The Future of Commission Clubs: What Insurers Aren’t Telling You

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If the continued practice of paying override commissions to groups of aligned agencies sounds too good to last, there’s a good reason why.
The Future of Commission Clubs: What Insurers Aren’t Telling You

Every agency principal wants to make sound decisions to preserve the business they’ve built – and the best decisions are informed ones.

In a previous post, I described how I’ve long wondered what the actual value proposition of commission clubs is for carriers. How long will carriers continue to pay override commissions to certain agencies that leverage aggregated premium without providing anything in return?

I’ve been bringing this up in my regular conversations with some of the largest insurers in the U.S. that we partner with, and here’s what they’re not telling you.

Several key carriers have been asking the same questions, wondering why the practice of yielding to commission clubs has lasted this long. They’re taking a second look at those arrangements and reassessing those profit-sharing and compensation agreements. The resources carriers allocate to agencies and brokerages are likewise being called up for review, and the pressure on agencies’ production, resources and compensation will likely only increase in years to come.

It would hardly be a surprise if over the next five years, many carriers stop paying enhanced commissions to commission clubs because they aren’t providing any value to the insurer.

The reality of it is – and longtime agency principals know just what I mean when I say this – the partnerships between independent agencies and the carriers they deal with are nowhere nearly as personal as they once were. At one time, agents enjoyed longstanding relationships with the same carrier reps, who understood well the value those agencies brought to the table and would give them some well-earned special consideration when needed. As agencies know full well, those days are either coming to an end or are already gone entirely.

To be sure, agencies are used to demands from their carriers for more production – but this is now a different ballgame. Those insurers’ books are under more scrutiny than ever before as the environment for mergers and acquisitions on a grander scale grows more intense. You don’t need to look much further than the amount of consolidation among the world’s biggest brokers in recent years to see that the war for insurers’ business in 2021 and beyond is very much about scale.

Cashing in

Speaking of M&A, here’s another key reason why commission clubs’ days are numbered: the fact that agency valuations are higher than they’ve been in ages, and there’s a huge amount of M&A going on in the independent agency world at the moment. After having to spend a year or more working from home due to the pandemic, a good many principals have gotten used to seeing more of their families – especially spending time with their grandchildren – and more than a few are thinking of finally retiring and selling their agencies. In a lot of cases, it’s the perfect time for them to do so.

Once one agency in the club gets sold, leverage among the remainder of the group is instantly lost. Say you’re a member of one of these small clubs, in which you have 12 members and two of them sell in a year: When that happens, you’ve literally just lost nearly a fifth of your premium.

However, no one thinks they should sell their business when they’re growing at 10% or 12% or 14%. As I said earlier, deciding your agency’s fate is dependent on how much you want it to grow. And there’s a far better way to achieve that than what you may currently be doing.

In my next post, I’ll explain a concept I like to call “The Virtuous Cycle,” and how you can put it to work and start earning what’s really due to you.

Kevin Callahan
Chairman & CEO
Renaissance Alliance

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About Renaissance Alliance

Renaissance Alliance works with independent property casualty agency owners to grow your premium, maximize your revenue and increase the value of your agency through increased profit sharing, guaranteed override revenue and offloading non-revenue generating activities. The net effect is higher revenue, decreased expenses, improved operational efficiency, and accelerated agency growth.

 

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