Uncaptive Agency: The Future of Insurance, Ep. 14

Historically, insurance carriers have been driven by their loss ratio, but the trend recently has been towards managing expense ratios. Each carrier handles it differently, but some may cut down on commissions if agencies do not step up.

Insurance companies are using data in a more sophisticated way than ever, and agencies will have to step up their technology adoption, lower costs and produce better quality submissions and higher hit ratios to stay in a position to negotiate with carriers. 

Join me as I discuss carrier-agency relationships and management of expenses with Chris Burand, CEO of Burand & Associates.

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Tony Caldwell:

Hi, everybody. It's Tony Caldwell. And welcome to another episode of the Uncaptive Agency: The Future of Insurance, where we're talking about what is the insurance agency system and the insurance distribution business look like over the next three to five years? And today, I'm really excited to have, as my guest, Chris Burand. Chris is present CEO, Burand & Associates. And almost everybody in the industry knows Chris because he's a prolific author, writing a monthly column for the insurance journal and many others, and is spoken widely across the industry.

Chris works in a variety of areas in the business, including marketing and selling advice and consulting. But he also does a lot of work in the acquisitions and valuation space, as well as something that is really useful to agents that most don't think about, which is how to negotiate contingency agreements. So, Chris also works really deeply in the financial side of the business and probably understands insurance companies and their performance, their lack of performance or capabilities, and issues better than anyone else I've ever had the privilege to know or read.

So, Chris, welcome. Glad to have you this morning.

Chris Burand:

Thank you, Tony. Thanks for those kind words. Appreciate it.

Tony Caldwell:

You bet. So, you've been observing the industry and working closely in it now for three decades. And from your perspective with all the things that you do and the involvement that you have, where do you see in general terms the business going? Are we going to be steady as she goes similar to what we've been doing the last a hundred years, or are there profound changes coming?

Chris Burand:

The changes are pretty profound. Tony.

Tony Caldwell:

Tell us. I'm sorry. So, give me some idea of what you think the big ones are.

Chris Burand:

Yeah. So, historically, carriers have been driven by loss ratios. They always have to get a loss ratio to a certain number. But the driver today and the driver over the next three to five years is their expense ratio. And that expense ratio is it is driving their decisions, and is driving their decisions, and it is driving their decisions.

And at the distribution level, agency level, they don't get that. If agents and their umbrella organizations do not get that, the conflict, the friction levels are too high.

Tony Caldwell:

What do you mean by that? What do you mean the friction levels?

Chris Burand:

Well, the carriers are pretty much looking at this as life and death. They have to get that expense ratio down to a certain level, or they don't have a future. At the same time, a lot of agents and a lot of distributors out there are pushing the expense ratios higher in a variety of ways. But a lot of times, it has to do with, they combine this way or that way, or they're buying up a bunch of agencies. They demand extra services, extra compensation, extra whatever, but they're not delivering anything back to the carriers.

Carriers are looking at it going, "Okay, our expense ratio is going up and up and up. We're kind of trapped. We don't really have anything coming out of it, but if we don't decrease our expenses, we're dead." The friction level right there is pretty intense.

Tony Caldwell:

Yeah. I'm privileged to serve on an agency council for one of the larger commercial insurers. And we've had some pretty frank conversations along those same lines. And part of my reaction to that has been that it's easy to cut compensation for agents. I mean, that's one of the places that carriers always go to when they've got an expense problem and you're seeing some of that already. But to your point, it almost seems that no one wants to go first because they know they're going to take it in the market share backside pretty quickly.

But obviously, agent compensation is not the only place that carriers can reduce expenses, but how do you see that if you could just tell me?

Chris Burand:

So, I just studied pretty deeply. I've studied it really deeply and it's pretty interesting. It's not the commission rate that's the driver.

Tony Caldwell:

Okay.

Chris Burand:

It really isn't. It's the overall expense rate that's the driver. So, there are some companies out there that actually pay pretty high commissions, but they manage themselves internally so tight that their expenses overall are still lower than normal than average. So, they figured it out that way. Then there are other carriers who maybe their internal drivers or internal expenses aren't really under control, so they don't have a choice, but to cut expenses. So, the solution is going to vary from one carrier to another, but it's not just about commission rates by any means.

Tony Caldwell:

Okay. Yeah. I see that as well. And that's really interesting because obviously, if one carrier takes one approach, another carrier takes a different approach, what that means for the agent and agency owners confusion because you now have to deal with each company individually. I was just reading an analysis of the recently completed elections. And one of the things that everyone's talking about is what happened to the Latino vote, which was different than what everyone expected.

Tony Caldwell:

And this observer made the point that what politicians are going to have to learn to do in the future is understand who they're talking to better. And that there's not a “Latino vote” - there's about eight or 10 different subsets inside that Latino vote. And every one of them has a different set of needs and interests and is as susceptible to different political messaging. So, it's the same thing with insurance companies. It sounds like.

Chris Burand:

It is. It very much is. I consult with carriers as well.

Tony Caldwell:

Right.

Chris Burand:

And so, I'm working with a carrier that hasn't updated their IT adequately. Their situation is quite different than the carrier that has already 100% completed. They updated their IT systems. Their expense ratios are materially different on a go-forward basis. So, every carrier is different. One of the best piece of advice I can give agents is don't treat all carriers the same. Each carrier is unique. Understand that carrier and work with them relative to their strengths and weaknesses. Don't you mistake them.

Tony Caldwell:

I had a recent conversation with a Senior Vice President for Hartford that runs their small business. And talking about a similar subject, he said that because I asked him, how are insurance companies going to evaluate insurance agents in the future? How will that change? And one of the things he said really falls right in line with what you're saying, which is that carriers, and by that I presume he means Hartford in particular, will be looking at agents in terms of what it costs to do business with that agent. And the big driver of that will be how well, or if at all agents use the technology that the carrier is providing.

And so, behind that lies some frustration around agents insisting on doing business in a way that carriers no longer can afford to do it and refusing to actually use the technology they're providing.

Chris Burand:

Absolutely. Without question, there's three schools that are developing in that sense, I'd say.

Tony Caldwell:

Okay.

Chris Burand:

One school is that there's a handful of carriers that are very intent on doing things the old fashioned way. They've got a model that actually might work as long as a hype doesn't migrate into being a hybrid between old-fashioned almost paper world and high tech. There's a hybrid world that is really in a mess right now when they're trying to do some things the old way and some things the new way. The expense ratio on that is through the roof.

Then you've got the carriers that are really advanced and they've got their technology down. Agents need to use their technology to help them continue. Otherwise, it's just two heads biting like this. It's not going to work out.

Tony Caldwell:

You mentioned consolidation on the distribution side as insurance agents continue to bite each other up and particularly the larger getting really large and making demands. So, do you find that the larger agents are less likely to accommodate carriers? Where's the pain point for carriers? Is it the big guys or is it the little people?

Chris Burand:

It's really a combination. On the big side, one of the publicly traded carriers put in their tin game this year. One of the threats to our entire business model is aggregation of distributors buying other distributors. I'm paraphrasing what the 10K stated, but the 10K stated we are concerned that they will get show big, that they can make demands of us that we can't afford. Now, it's pretty prominent to put it into a 10K.

So, there's that part of it for sure. But then you've got the other part where you have shops that just won't use technology and the carrier, some of the better carriers are starting to measure behind the scenes. I haven't seen them actually provide the results to agents yet, but the better carriers have it. And they're measuring things like what the hit ratio is, or is the agent just shopping every account to every carrier, every time? That's way too expensive for carriers.

Tony Caldwell:

Right.

Chris Burand:

They're looking at submission quality. National carrier has introduced into their contingency contractor, clause that states that if we determined that the quality of your submissions is sub par, we have the unilateral right to cut your contingencies.

Tony Caldwell:

Wow.

Chris Burand:

They're measuring this stuff.

Tony Caldwell:

Wow. I have not seen that yet. That's interesting. I mean, about five years ago, we had a presentation by some data analytics folks for one of the top 10 carriers around our book of business. And so, we're a master agency for strategic insurance agents alliance - that master agency alone has 185 agencies. And we have agencies of all different sizes and across a big geography.

Five years ago, we weren't quite as large, but still had a pretty good sized book of business with this carrier. I want to say we were looking at personal lines. It was about a $25 million book of business with maybe a hundred points of distribution. And what they were able to do five years ago was really fascinating because they could tell us based on things like submission rate, retention rates, the loss ratio, the book of business mix, and a variety of other factors, a lot about every one of those distribution points in terms of what they expected to see for the next three to five years in terms of overall volume, growth, retention rate, and profitability.

And based on that, then we had conversations with a number of those folks about whether they wanted to continue to do business with them or not, not because they were underperforming at that moment, but because of what they expected the under-performance to be over the next three or four years. They had similar conversations, they said, with other organizations around the country, most of whom didn't appreciate it very much. I was fascinated by that. And it just told me that, okay, there's a coming day in which the data sophistication, the ability to not just gather the data, but to analyze it and draw conclusions from it is going to be at a level that we can't even imagine today.

I guess what you're saying is actually coming to pass or coming in quickly to pass on a much broader basis right now.

Chris Burand:

Yeah. I think one of the biggest cultural changes from agents' perspective is that most agents that have been in the business more than 10 years, grew up thinking that one of their jobs was to manage loss ratios for their carriers.

Tony Caldwell:

All right.

Chris Burand:

Right? The cultural shift is that's really not the job of the agent any longer within reason. The job is to bring something to the table that enables the carrier top rate and a lower expense ratio. Most of the carriers with whom I'm working are pretty straight forward, "If distributors can decrease our expense ratio enough, we're willing to share some of the extra gains, but we need a net decrease." So, there's a real opportunity from that perspective, but that's the focus.

Tony Caldwell:

So, this fits in with a column that you wrote, I think last year in the Insurance Journal where you made the point that direct writing companies, I don't mean direct writers but Geico and the progressive people that direct response carriers. We're getting much better results than agency force carriers to their bottom line. Not just because they were cutting out agent commissions, which is a significant expense item obviously, but their underwriting results were better without agents than carriers were experiencing with agents, which you made the point that really undermines one of the agents traditional calling cards, which is that, "Hey, we wrote a good book of business for you. We do it better than you could do it yourself because of our field underwriting expertise."

And really your point was it doesn't exist anymore or isn't existing. So, if that's not the case, and that just fits right in with the loss ratio points you're making today, what are the levers that agents need to pull in order to lower expense ratios for their carriers? What are the things that carriers in particular are looking aside from using their systems?

Chris Burand:

Yeah. Using their systems is big, but really very basically where we have perfect alignment between the carriers and the agencies is higher hit ratios and better quality submissions. Agents that have better hit ratios, better quality submissions, they make more money. They have a higher growth rate too. And the carriers with whom they really focus their business, they end up with higher growth rates and a lower expense rate as well. So, we have perfect alignment right there. And those are simple to address. We don't have to buy a bunch of technology. We just have to have a more disciplined approach.

Tony Caldwell:

With that in mind, let's shift our conversation to talk about operations of agencies because this is a protracted endemic problem that we've seen for many, many years, around 15, 20 years ago, when you got particularly in personal insurance, when the multi-company rating systems came out, and then you began to have a big movement of direct writers, former direct writers into the independent agency ranks. And at the same time, the direct writing companies began to really not be as fond of writing personal insurance as they used to be.

So, there was an increase in market share coming into the independent agency channel. But all of that market share growth was predicated on price competition, not based on putting the business in the right places. And so, we now see that we have a whole generation of insurance agents, and it's made its way into small commercial, for sure if not in the middle market, who are really price focused, as opposed to some other marketing value base for their company or for their customers and clients.

So, it seems like what has to happen for agents to get aligned with insurance companies is they've got to break a generations worth of bad habits. How do they do that?

Chris Burand:

That's an awesome, awesome, awesome question. How do you break bad habits is starts with the leadership. The leadership of the organization has to instill, this is the way we're going to do it going forward, and then have the discipline to force people to follow their lead. Otherwise, as you well know, it's not going to work. Producers will do what producers do, account managers will do our account managers do.

I'm having quite a bit of success with it. Some of my clients right now who have leadership and they've instilled that discipline and it's the funniest, absolutely the funniest thing in the world that happens. They will have success, or certain producers will start having success. Their sales will go up, the quality of relationship that they have with their clients increases dramatically. And then, they will go, "Wow. This works. Okay."

Having the leadership is being intuitive enough to see it through long enough to see that it works.

Tony Caldwell:

All right. Yeah. All change requires courage. And so, that really is the fundamental here is making a commitment, as you said, and then having the courage to see it through. One of the things I wonder about in the agencies that you've worked with, do they also use compensation as a lever themselves? So, my observation is that in most smaller agencies, let's say under a million dollars of revenue for certain that those agencies overpay their producers. They pay more than they should. And when you look at the comparison to say larger agencies who figured this out, it's very obvious.

But one of the things technology lets an agent do today is pay different commission rates by carrier line of business or any other metric they want to set into their system. So, are your clients changing up with the carrot and stick on commission rates to reinforce that behavior? Or are they just doing it through having pep talks every week?

Chris Burand:

No, it's disciplined. The simplest way to do it for any agency out there regardless of size, regardless of IT system is to insert a clause in their producer contract that says, "If you don't follow our procedures, you don't get paid."

Tony Caldwell:

Okay.

Chris Burand:

Very basic, easy to monitor, easy to manage.

Tony Caldwell:

Okay. And I guess you do the same thing in customer service agents or customer service representatives contracts as well because often they're the ones making those decisions, not the producer.

Chris Burand:

Right. It's a little bit more difficult there because of our labor law perspectives. It's a lot more challenging honestly, but there's other ways of doing it there for sure. The other thing though, that you're bringing up that I like to insert here, Tony, is the use of agency management systems. Agencies regardless of what agency management system they use are not making use of the full capabilities of these systems.

Tony Caldwell:

All right.

Chris Burand:

They are leaving money on the table because they don't do it. They are leaving opportunity on the table and they're increasing their internal expenses by not using those systems really well. And that goes for big agencies and small.

Tony Caldwell:

Yeah. I'm actually working on an article right now for another magazine on that very point. And my working thesis is that agents that don't master their agency management system within the next five years won't be in business.

Chris Burand:

I totally agree. This industry has gotten away with not using their systems very well forever, but there's not that room. There's not the wiggle room left anymore from not only an expense perspective, but I did a ENO podcast last week. I think it's going to be released today on the wave of ENO that's expected out of COVID also because of a lot of the direct writers that have come into the independent agency space.

Tony Caldwell:

ALL right.

Chris Burand:

They don't know and they don't understand that the standard of care is so much higher for ENO purposes. And if you're not using your systems well, it makes it really hard to defend yourself in Oakland.

Tony Caldwell:

Yeah. I think this is an opportunity for a clarion call to the professionalism in the industry that I think is not being made and certainly not being heated. And it's not just the direct writers, it's not just the new person lines producer here. I worked on another fall piece a while back about how we really failed the national economy with the way we've sold business interruption coverage.

I mean, the fact that there were so many people who were genuinely surprised that they had no coverage for COVID is an indictment of agents because it's very clear that it was an issue before. That's why there was an ISO exclusion for viruses and bacteria that was created because this is a previous problem that had already residents had one other time. So, why weren't agents talking about it?

I think it's because most agents or let me say it like this, many agents don't even understand how business interruption coverage works in themselves. They don't really pay a lot of attention to the forms. Again, if you're selling on price, instead of actually... To me, business eruptions, one of the places that an agent can really distinguish themselves in terms of their ability to serve your client, because there are so many things that you can do with that policy that are different than say the rest of property coverage.

Property coverage, you can pick three different forms and you can maybe make a couple other tweaks. There's not much else you can do selling products for five or six carriers, but with business interruption coverage, there's an unlimited number of ways you can write that policy to serve your client and agents just routinely fail to do the technical professional work.

Chris Burand:

Yeah, totally. In my ENO audits and also I have an educational program at different business for coverages. We find exactly the same thing in that education program when we do business income. Almost nobody understands it. I mean, probably 90% of all the people in both sides do not understand it.

Tony Caldwell:

In fact, I talked to agents for many years. I started my book of business focusing on workers' compensation because that was a pain point for almost everybody that most agents didn't want to mess with. And so, it was an opportunity. And then you go after the rest of the business. I think if I were a new producer starting today, I would go after business interruption because I think I can drive a wedge between every agent and almost every client in America.

Chris Burand:

Yeah. I think you ought to use a wedge concept. Business income is the simplest. You got to know what you're doing. You have got to put the time in to understand what you're doing, but almost every policy out there is written inadequately. I'll tell you another part about this, why it's such a big deal. So, you mentioned earlier on a business appraiser.

So, I have to do continuing ed for a business appraisal world as well as insurance world. The business appraisal world has identified that agents and carriers are not writing business income correctly and potentially not adjusting business income claims correctly, so that the business appraisal world is embarked on an educational program where they're educating hundreds and hundreds of potential expert witnesses for the plaintiff by and large. And these are really smart people. These are accountants, these are attorneys, these are business appraisers. They're learning business income coverage at a far deeper level than producers and agency owners and account managers.

Tony Caldwell:

Wow.

Chris Burand:

I mean, way deeper.

Tony Caldwell:

Yet another threat to insurance agency owners. So, if I can summarize where we are right now, it's that here are the threats coming. Insurance agencies are slicing and dicing their data with greater precision and drawing conclusions from that about who they want to represent them, which threatens agents either from a representational capability point of view or perhaps with income and what they do or don't receive going forward. And then agencies are going to be faced with increasing demands for professionalism going forward, forced on them by third parties.

And obviously, another threat that is ongoing for many agencies and an area that you know a lot about is the threats and opportunities that are coming about because of the continued acquisition of agencies. Two things I was thinking about, one is that I had a recent conversation with someone involved in the business who said that really the big middle of the independent agency system is being hollowed out. So, you've got a lot of agencies getting really huge and again, making these demands of carriers as a consequence of that.

At the same time, you have a lot of new agencies getting started in part because of the problems that the direct writing companies have vis-a-vis the independent agency companies, which are actually driven a lot by their... they have an even bigger cost problem, I think, than independent AC companies. But that's one of the drivers. Another driver is that people are going to work with these big companies because they got bought out. They don't like bureaucracy and starting their own agency.

You wrote an article last year, I think, about insurance companies that really miss the mark. They've been focusing on helping people perpetuate agencies. That was kind of a traditional agency carrier thing, instead of focusing on starting or helping people make the transition to starting their own business. They were missing an opportunity.

So, how do you see both what carriers' demands are right now, which is they've got to cut costs - the hollowing out of the business - because of the consequences of this acquisition boom that's been going on seemingly forever? And then the technology that agents can use to do things like driving wedges that I talked about just a minute ago. So, with all that in mind, what does the business look like five years from now? There's 35,000-ish agencies today. We have 35,000 5 years from now because more got created as they got bought up. Does that slow down this pace of movement from the captive ranks and the independent ranks and the start up of agencies or does it continue pace? And we have 50,000 agencies. I mean, where do you see all that happening?

Chris Burand:

I think the hollowing out is a really good point. There's a hollowing out that's occurred, and I am not sure that the hollow will get built in. I don't see that coming back that middle coming back like it was. I think one of the keys is SIA. Honestly, SIA has done the best job of anybody I know of helping create startup agencies, just a phenomenal job. If you look at just the pure numbers, SIA has been almost a savior in that sense to the industry.

So, as long as SIA has this model and there are some other people trying to copy it, I think that the future is very good for startup agencies. And I think we'll keep seeing startup agencies for all of the different reasons that you listed. And it just seems like every agency that gets bought out, there's one that starts up from scratch. Whatever reasons, it's kind of bizarre in my world.

But what's changed is this is going forward. Even though small agencies are going to have to operate much more efficiently with systems, then the startup agencies from even three, four, five years ago.

Tony Caldwell:

I think-

Chris Burand:

This won't work otherwise. That's the point where I'm not real sure how those agencies are going to go forward. SIA is bringing a lot of great tools to the table for them. Some of them they're trying to do it on their own or with some other organizations. They don't have those tools. I think the friction may just be too much.

Tony Caldwell:

So, what does that mean then that if an agency doesn't start up and doesn't develop the technological sophistication fairly rapidly they just go out of business or they become increasingly marginalized?

Chris Burand:

They're just going to be marginalized. Yeah. I've got some clients that are startups. Man, they use technology better than anybody else. It's not that startups are not affordable or whatever. It's a mindset part and more than anything else. So, I want to make that clear to everybody. It's not a money issue. It's a mindset issue. That's the difference.

Tony Caldwell:

Thank you. So, with this hollowing out that's taken place, obviously, the big acquirers, they looked for five and $10 million revenue shops. Now, they're looking for two and a half million all revenue shops. So, it won't be long before they're buying million dollar revenue shops because they bought everybody else at the upper end. But where is the practical limit from your perspective? So, if you're a 70-year-old insurance agency owner and you've got a $600,000 or $700,000 revenue agency, and you've had a great life, you've raised a family and you've done great things in your community for 35, 40 years, it's time for you to go because you don't want to make all these changes.

Chris Burand:

Right.

Tony Caldwell:

And obviously, there's a huge cohort of those folks in our business because I think all the statistics show that a majority of people are eligible to retire in the next five years. So, if you're that gap, do you wait till the ABC publicly traded or PE backed company gets desperate enough to buy you? Or is there a role to play with local agents binding to? Is it going to keep doing what it's doing right now? Has it changed?

Chris Burand:

Well, if you're 70 and you're starting to think it's time you should sell now, you should. Because if you wait another five years, it's probably not going to work out as well for you on a lot of different levels. So, you should start working that process one way or the other.

If you're 17 years still loving coming to work and you're not slowing down whatsoever, then keep going. But if you're starting to think about slowing down, it really is better. It's going to get tougher and lots of things can start going wrong. It's just better. It really is. That hollowing out part is interesting. There's this, if you want to sell it to somebody local, there's a million local buyers, other agency owners, that will do the deal in a heartbeat for the right agency. I had a call already this morning. That's what they're looking for, so not a problem.

But what's the practical limit was your other part of that question, if I remember, if I heard you correctly. That's like the billion dollar question, nobody knows what the limit right now is for how big private equity can become in the insurance distribution world. There are a lot of rumors out there that certain shops have already become too big and that's become a problem for them. I don't know if the rumors are right or wrong.

One of the things that I think is probably going to happen in 2021 is that I think you're going to see some of the shops, some of these aggregators that have done a lot of buyouts are going to have to get real about actually improving operations and assimilating operations throughout all the agencies that they purchased that they've let just run as they were in the past. That's pretty expensive.

The exposure is really high. Based on what I'm seeing from the third quarter of publicly traded broker calls and some other information. Maybe the pressure to meet the EBITDA in margins is so high now that they can no longer allow the freedom to do whatever they were doing. I feel very strongly that we're going to see some big changes along those lines, and that's going to shrink their ability to buy because a lot of sellers are going to say, "Well, if you're going to force me to do things a certain corporate way or corporate way, I'm not selling to you." I think we're going to see some changes in a lot of different angles in 2021, starting 2021.

Tony Caldwell:

Well, so obviously, the PE players along with, I mean, the public brokers have been arbitrage in their stocks forever to create the money to buy companies. PE guys have come in because they've got a lot of money to deploy, looking for a return. But those private equity companies and hedge funds, I mean, they have a three to five year hold period, anyway. So, looking five years out, you would think typically, that they would be looking to unload all those assets anyway, and we're going to do this all over again.

So, with that in mind, and it's unlikely that interest rates stay this low forever. They may stay low for five years, I don't know. But what do you think the agency evaluation looks like? I mean, right now, we're seeing anywhere from 11. We had an agency transacted 16 in April. So, I mean, it's crazy evaluations if you think about it, nominal terms. Is that going to continue or is it going to fall off of the next three to five years?

Chris Burand:

It goes back to before we began the discussion, and that is just, how are the carriers going to go about cutting their expense ratios? The carriers cut their expense ratios through lower agency compensation, then agencies are worthless. It's really black and white. And it's pretty simple.

Tony Caldwell:

Okay. Regardless of anything else, obviously. Yeah.

Chris Burand:

Yeah. Regardless of anything else. One of the publicly traded brokers vice-president of mergers acquisitions in 2019 made a public statement and I'm going to paraphrase it because I don't remember it exactly. But he said something to the effect of, "We have to continue paying high prices for new agencies so we can afford to pay for the agencies we already bought."

Tony Caldwell:

Yeah. Yeah. A friend of mine is in the M&A side of the business says, "Buyers have to buy." And so, there becomes a cycle. Exactly, right. You've got to keep propping yourself up. And in fact, I think if you look at some of the national stock market trading brokers, that's really been their business model for years, arbitrage their stocks, they can buy the business. And then don't worry about organic growth, but that forces you in a constant cycle of having to acquire. And the inventory is running out. It's like musical chairs.

Chris Burand:

That's what somebody else said was, "This is musical chairs. And I just hope I'm not the last buyer out there." There's one other important point though that's kind of an academic point, but it's really important. One of the reasons that the prices that are being paid are so high right now has to do with change in accounting rules that occurred, I'd like to say, about 10 years ago. I'm not sure exactly when.

Right now, as we're recording this, there is a tremendous, and I mean, very tremendous debate occurring throughout the United States as to whether that accounting rule should be revised or repealed. And there are a lot of really loud voices on both sides of this accounting rule. If that accounting rule is repealed, much less depending on if it's revised in some meaningful way, you may very well see a reduction in agency prices that alone.

Tony Caldwell:

Okay.

Chris Burand:

That is something most people don't know about, but it is a true driver.

Tony Caldwell:

Well, it's just another reason if you're closer to the end of your career than the beginning, and you were thinking that selling you a third party is your exit that maybe, you sooner rather than later, is your timeframe. One other thing that's interesting again, really smart friend in the business, he and I had a conversation earlier in the year about the fact from his perspective prices are not actually as high as they appear to be. They appear to be high on a nominal basis, but he said, "If you go back to 2008, look at 6.5% interest rates compared to 2.5%, 3%. You factor in all the complicated math he was using that really they're about the same.

So, even though there appear to be really high transaction numbers, what the seller ends up with isn't a whole lot different. Do you see it the same way?

Chris Burand:

Not quite. They're elevated numbers right now. And what are the differences in the math goes to the accounting rule that I was talking about. That change in the accounting rule allows for the net income that is shown on the buyer's income statements to be higher, materially higher now. If that accounting rule was changed back to what it was before, you would absolutely, categorically see a decrease in buyers' net income.

Tony Caldwell:

Okay. So, they can't do deals that are accretive to income and value nearly as easily.

Chris Burand:

It's not as easy. And it really has to do a lot with a particular accounting rule.

Tony Caldwell:

So, the future for independent agents is that if you're thinking that three to five years is your horizon the sooner rather than later, but at the same time, I would assume that if there are fewer agents, particularly fewer entrepreneurial agents in a community, this hollowing out, I think hasn't gotten the attention that really deserves because it really represents an enormous opportunity from my perspective for agents that are earlier in the curve of building their careers because when those guys leave, the buyer doesn't keep all the business and there's plenty of opportunities to pick it off.

So, it seemed to me that relatively younger agents actually because they're more technologically savvy, so they're more likely to fit in with carriers' needs regarding costs that you talked about earlier. They're aggressive marketers, and there's a lot of business on the streets because people are retiring and turning over. Not to mention the third fact is that now over half of all businesses in America are owned by millennial or younger business owners. We're aligned with those folks as the older guys are selling and leaving. It seems to me that and if you factor in then one other technology piece, that's really coming to the fore just in the last nine months, which is the rise of Zoom and the ability to make geography irrelevant from the standpoint of marketing selling, and having relationships with people that those three or four factors mean there's a bigger opportunity for young, ambitious, entrepreneurial agency owners that maybe there's been an a generation or so, what do you think?

Chris Burand:

Yeah, I totally agree. And I like to have one other ingredient to that. And that is, in my experience with people that age group, they are more concerned with actually bringing true value to their clients than the generation that came before them. I find, not obviously across the board, but almost across the board, they want to actually learn coverages more so than the prior generation did. They want to get away from that rate or that you mentioned earlier.

Tony Caldwell:

Right.

Chris Burand:

They would really understand the coverages and bring that true value to the clients. And I think that if you're going to feel that hollowed out space, that is the way that has to be done because it's not going to be filled in by selling price.

Tony Caldwell:

Yeah. I totally agree with that. So, let's come back to the carriers and their problems because there was a part of that, that we haven't touched on I'd like to touch on. Carriers have a cost per woman. As you said earlier, the cost problem depends upon their business model or their evolving business model to some degree. But it does seem to me that it's pretty obvious who some of the winners are likely to be and who some of the losers are likely to be, but that there's going to be winners and losers among the carrier ranks because if carriers are struggling today to make money and don't surplus to be able to afford, to simplify and redo their systems.

I mean, I talked to the president of the personal lines division of one of the largest companies in America a couple of years ago. And he was struggling with the fact that he had 300 legacy systems in that part of their business and there were competitors arriving that had one system that was built on business rules and not on COBOL programming. And so, the cost to stay competitive from that perspective is so enormous that a bunch of companies aren't going to be able to make it and so that either forces them to sell or merge, or in some cases go out of business.

So, I'm curious over the next five years or so, do you see the rate of default in the carrier ranks increasing? Do you see the rate of mergers and acquisitions among carriers increasing? And what are the implications for agents in terms of carrier picking them? In other words, you can't do business with everybody, at least not yet. And so, who you pick to partner with has really important long-term repercussions to your agency, I think. So, how do you see all that working out?

Chris Burand:

Yeah. For sure, there's a lot of parts to that. So, one way-

Tony Caldwell:

I have multi-part questions. I'm sorry.

Chris Burand:

So, one of the factors there is, is that one of the ways the carriers are going to beat back aggregators is by buying other carriers and increasing their leverage from that perspective. Categorically, that's going to happen. Number two is that I've talked to a number of smaller carrier CEOs and they all told me the same thing, "What keeps me awake at night is that I can't afford to upgrade my IT systems. And if I can't afford it, I have no future. So, what's plan B?"

I mean, nobody's even brought up to me anything else that keeps them awake at night. That's it? So, we're going to have that. Another factor that builds into it is that we have about 900 PNC carriers in the United States, and I'm not talking about all the companies.

Tony Caldwell:

Right.

Chris Burand:

There's 3,000 of them. But 900 major carriers at the group level and 90 of them write 90% of all the business. So, we have 810 other carriers fighting over 10% of the business. That is a nonsensical industry. That makes no sense to have 810 carriers fighting over 10% of the market. That has no future.

Another factor that's developed in the last 36 months, I'd say is that we have two carriers who combined are writing about $10 billion of net new a year. Put that into perspective, $10 billion in net new between two carriers. There's only about 14 companies out of 1,900 that even have 10 billion.

Tony Caldwell:

Right.

Chris Burand:

So, those two carriers are putting a bunch of other carriers out of business in the sense of it's death by a thousand cuts.

Tony Caldwell:

Right.

Chris Burand:

So, at a distributor level, picking the right partners, especially if you're younger and you're building for the future, it's a really important point you're making, is a critical point that you're making.

Tony Caldwell:

Something like 55 to 60% of all agencies belong to some sort of aggregation group. And then you've been using aggregator to describe the PE funded acquirers and the alphabet houses, but really there's a different meaning to that word in our business, which is the people that began as clusters and then an aggregation of some form of their business model, including SIA, for example. But it seems to me that agents are reacting to this compensation struggle, which is requiting itself and what they get paid to some degree, as well as probably in the back of many agents' minds, "Hey, I need to be sure I'm aligned with the carriers that do survive. And so, I need to be in a bigger boat from that standpoint."

So, agents have continued to join aggregation organizations for that reason, as well as just pure compensation. 20 years ago, there was just other than local groups or work related national groups. But now there's a boatload of those. Lots of people are jumping into that business. There are so many of them, in fact, that they've been challenged in their own business models. And there's been an effort for the last two to three years to aggregate news which tells me that really fundamentally between agents and carriers, it's like a transmission or linkage if you will. But it's got a few loose bolts in it. And that there's in the next three to five years trouble coming for a lot of aggregation organizations because of all the things we've talked about, as well as their members who could become collateral damaged from all of that. So, curious what you think about that part of the business and what happens.

Chris Burand:

Yeah. Some people accused me of playing all sides because I consult with carriers, and aggregators, and consolidators, and regular agencies, right? But it gives me a pretty good picture from the inside, right? And when I work with carriers, they're pretty interesting. They'll say, "Whatever, we're also good in this industry of using the same word for multiple different scenarios like aggregator. We just expect the listeners to know what we mean."

Tony Caldwell:

Right.

Chris Burand:

So, aggregator in the sense of where you put a bunch of agencies together, but you continue to have individual ownership of assets. The carriers will say, "This aggregator brings value because they either bring organic growth or they bring lower distribution costs. Even though we pay them more, they're efficient enough that it cuts our costs." Or they'll say to them about this carrier, "We hate their guts. We would like to see them rot in hell." They're that blunt sometimes with-

Tony Caldwell:

Yeah.

Chris Burand:

And that's because those kinds are not bringing either organic growth or a lower cost. What they're bringing is zero organic growth or worse because the members that are joining are dead in the water agency, anyway. And they're trying to find a place to hide. They're not bringing any value to the table.

Tony Caldwell:

Right.

Chris Burand:

And there's this mindset that carriers need more volume. I've got news for everybody out there and carriers don't need more volume. Nobody needs more volume, especially in the market today. What they need is a higher organic growth rate, but not more volume.

Tony Caldwell:

Right.

Chris Burand:

So, if the aggregator is based on volume, there's not a lot of future there. It's not going to work. If it's based on higher organic growth and or lower distribution costs, that's the future. They will survive. They will win.

Tony Caldwell:

20 something years ago, a buddy of mine told me... we were having a chat about growth. And he said, "I don't care if my top one grows. I only care if my bottom line grows and everybody in my organization is incentivized to do that." Agents though, we have an orientation towards new business, and whether you've measured as premium or commission dollars, everyone's always talking about and carriers measuring you on this new business that you're creating at the top line.

And so, very little focus on the growth of the bottom line, which is really where a business person should put their attention. And so, I think if I could sum up our whole conversation is that carriers are of necessity increasingly going to be focused on the bottom line impact that agents bring to them. And so, it'll be interesting to see how those discussions change and also the information that they provide to agents. Because, frankly, I mean, we're getting ready to start lots of planning discussions over the next month or so.

And I have yet to have a planning session where the carrier even on $50 million books of business, where they talk about, "Here's your bottom line impact. And here's what we want to see happen to that." Now, you talk about the constituent parts, but it's still left your imagination as the agent as to what all that means. So, it does seem to me that greater transparency between carriers and agents is necessary or folks like yourself, who, as you said before, see everybody's underwear are going to get a lot busier because you're going to be helping people understand each other.

Chris Burand:

No, I think that's one of the values that I actually bring to both parties is to help them with that transparency because there's a real reluctance to become more transparent even at the carrier level. Even if the executives see the importance of it, man, that reluctance is probably going to override the decision.

Tony Caldwell:

Yeah. Well, so certainly one thing I'm taking away from our conversation about the future of insurance distribution is that it's like the old song, You May Live in Interesting Times, is that a blessing or a curse? It's probably both depending on who you are, but we're certainly in interesting times, and as we started off the conversation and sure looks like the next three to five years are going to find us in different business really than we're in today.

And so, the secret to success is to be open-minded, nimble and really talking to your partners and being responsive to that if you want to have a future. Or, get out now while the multiples are high and there's lots of people chasing.

Chris Burand:

Yeah. I think those are good words of advice. And I'd like to share... I'm pretty excited about where the industry is. I think right now is just such a phenomenally good time to bring high value to the clients, wind coverages, explained business income. And I think we have a better opportunity than we've had in 20, 30 years to really deliver value to the clients and be paid well in return. I really believe that in my heart.

Tony Caldwell:

Well, you know what? In that sense, your conclusion, if you will, is the same as mine. And interestingly, it's the same as everyone I've spoken to, which is that for independent insurance agency owners and independent insurance agents, the best is in front of us, not behind us. And I'm tremendously excited about that and anxious to see how it all turns out and looking forward to being a part of it. And I know you are as well. Any last thoughts so that we wrap up?

Chris Burand:

No, thank you very much for the opportunity. I was looking over at your book and if anybody hasn't read it, they should. It's a good book.

Tony Caldwell:

Well, I appreciate it. I found in my father's effects when he passed away a book that was titled “Everything he knew about the record business” - he'd been in the record business in the '40s and '50s - by Bill Caldwell. And I was so excited to find that my father had written a book and then I opened it and as I began, all the pages were blank. Somebody had given it to him as a gag gift.

Chris Burand:

Oh.

Tony Caldwell:

But I think that is every book author's greatest fear is that no matter if you fill the book up with words, it has about that much impact. And so, I hope UnCaptive Agent is more useful than that because I'm scared to death that I've written a book that's a sequel to my dad's.

Chris Burand:

I hope people will enjoy it.

Tony Caldwell:

Good. Hey, Chris, I've enjoyed our conversation. Thank you for being with me, and let's do it again.

Chris Burand:

All right. Sounds good, Tony. Thank you.

Tony Caldwell:

All right, take care. I'm talking to independent agency owners about this all the time. If you'd like to have a more personalized conversation, click on the button or the link in the description and we'll make that happen. You can also reach out to me at tonycaldwell.net/contact.