policy only applies the 10% limit to personal property that is "usually located at an insured’s residence other than the residence premises." That is, for the restriction to apply, the insured must have more than one residence. In addition, the personal property must be "usually located" there. For example, if the insured has a second home, the coverage C on the homeowners policy covering his or her main residence only extends 10% of the coverage C limit to personal property usually kept at the second home. For personal property the insured takes back and forth, the 10% limit would not apply.

The 10% limit would also not apply to personal property that is usually kept at a residence that is not an insured’s residence. Personal property in storage at a friend or family member’s house would not be subject to the 10% limit.

Personal property of college students is subject to the 10% limit, according to most insurance experts. In most cases, the 10% limit under the parents’ homeowners policy is usually sufficient, but coverage can be increased using the HO 04 50 - Increased Limit on Personal Property in Other Residences endorsement (or, the student can purchase an HO-4 policy).

Personal property stored in a mini-warehouse is not subject to the 10% limit under the insured’s coverage C. Again, the 10% limit only applies to "property usually located at an insured’s residence, other than the residence premises." A mini-warehouse is clearly not a residence, thus the 10% limit does not apply to property stored there; full coverage C applies, subject to other restrictions discussed in the full article from which this is excerpted.

While coverage C basically applies to personal property worldwide, there are certain restrictions of coverage, in addition to the 10% limit discussed above. Under "Special Limits of Liability," coverage C is limited for business property. The HO 04 12 - Increased Limits on Business Property endorsement can usually be used to increase the policy special limits, but it does not provide any additional coverage for business property in storage. Under the endorsement, the increase in limits on business property does not apply to "business property in storage..."

The coverage C named peril for theft contains several limitations relevant to certain types of personal property in storage (or otherwise off-premises). For example, insureds who use a mini-warehouse to store watercraft and equipment, or trailers and campers, have no theft coverage for such property. Another limitation exists in valuation if the HO 04 90 - Personal Property Replacement Cost endorsement is added. There is no coverage for "outdated or obsolete" articles that "are stored and not being used."

There are also a number of liability and contractual exposures to consider, so while the homeowners policy provides broad coverage for insureds in most storage-related situations, there are certain specific exposures that are not covered. Agency staff should be aware of potential gaps in coverage and make appropriate recommendations to insureds when handling new and renewal personal lines business.

To read the entire article, click here. 

If you do not know your Big "I" Web site user name and password, e-mail logon@iiaba.net to request your login information.

Mike Edwards (medwards65@aol.com) heads an insurance training firm in Atlanta, Ga.


Agency Management
The Producer Compensation Debate
Experts share insights on how to properly compensate producers.

One of the most common questions the Virtual University’s "Ask an Expert" service receives deals with how much an agency should compensate its producers. Unfortunately, there are probably as many answers as there are agency principals asking this question.

Numerous articles have been written about the subject, but there is still no clear, absolute best way to compensate a producer, nor is there a certain commission appropriate for every agency and every producer. Some agencies don't even operate on a commission basis anymore; instead, they use a salary and bonus, or profit-sharing plan.

The appropriate plan for your agency depends on many variables with seemingly infinite combinations. The following are some suggestions from the VU’s agency management experts, including Chris Burand, Judi Newman, Al Diamond and Howard Candage.

There are no average renewal commissions that should be paid. The average is 35-40% on commercial and 0-20% on personal lines. The split is anything and everything from 70% new/0% renewal to 20%/20% for commercial. For personal lines, the variance is even greater.

The "right" answer depends on the support the producer receives, the kind of business being written, whether the agency or the producer pays expenses, what the producer writes, how much experience the producer has and how big a book the producer has.

Anyone who uses "industry averages" is sure to get the answer wrong, and it is indeed difficult to appraise the value of a producer. The key in commercial lines is that the producer must usually produce at least $200,000 in commissions annually for the agency to break even at any split if the producer is paid more than 33% on renewals.

On average, most agencies pay between 25% and 30% renewal, but this does not usually include personal lines. Personal lines most often involve a one-time payment (either a set amount like a finder’s fee or the first-year commission only). New commission on commercial lines is usually 30% to 40% first-year only.

In small to medium sized agencies typical splits are:

    • Personal lines: 50% new, 25% renewal
    • Small commercial: 40% new, 30% renewal
    • Commercial: 40% new, 30% renewal

This varies by region of the country; however, it is important for agencies to understand that they can only pay what they can afford.

The average spent on producers in the industry is between 30% and 33% of the commission dollar. Some agents pay salaries, some a single commission rate, some split commission with more for new business than for renewal, some pay a base and growth split (e.g., 25% on up to the total commission of the producer last year -- 35% on growth beyond last year's commission).

Some new producers are making 40-50% of their new commission and around 20 or 25% of their renewal. The agency that returns 25% ROI after owner-base compensation and sales compensation is doing a good job, and 30% is even better. That means the agency is losing money on new business and, at 25% on renewals, is giving the producer most of the money made. That being said, the remaining 75% includes producer compensation, so 25% on renewals seems fair if that includes the total compensation package plus benefits. If an agency is paying a salary plus commissions and benefits, it could find itself stretched quite thin.

To read the entire article, click here. 

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.


Agency Management
Strategies to Enhance Agency Performance in 2009
Agencies can improve business by maximizing their resources.

Insurance companies constantly strive to improve by focusing on the right people and developing them to take on multiple responsibilities. In this tough economy, making the most of company resources has become more important than ever. But as each year progresses, it’s easy to fall back into old habits and make poor performance decisions.

In looking ahead to 2009, resolve to focus less on past performance issues and more on how to improve and make the most of what you have. Here are some resolutions to enhance the overall performance of your agency:

1. Make more accurate personnel decisions. In the war for talent, obtaining the best insurance employees is not an easy task. In today’s economy, insurance companies are looking to expand job descriptions and utilize resources to the fullest extent. Ensuring you have the right people capable of taking on that challenge will help you make more cost-effective decisions.

• Determine the competencies and key skills required to do the job effectively.
• Develop a detailed job description that is accepted and agreed upon.
• Create a structured interview process that utilizes an in-depth personality assessment to help you determine whether a person would    fit in with your insurance company’s culture.

2. Build the most productive team. Even if you have productive employees, they may not work together in the most meaningful way. You want to make sure your team members understand each other, learn how to resolve conflicts more constructively and play to their strengths.

• Analyze the personalities of your team and see where potential clashes could occur.
• Participate in team-building exercises and development programs to help your team play to its strengths and work on areas of limitation.
• Engage in conflictresolution techniques.

3. Identify and develop top performers for key positions. Part of being an effective manager is knowing what drives your employees so you can help them reach their full potential. By understanding individuals’ strengths and motivations, you can help create a customized, in-depth developmental plan for your agents, customer service representatives and salespeople.

• Focus on what else your insurance employees can do for your company by looking at their potential and delegating new responsibilities.
• Look within your company for promising agents and representatives who have displayed leadership skills but are currently in other positions.
• Incent top performers and recognize achievements.
• Replace fear with confidence during difficult economic times by serving as a sounding board for employee concerns and helping ease tension within the workplace.

Patrick Sweeney is president of Caliper, a global human resources consulting and assessment firm.