IIABL 2022 September Newsletter

IIABL STAFF

JEFF ALBRIGHT

Chief Executive Officer jalbright@iiabl com (225) 236 1366

BENJAMIN ALBRIGHT

Vice President of Strategic Initiatives balbright@iiabl.com (225) 236 1357

KAREN KUYLEN

Director of Accounting & Finance kkuylen@iiabl com (225) 236 1353

JAMIE NEWCHURCH

Director of Insurance Programs jnewchurch@iiabl.com (225) 236 1350

KATHLEEN O'REGAN

Director of Communications & Events koregan@iiabl.com (225) 236 1360

BRANDI VAN PELT

Insurance Programs Administrator bvanpelt@iiabl.com (225) 236 1358

DUSTIN WAMBSGANS

Agency Consultant dwambsgans@iiabl com (225) 236 1361

LISA YOUNG-CROOKS

Director of Member Relations lyoung@iiabl com (225) 236 1351

RHONDA MARTINEZ RETIRES AFTER 27 YEARS AT IIABL

It is with bittersweet feelings that we announce the retirement of Rhonda Martinez from IIABL after 27 years. We will miss Rhonda and her valuable work with member agents, but we celebrate her plans to enjoy her retirement.

Rhonda worked as a commercial account manager for many years and represented an agency rating provider before joining IIABL as the Director of Insurance Programs. Rhonda handled agent’s professional liability and cyber liability for many IIABL member agencies. She also assisted agents with the personal umbrella program.

We wish Rhonda a healthy and happy retirement and thank her for all her great work at IIABL!

To IIABL Agents:

It is with mixed emotions of joy and sadness that I say goodbye to my insurance friends and family It has been a true pleasure working with each and every one of you throughout my 27 years at IIABL, and I will miss you all I sincerely hope our paths cross again

As I enter the next chapter of my life, I plan to spend time with my family, see more of this beautiful country and relax at our property in Mississippi.

Thanks, Rhonda Martinez Director of Insurance

IIABL’s marketplace report is now available online. For those of you who haven’t seen previous years’ iterations of this valuable report, it delves into the data reported annually to AM Best by carriers. This data, both annual and year to year trends, can inform your business decisions and how you discuss renewals with clients. I encourage you to check out the full report HERE, but below are some of the top line results in the report:

1) Unsurprisingly, any LOB with wind exposure has had extremely poor loss history over the past 2 years.

a) Allied Lines 460% and 655% combined ratio

b) Commercial Multi Peril 290% and 405% combined ratio

c) Fire 301 and 367% combined ratio

2) Insurers are still losing money on both Commercial and personal auto.

3) Total premiums continue to grow the industry continues to experience organic growth.Good news for insurance professionals.

4) State Farm continues to retain dominant market share in personal lines around 27% on both personal auto and Homeowners.

5) Independent agents continue to dominate the commercial lines marketplace. The IA channel in Louisiana is slightly lagging the national average for premium growth in personal lines. This may be an area of opportunity for our member agents.

6) The losses from the hurricanes in 2020 and 2021 have eliminated over a decade of premium earnings for insurers Combined ratio of 294% last year and 457% this year has lead to a 5 year average of 197%

7) Since Hurricane Katrina, Homeowners insurers have netted a loss of $4.5 Billion in Louisiana.

8) If you include the losses they suffered in Hurricane Katrina, insurers have lost over $13 Billion.

9) This is, obviously, the driving factor behind our current market crisis.

ARE YOU READY FOR THE WORK COMP AUDIT?

Confirming Payrolls Used

Workers' compensation policies are generally based on payroll. At the beginning of the policy term payrolls are estimated; when the policy expires, payrolls are confirmed via an audit. I'm sure you already know this, but I needed to provide a basis for this article. There are two questions surrounding the audit that every agent must be able to answer:

What pay (remuneration) is included in the audit; and What pay (remuneration) is excluded from the audit.

Following

to

What Remuneration is INCLUDED in the Audited Payroll?

Wages or salaries including retroactive wages or salaries

Commissions: If the employee is on a draw, and the draw is greater than commissions earned use the entire amount of the draw; Bonuses, included stock bonus plans unless the bonus is awarded for individual invention or discovery;

Overtime: One third of amount is subtracted from the total amount (one half is subtracted if the employee earned double time pay);

Davis Bacon wages or wages from a similar prevailing wage law;

Pay for holidays, vacations, or periods of sickness;

Pay for time not worked (i.e., paid for an 8 hour day when only 7 hours worked);

Pay for travel time to or from work or specific job site;

Employer payments of amounts otherwise required by law (i.e., Statutory insurance, Social Security, etc.);

Contributions to a savings plan or vacation fund required by a union contract;

IRS Qualified Salary Reduction Plan (i.e. 401K) (refers to the employee's contribution and any qualified agreement between the employer and the employee to pay into a retirement plan in lieu of direct wages);

Employee Savings Plans: Only the amount put in by the employee, not the employer's match, (includes contributions to an IRA) if any; Payment on any basis other than time worked such as piecework, incentive plans or profit sharing plans;

Payment or allowance for hand tools or power tools used by hand provided by employees either directly or through a third party and used in their work or operations for the insured;

Car allowance (not a company car, a car allowance);

The rental value of an apartment or house provided for an employee based on comparable accommodations, along with utilities paid by the employer on behalf of the employee;

The value of lodging other than an apartment or house received by employees as part of their pay to the extent shown on the insured's records;

The value of meals received by employees as part of their pay to the extent shown on the insured's record;

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Substitutes for money such as the value of store certificates, merchandise, credits or any other substitute for money received by employees as part of their pay or in lieu of pay; Expense reimbursements to employees to the extent that an employer's records do not substantiate that the expense was incurred as a valid business expense; and

Payment for filming of commercials, but this EXCLUDES subsequent residuals, which are earned by the commercial's participants each time the commercial appears in print or is broadcast.

Basically, what could the employee possibly lose if he or she can't work? That amount is included in the audit.

But more important than knowing what payroll is included is knowing what payroll is excluded; so…

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What remuneration is EXCLUDED from the audit?

Tips & other gratuities (subject to minimum wage exceptions meaning if hourly pay plus tips do not equal minimum wage, the amount to make up the difference is included as remuneration in the audit); Group Insurance/Pension Plan contributions made by employer; Special rewards for individual invention or discovery; Severance pay; Pay for those on active military duty; Employee discounts; Expense reimbursements if substantiated by the employer's records; Money for meals for overtime work; Work uniform allowance; Sick pay paid by a third party (can't you just hear the duck Aflac);

Employer provided perks (company autos, incentive vacations, memberships); and Employer contributions to salary reduction, employee savings plans, retirement or cafeteria plans.

More mistakes are made including payroll which should be excluded. Keep both lists handy, but commit the payroll exclusions to memory (well, just be able to recognize them).

From: ePayPolicy

The trend is clear. People today prefer to pay digitally. That includes everything from Amazon purchases to their monthly utility bill and yes, their insurance premiums! While there are still a few diehard check writers out there, digital transformation is here to stay.

The Many Benefits of Digital Payments

Customer convenience is often cited as the main reason businesses offer digital payments. And statistics bear that out. In a survey of billing executives, 97 percent reported higher customer satisfaction as a benefit of digitizing payments. The report, called “The Digital Edge”, also found other key business benefits, such as: reduced collection times (86.5%), increased operational efficiency (90.8%), cost reductions (81.6%) and gaining a competitive edge (92.3%).

Who wouldn’t want to collect payments faster and more efficiently, at less cost, and gain a competitive edge?

Do Your Research

As you know, the insurance industry has historically not been an early adopter of technology and innovation. However, that is changing. ePayPolicy has customers that have been using our digital payment solution for five or more years.

The pandemic also created a spike in insurtech adoption, as the industry turned to technology for remote team communication, customer relationship management and more Customers and accounting teams needed no touch payment options not only because of the risk of Covid, but also because checks being delivered to an empty office was of no use Many of the habits left by the Covid pandemic are here to stay

Where to look and what to look for

Which payment system is right for your organization? Read reviews, ask your state association rep (or look on their website for

SATISFACTION

preferred partners), talk to your IMS provider. Which payment processor do they recommend? You want a system that streamlines internal processes, expedites receivables and integrates well with other systems already in place (or planned).

Because of the fiduciary nature of collecting insurance payments, a generic payment system built for retail transactions is likely not the best choice. You will want to focus your search on solutions designed specifically for the insurance industry. This will give way to insurance specific features like management system integrations, and you can also rest assured that customer support will understand your specific problems when needed.

Try Before You Buy

Compare apples to apples. Understand what your payment processing vendor charges for setup, as

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well as their monthly subscription

fee. Do they offer a free trial? Do you have to sign a multi year contract? What kind of training/support do they provide?

At ePayPolicy, we offer 60 days free to new users, no contract or set up fees.

Customer Adoption is Key

According to The Digital Edge survey, one of the biggest hurdles to digitization is employees with insufficient technical skills (59.6%). Be sure to choose a digital payment system that’s easy for your employees to use. After all, they will be the ones behind customer adoption.

Encourage everyone to advocate for digital payments. Announce proudly to customers (and prospects) that you now take payments online. Promote it across your website, newsletters, press releases, ads and social media. This will be

CUSTOMERSATISFACTION

welcome news! But don’t count on customers to remember from one payment to the next.

Put a “Pay Now” link on your invoices, in your emails, and a big, can’t miss button on your website. Show customers how simple it is to pay their premiums through your digital payment portal. Increased loyalty is definitely part of customer satisfaction!

With so many business benefits and literally no downside, isn’t it time to prioritize digital payments?

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BIG "I" ASKS FOR DELAY WITH MEDICARE RECORDING REQUIREMENT SET TO TAKE EFFECT OCTOBER 1 Wyatt Stewart

The new requirement is overly broad and includes individual agents and brokers, who will now be subject to two new requirements.

Earlier this year, the Centers for Medicare & Medicaid Services (CMS) issued a final rule titled, “Medicare Program: Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs."

The final rule revises the Medicare Advantage (Part C) program and Medicare Prescription Drug Benefit (Part D) program regulations to implement changes related to marketing and communications, past performance, Star Ratings, network adequacy, medical loss ratio reporting, special requirements during disasters or public emergencies, and pharmacy price concessions.

Specifically, the final rule seeks to account for unscrupulous marketing behaviors by requiring third party marketing organizations (TPMOs) to record all enrollment conversations However, TPMOs have already had this requirement in place What is different

MEDICARERECORDING

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in this final rule is how TPMOs are being defined The new definition of TPMO is overly broad and now includes individual agents and brokers who will now be subject to two new requirements: the above referenced recording obligation and disclaimer language.

The final rule notes that all TPMOs must prominently display a standard disclaimer that says, “We do not offer every plan available in your area Any informati we provide is limited to those plans we do offer in you area. Please contact Medicare.gov or 1 800 MEDICARE to get information on all of your options.

The rule goes on to note that the disclaimer must be:

Verbally conveyed within the first minute of a sal call.

Electronically conveyed when communicating wi a beneficiary through email, online chat or other electronic means of communication Prominently displayed on TPMO websites. Included in any TPMO marketing materials, including print materials and television advertising

The recording requirement is no less burdensome and the final rule will require all TPMOs to record all sales calls with beneficiaries and store the calls in a HIPAA compliant audio recording system for 10 years. These new requirements on agents and brokers are scheduled to go into effect starting Oct 1, 2022

As a result of the additional burden being placed on agents and brokers, the Big “I" joined with other agent and broker trade associations in sending a letter to CMS noting our concerns with the rule and the lack of guidance surrounding it.

The letter notes that “it is nearly impossible for our members to be in compliance with the final rule prior to the annual enrollment period (AEP) which will leave thousands of Medicare beneficiaries without the help of licensed agents and brokers and left in the hands of the bad actors that this rule seeks to regulate."

“The trade associations request a delay of 6 12 months, during which CMS will work with stakeholders to develop marketing regulations that will protect beneficiaries while allowing them access to their trusted licensed independent agent or broker," the letter said

Wyatt Stewart is Big “I" assistant vice president of federal government affairs.

EAGLE MAKES IT EASY

Need another market option for personal lines? Look no further. Big “I” Eagle Agency makes it easy.

Eagle provides Big “I” members with direct access to preferred personal lines with minimal volume commitment. The program strives to fit the member's personal lines needs by incubating the member until they qualify for a direct appointment. Eagle company partners include Foremost Signature℠ Auto & Home, Safeco and Travelers.

Features of Eagle include:

Big "I" Markets

Agency maintains ownership of business

Direct access into the carrier's portal Graduated commissions based on volume

EAGLEAGENCY

Is Eagle right for your agency? Take a two minute quiz now to see if your agency is ideal Eagle material. If Eagle’s not the correct fit, Big “I” Markets offers additional market access solutions for Big “I” members.

You can learn more about Big “I” Eagle Agency at www.iiaba.net/Eagle, or simply schedule a meeting with Big "I" Markets and Eagle Agency Personal Lines Director Nancy Doherty for a personal introduction to the program.

The Eagle program is available nationwide except for in Hawaii.

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This article is intended for general informational purposes only. IIABA and its subsidiaries and affiliates shall not be held responsible in any way for, and specifically disclaim, any liability in any way relating or connected to any reliance on or use of this article. The information contained or referenced herein is not intended to constitute and should not be considered legal, accounting or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.

Copyright © 2020, Big I Advantage, Inc. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big I Advantage. For permission or further information, contact Big “I” Markets, 127 South Peyton Street, Alexandria, VA 22314 or email at bigimarkets@iiaba.net.

TECH STACK SURVEY RESULTS

Catalyit is the independent agency technology consulting company that IIABL started with other Big I state associations to help agents leverage technology to improve operations and profitability.

For more information on Catalyit please go to www.Catalyit.com.

Catalyit recently conducted a survey of Big I member agencies about their Tech Stack. What’s a Tech Stack? All the technology, software, and tools you use to run your agency, connect with customers and prospects, and ultimately grow profitability.

Technology is no longer just a backroom activity that keeps the computers running. Tech is a profit center. What software agencies use, what tools, integrations, processes, and data agencies harness are all critical in driving profit. With the right tech, your agency will thrive.

Your business has a tech stack. Does it currently include the right solutions for your agency? Are you using all the features you should be? Do you have processes in place to get the most out of that investment? To provide a fantastic customer experience? To become more profitable? Catalyit.com helps with all of that.

To view the Catalyit Tech Stack survey click HERE!

VIEW THE RESULTS

I recently had a neighbor who couldn’t turn off the radio in his car. When he turned the ignition off, the radio continued to play until it drained the battery. Turns out it was a faulty circuit board and it took 4 months to get a new one.

This past weekend I was reading about how auto repairs involving chips and circuit boards sometimes take up to 8 months because of supply issues. Most auto policies, at best, include 30 days of coverage for loss of use, usually to rent a vehicle or use a service like Uber or Lyft. ISO’s Personal Auto Program has an option for expanded coverage ($30 $75 a day up to $900/$2,250 max.), but I’m told by many agents that carriers are reticent to provide more than 30, maybe 60, days coverage (not that consumers would buy it if available).

H O W M U C H P A P LO S S O F U S E C O V E R A G E D O I N E E D ? T H E N E W E S T R E A S O N T O B U Y T H E R E N T A L C A R L D W

Fortunately for my neighbor, he had another car in his household that he was able to use. But that’s not an option for many people. And perhaps this is even a bigger issue when someone has rented a car that is damaged. I’m aware of one $9,000 loss of use charge assessed to a renter because of a delay in getting parts from Japan. In the case of a rental car, the renter is at the mercy of the rental agency and may be contractually obligated to pay whatever the rental company demands.

While agents may have little control over the availability of increased limits of loss of use coverage, they can at least warn customers about the increased need to buy the rental car agency’s loss damage waiver. For additional reasons, check out this article.

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TOP 10 REASONS TO PURCHASE THE RENTAL CAR DAMAGE WAIVER

Although most damage waiver fees are considered outrageous, the insured is best advised to purchase the waiver for short term rentals. This is not only in the best interest of the insured, but also the agent since an inadequately covered loss may result in the loss of an account or worse, an E&O claim.

Although most collision damage waiver (CDW) or loss damage waiver (LDW) fees are considered outrageous, the insured is best advised to purchase the CDW/LDW for short term rentals. This is not only in the best interest of the insured, but also the agent since an inadequately covered loss may result in the loss of an account or worse, an E&O claim. This is becoming increasingly the case as rental car companies charge ever-higher

fees and penalties for occurrences not covered by most auto policies. Click here for Disclaimer.

1) Loss Valuation

The value of a rental car, according to virtually all rental agreements, is determined solely at the discretion of the rental company and may be significantly different from the "ACV" basis used by most auto policies. The ISO Personal Auto Policy (PAP) covers the lesser of the "actual cash value" of the vehicle or the amount "necessary" to repair or replace the damaged property.

The rental agreement may very well contractually obligate the insured to reimburse the lessor for the "full value" (whatever that is) of the vehicle. Under

the current PAP, the "betterment" clause may result in the insured being significantly underinsured relative to his/her obligations under the rental agreement. For more information on this issue, read the VU article, "Betterment in the ISO Personal Auto Policy."

2) Loss Settlement

As implied above, there may very well be disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property depending on the PAP edition, the Appraisal clause may be invoked by the insurer with its accompanying costs covered partially by the insured.

More importantly, the PAP insurer has the right to "...inspect and appraise the damaged property before its repair or disposal" the rental company may choose to effect the repairs immediately, potentially resulting in a lack of PAP coverage because of failure to comply with the condition cited above. In a recent claim involving farm equipment under a similar policy provision, the insurer denied coverage when the farmer had the property repaired immediately in order to minimize lost production and the insurer never had the opportunity to appraise the damage.

3) Loss Payment

The rental agreement may require immediate reimbursement for damages and it is not uncommon for the rental company to charge the insured's credit card. This can create a significant debt, "max" out the card's credit limit (perhaps shortening a vacation or business trip), result in litigation, etc.

4) Loss Damage Waivers (LDW)

The rental agreement usually requires reimbursement for more than collision, making the insured responsible for ANY "loss" in value beyond normal wear and tear regardless of fault. Obviously, the PAP must include collision coverage on at least one insured owned vehicle

for collision coverage to transfer to the nonowned auto.

If the rental agreement includes a Loss (not just Collision) Damage Waiver (LDW), the policy must also include comprehensive coverage to protect the insured. Even so, keep in mind that the insured's contractual liability under the rental agreement may be almost absolute, so it's possible the PAP may not respond to all losses. (Note: Likewise, the PAP might respond to losses not covered by the LDW such as use off paved roads, use while intoxicated, use by unlisted drivers such as valet parking (see below), etc. Therefore it is important to have BOTH PAP and LDW coverage.)

5) Indirect Losses

The insured most likely will be responsible for the rental company's loss of rental income on the damaged unit. The PAP has, at best, daily and

RENTALCAR

maximum caps for this indirect loss and, depending on the edition date, an unendorsed policy or proprietary company form may pay only for loss of income resulting from theft. In addition, many rental companies will not divulge their fleet utilization logs for competitive reasons or their rental agreements may make the renter responsible for loss of use without regard to fleet utilization rates. If so, the renter may be charged even though unused rental vehicles are sitting on the lot. In one case, a renter was hit with a $2,000 loss of use charge, far more than what her PAP covered.

In addition, rental car companies are increasingly inclined to charge for "diminution of value," an indirect loss that is not covered by the PAP's physical damage section (nor most credit card coverages). We have seen documented examples of these charges for amounts of $5,000 and almost $8,000 and heard of one that was allegedly $15,000 on an upscale SUV rental. For more information on this issue, check out the VU article "Rental Cars and Diminution of Value" and the American Agent and Broker magazine article "Rental Car Contracts Raise Coverage Stakes."

6) Administrative Expenses

The rental contract may make the insured liable for various "administrative" or loss-related expenses such as towing (e.g., one insured was charged for a 230 mile tow), storage, appraisal, claims adjustment, etc. None of these expenses are typically covered by the PAP.

7) Other Insurance

The PAP says it is excess over: (1) any coverage provided by the owner of the auto (does "coverage" include rental car company self insured plans?), (2) any other applicable physical damage insurance, and (3) any other source of recovery applicable to the loss CDW/LDW, travel policies, credit card coverages, etc. (what if the credit card coverage says it's excess over the auto policy?). The potential controversy over who pays what is obvious and can result in litigation.

In addition, keep in mind that many states (e.g., MD, MN, NY, TN, etc.) have statutes, proprietary forms, and/or case law precedents that may govern this and other rental car exposures. For example, the PAP is primary rather than excess for nonowned autos loaned or rented by a dealer, but not rental agencies. Another state makes the PAP primary only if the auto is rented without purchasing a damage waiver. Another states only modifies the PAP with regard to liability for rental cars, not physical damage. Another state makes no exceptions for any nonowned autos including rentals. Needless to say, since the PAP Out of State condition says the policy will comply with state laws, it can become virtually impossible to know whether the PAP will respond on a primary or excess basis in a given state while on a trip...yet another reason to rely on the rental company's damage waiver.

In one final example, a consumer was given a loaner vehicle from a Cadillac dealer while his car

RENTALCAR

was being serviced. He proceeded to total the vehicle in an accident to the tune of $37,000. His PAP insurer refused to pay on the basis that the PAP provided excess coverage over the dealer's garage policy, offering only to pay a portion of the dealer's deductible. The garage insurer paid the entire claim, then subrogated against the PAP insured by filing a lawsuit. When the insured turned the suit in to his PAP insurer, the claim was denied under the liability section of the PAP, citing the care, custody or control exclusion. While this involved a dealer loaner auto, the same result could have been reached in this state if the auto was a rental. For more information on this claim, check out the VU article, "Driving a Dealer Loaner Auto...No PAP Coverage?!"

8) Excluded Vehicles & Territories

The PAP normally does not provide physical damage coverage for motorcycles or other non auto/pickup/van vehicles (e.g., motorhomes) and use of covered vehicles is limited to the U.S., its territories and possessions, Puerto Rico, and Canada (the rental agreement may also exclude operation outside a specific geographical area, in which case the PAP could provide coverage not provided for under an LDW). In addition, if the insured is renting a trailer (U Haul, camper trailer, etc.), PAP coverage is typically limited to only $500 $1,500. The insured usually has no choice but to rely on the rental company's damage waiver for coverage under these circumstances.

9) Excluded Uses & Drivers

The PAP may have limitations on use of vehicles that are not otherwise excluded by the rental agreement damage waiver for example, some older editions of the PAP (and perhaps some proprietary company forms) provide no physical damage coverage for the business use of nonowned pickup trucks or vans.

Also, the PAP may include an exclusionary endorsement for certain individuals or may apply only to designated individuals that can be covered by listing them on the rental agreement. In contrast, the damage waiver usually only applies to designated individuals (with certain omnibus

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"insureds" such as spouses), so having both a PAP and the damage waiver can again be advantageous. For an example of this exposure, check out the article, "Rental Cars and Unauthorized Drivers," and for an example of a coverage dilemma for business auto exposures involving auto symbols 8 and 9, check out the article, "More Rental Car Issues."

One often overlooked issue where a large coverage gap can exist is using valet parking at a hotel or restaurant during a trip. For an example of more information, check out the article, "PAP Coverage for Valet Parking."

10) Additional and/or Future Costs

The PAP will most certainly include a deductible in the range of $100-$500 or more. In addition, payment for damage to a rental car may result in a significant premium increase (if not nonrenewal) via surcharges or loss of credits.

I N S I D E - O U T G A M E : I S A N I N T E R N A L O F F E R R E A L L Y W O R T H L E S S T H A N A N E X T E R N A L ?

Independent agency sale transactions are continuing at a strong pace in 2022. Organic growth rates and profitability are booming, according to Reagan Consulting. Those financial drivers continue to steer agency merger and acquisition prices upward.

In this environment, some agency principals are looking for a game plan to sell their firm, whether to an outside buyer (such as a strategic investor or a private equity investor) or an inside buyer (through an agency perpetuation continuing the independent agency as it exists but with new leadership).

Agency principals may perceive an outside sale as more lucrative than a perpetuation. But is an internal offer really worth less than an external? An internal offer to perpetuate an agency can be as appealing as an external sale or even more so. Here’s a look at why.

While the financial terms of the sale are always a top consideration, the price tag is only one of the key considerations for an agency owner. Some of the others typically are:

The selling owner’s role in the agency after the sale.

The timeline for the transaction (especially for the selling owner).

Start with Goals

Agency owners looking to sell who look at the price tags of other merger-and-acquisition transactions

in the marketplace are in essence starting at the finish line. Instead of doing that, it’s productive to start by looking at goals for 1) the owner and 2) the future of the agency.

Those aspirations provide a guiding light through the sometimes complicated process of deciding upon an agency sale or perpetuation transaction. Questions to ask include: Do I want to continue working or retire outright? What responsibility if any do I want to take after I sell to a third party or perpetuate my agency to an internal buyer?

Understand How Inside & Outside Buyers Can Differ

While any potential buyer covets the potential growth and profitability of a target agency, a handy way to categorize agency buyers is to divide them into inside buyers and outside buyers.

Internal buyers are those already working within an agency, and usually become owners through t principal’s decision to perpetuate Commonly, inside buyers are family members and/or producers or other key employees working at the agency

External buyers come in a couple variations Firs the private equity (“PE”) buyer, who is not necessarily familiar to an agency owner but is attracted by the agency’s financial performance, growth prospects, and/or market share Some PE buyers acquire an agency to merge its operations into another In fact, some sellers perceive that P buyers are making “book of business purchases.” It’s often true, though, that PE buyers want the seller involved after the sale to run that book of business, continue to manage results, or take on sales role.

A second type of outside buyer is the strategic buyer. Possibly already known to the owner, he o she might be a peer from a nearby geographic are or even the same city. Like a perpetuation buyer, strategic buyer is likely to carry on an acquired agency’s operations as they are. However, it’s als possible the strategic buyer might want to chang

the name of the agency, consolidate operations, or make other changes. Strategic buyers might be less likely to want a selling owner to remain on, since these buyers are involved in the agency business already and might not need the support that a perpetuation buyer might want.

Look at Non-Financial Factors Driving Value

A sale to a third-party buyer may seem to have the highest number at first look. But there could be non-financial factors at play. A private-equity buyer, for example, might fold the agency into another. This may mean the agency location may close, employee arrangements may change, agency branding may shift, and so on. An external buyer also might feel less obliged to continue the agency’s community involvement. A selling principal needs to consider those factors in light

Examine the Earnout Component

An issue with outside buyers, often with PE deals, is the “earnout component” in the sale. These earnouts are payments triggered if the seller helps the agency hit financial targets after the sale.

Those targets can be ambitious to hit. So while PE deals might sound initially like big-dollar transactions, an outside observer might not really know how that earnout affects the price the seller gets. (Keep in mind that any agency merger-andacquisition information available through word of mouth is usually incomplete.)

Recognize Post-Sale Role in Perpetuation

For owners thinking about an agency perpetuation, it’s vital to discuss those ambitions with potential buyers as early as possible. This can help uncover how much interest they have in being future agency owners. Having those conversations

can clarify what’s possible.

Perpetuation deals, as with any transaction, also involve a transition for the selling owner. Both the seller’s role and the transaction timeline are important here. The selling owner might take a role as a mentor, produce business, work as a consultant, and/or take other responsibilities while the new owners work into to their new roles. That transition role likely would be specified in the purchase agreement.

Staged perpetuations (those that take place over several years through two or more steps) can be appealing to owners who want to get out of the agency gradually. They can result in prices equivalent to or even more than an external sale by cashing in on a portion of ownership now and building shareholder value as the agency grows. Those shares could be worth more down the road and the principal continues to benefit from the agency’s cash flow while remaining a partial owner.

But owners who want to exit the business quickly might be more amenable to selling to a third party with no involvement after the sale. However, owners who make an outside sale without setting a plan fo their career after selling their agency sometimes want to get back into the agency business after a couple of years having experienced “seller’s remorse.”

For any agency sale, it can help to think of the owner’s role in terms of his or her “runway”: The principal may be taking off by selling the agency, but if they haven’t decided fully on a destination they might not be satisfied with where they land.

Think About Tax Treatment

One other consideration for any agency owner is the tax treatment of the sale. For instance, a staged perpetuation can allow the owner to receive sale proceeds staggered over a period of years, which can be attractive not just for tax reasons but also financial reasons

Whatever thoughts an agency owner has today about a future sale or perpetuation, the strongest advice I give to anyone is to take a broad view of the three factors: financial terms, the selling owner’s role after the sale, and the transaction timeline.

Scott Freiday

Scott Freiday is senior vice president and division director of InsurBanc, a division of Connecticut Community Bank, N.A. An expert on agency mergers and acquisitions, agency perpetuation and financing, he has presented at numerous venues nationwide.

Allianz posted an article in January 2022 based on a survey of 2,650 businesses listing cyber, followed by business interruption, and natural catastrophes, as the three highest rated perils that businesses face.

Let me work backwards. The prior week, MunichRe provided a report showing that 31% of catastrophes in 2021 were covered by insurance (in claims dollars). This is in line with a prior long term study by SwissRe concluding that only about 30% of catastrophes, in dollars, are covered by insurance.

Business Interruption coverage claims related to the pandemic, at least in this country, were denied almost 100% of time in 2020 2022 for arguably the largest business interruption event in history.

Cyber coverage can be purchased. However, it is questionable just how useful it is as a lot of cyber policies provide minimal coverage. Good coverage depends on many variables being met. Does the client actually meet the warranties they are signing for on the application? Do the adjusters have a clue relative to how to adjust cyber claims? Not to mention, is the cyber policy affordable or does it cover ransomware. All of these circumstances, create a giant hole.

The three biggest perils to business have, at best, maybe 30% coverage. Do businesses really need insurance, especially in the traditional marketplace, if insurance companies are not going to cover what is most important? Or is it akin to the adage that the only time a banker wants to lend you money is when you don’t need it?

I have analyzed A.M. Best claims data and the traditional insurance world is simply becoming less important because the claims activity, relative to the overall economy as measured by GDP, is shrinking. Either people and businesses are having far fewer claims or the claims they have are less likely to be covered (which makes sense given higher deductibles and carriers' continued focus on tangible property rather than intangible property).

I know some carrier people will be thinking, "But we paid a lot of claims, so we still matter!" That is pretty much a moot point because small stuff can be self-insured and a lot of quality business is moving to alternative risk transfer mechanisms. The traditional marketplace is increasingly the residue of adverse selection based on accounts and agents who do not know better options exist for quality accounts.

INSURING

What to do? At the agency level the place to begin is to become educated, highly educated, on alternative markets Next, begin getting to know the people who run quality (because there is no room for sloppy) alternative markets Quality is everything because this market is not regulated in as many ways as traditional carriers. So many solutions exist making knowledge imperative at the agency level. An agent must know coverages inside and out to design a plan that provides the security his/her clients need.

At the carrier level you can continue dealing with adverse selection Agents who do not know what they are doing and agents who are years behind the times relative to market solutions are writing accounts that otherwise have nowhere to go. You can continue to compete for this segment of the market. In commercial, all the estimates I have read already show a majority of premiums are in the alternative marketplace, so this residual business is likely to continue shrinking relative to the economy.

Or you can decide that policies written for 1970 manufacturing America might not be as important as the policies written for the 2022 data driven America You might decide to broaden coverage for

catastrophes, for a price, especially using alternative risk transfer methods specifically designed for catastrophes

You might decide that, for a price, insuring business interruption for the most important business interruption events such as supply chain and civil authority makes sense. Otherwise, let's call it what it is, business interruption coverage for highly unlikely, limited perils that insureds will probably never face while ignoring the ones businesses are more likely to face.

You might decide that cyber is simply uninsurable Or that a straight DIC type cyber policy makes sense Or, perhaps the creation of a full cyber risk management program backed by cyber insurance, rather than putting cyber insurance at the forefront, makes the most sense.

Or, you may decide to do nothing, which I bet will be the case. Most insurance companies are not prepared for these times and this economy But, for the ones willing to think things through and offer solutions rather than silence and denials, the potential success is tangible.

The price that your agency commands depend on several factors, including what is most important to both the buyer and the seller, the synergies that exist between agencies owned by a potential buyer and seller agency, and the risk level that both parties are willing to assume in the agency sale. Both a buyer and seller should carefully weigh all these areas to successfully negotiate the price of the agency. Both parties need to weigh the potential revenue opportunities and challenges, expected changes to expenses, risks and opportunities involved with both the carrier and customer relationships, and the potential profitability of the combined entity. This will provide a solid understanding of the price that is reasonable and able “cashflow”. In an agency acquisition, “cashflow” means that revenue should cover 1.25x the expenses to achieve the expected profitability. Too often, when buyers and sellers do not take the time to explore these areas carefully, agency sales do not perform as expected, creating a situation where agencies ultimately sell for a discount, or a premium that is unrealistic. We are going to focus on the most common synergies in an independent insurance agency sale transaction between two retail agencies.

Customer Makeup

Do both agencies have a similar type of customer base? How do their average customers compare? Are they similar? Will they have the same expectations or different expectations? This can include average size policy, demographics, as well as customer and agency behaviors. Do both agencies have similar philosophy in the limits and coverages that they recommend? Does the overall philosophy on customer engagement align? This can include claims engagement, billing and payment behaviors, customer education and outreach, audits, and remarketing accounts to name a few. The more aligned two agencies are, the easier a transition will be for their customers and their staff. In some cases, a difference in philosophy between two agencies can create an area of opportunity as well.

Book of Business

Many agencies are looking to expand into new geographic areas, lines of businesses or niches. A great way to do that is through acquisition. A careful inspection on cross-sell opportunities is recommended. This is done by evaluating the number of monoline accounts, or accounts that offer opportunities to expand your core expertise such as cyber, benefits or worker’s compensation for example. In addition, the risk due to personal relationships with key customers or specialized expertise required in accounts must be considered when estimating both the ongoing business and the resources that will be needed to continue to service accounts.

Carrier Relationships

Another key reason that an agency may be an attractive acquisition is their carrier relationships. This may be a huge win, or a potential downside based on the carrier makeup and fit with a potential buyer. In some cases, the combination of the two agencies may put the combined agency in a

position to enter new markets and earn contingencies with a carrier that they have would not be able to achieve on their own. In other cases, they may find that some carriers are unwilling to work with the new agency and a book roll will be required to retain that business. It is important to carefully examine the carrier relationships, the ability to be appointed by any new carriers, and how the combined carrier will impact the overall carrier strategy.

Operating expenses

In some cases, multiple locations may be maintained after an acquisition, and in others two agencies will combine into one. Several factors including the agency reputation and brand awareness in their community, the proximity of the agencies, and the negotiated terms between agencies can all play a factor when deciding how to maintain locations after an acquisition. In the cases, when only one location remains, there will be a cost savings related to rent, utilities, equipment leases, insurance, etc. For those

SELLINGPRICE

agencies that choose to maintain two locations, there still may be potential cost savings related to the compensation of the exiting owner. In either case, the decisions on how the agencies will integrate and operate on an ongoing basis will determine what impact it may have on staffing, employee benefits, agency systems, marketing, and other cost as the two agency cultures are merged. Building a combined pro forma that outlines all these potential changes will inform the price and the options to fund the transaction.

Performance and culture

The fair market valuation highlights several areas of performance such as growth, retention, loss ratio and profitability and all of these will greatly impact the decision on the best price to offer. An agency that has strong policies and procedures in place, employee contracts with all key employees and a firm handle on their metrics is well positioned to negotiate on the sale of their agency. For those agencies, whose books and information are in order, utilize systems that are the same or compatible, and that operate a paperless agency the transition is expected to be much more seamless and therefore ongoing performance can be expected to be greater. You can expect that an agency that has strong performance metrics and operates efficiently will sell for a higher price than one that has weaker numbers or lacks the ability to provide metrics as expected performance becomes much more uncertain.

As agencies move through the due diligence process, they can expect to be offered a premium or a discount for their agency based on synergies or challenges that exist in each specific situation In all cases, agencies that know their numbers,

Continued from page 38

can access data and information easily to identify synergies and inform these areas will be much better positioned than those that cannot. Much like the sale of a house, the more work that is needed or areas of question the lower the offer.

Having the ability to provide accurate and complete information throughout the due diligence process and highlighting the areas of synergies and strengths of your agency will put you in a strong position with prospective buyers.

A NEW BREED OF FLEXIBILITY: THE SKILLS-BASED ORGANIZATION

SHARON EMEK

By this point, you’ve probably been inundated with news stories and fact filled reports about the talent shortage sweeping the nation. It’s become increasingly difficult to attract and keep the best and brightest employees, with July 2021 seeing the highest ever number of U.S. employers with unfilled positions.

Needless to say, organizations are feeling the pinch. Many are responding with promises of higher salaries, nurturing cultures, and, of course, flexible work environments which existing employees and job seekers alike have claimed as a top priority for them.

However, according to recent reports by the likes of Deloitte and Korn Ferry, the key to solving the talent gap might require another kind of flexibility, one that the organization itself must take on. Enter the “skills-based organization.”

“To enable agility and maintain competitiveness, organizations must shift from understanding the unit of work in terms of fixed, static jobs to reimaging it in terms of a dynamic landscape of skills that can be agilely deployed to work as it continuously evolves,” writes Deloitte’s Michael Griffiths.

And as Korn Ferry’s “Future of Work Trends 2022” report puts it: “Successful organizations are shifting their thinking towards the capabilities needed to win in their marketplace. Through strategic modeling of future workforce options, they clarify the future roles, skills, and mindsets to deliver their strategy. They then focus on sourcing and developing these through reskilling, upskilling, recruitment or drawing on the wider ‘gig economy’ of flexible workers.”

H A R O N E M E K ,

P H

D

, C I C

C E O O F W A H V E

SKILLSBASED

Indeed, companies will need to be flexible in how they think about their internal roles and responsibilities if they want to attract and retain great people. What does that look like?

Well, it starts at the beginning, with your hiring practices No longer should you be looking at a job description and trying to match bullet points on a candidate’s resume to it. According to Korn Ferry’s “Future of Work Trends 2022” report, 69% of the world’s most admired companies value learning agility and curiosity over career history and experience when it comes to hiring. You need to reimagine “jobs” as broader “goals to achieve” and consider the skills that are necessary for achieving those goals.

At WAHVE, for example, we blind screen candidates based on skills and organizational fit, ensuring that those who are hired have both the right skillsets and mindsets to thrive in their new environments.

Next, take a look at your existing workforce. In the broader context of your strategic goals, how do your people help take you there? Keep in mind that skills are transferrable. Siloes are your enemy: Consider mixing and matching individuals from different teams to create a “dream team” for a particular project As Korn Ferry puts it: “Expect more project based working, where teams assemble to achieve specific goals before dispersing back out into the organization.”

Further, offering employees the opportunity to work on projects based on their interest and skillsets is another way to motivate and keep them: Professional development and learning opportunities are consistently listed as top benefits that employees seek from their organizations

We at WAHVE have always believed that individuals’ skills and professional goals are what drive their ability to succeed in any environment. Our very business model is based on it. And we feel that the rise of the skills based organization is proof that this concept is the way of the future.

“What was a slowly growing sentiment has been accelerated exponentially The need for organizational agility and resilience spotlighted by the pandemic, digital transformation’s disruption of jobs and tasks, and the need to access and retain skills amid the ‘Great Resignation’ has put skills front and center,” Griffiths writes for Deloitte.

Continued from page 40

I invite you to join us in embracing this exciting future of work and to get ready to boost your company’s talent, goals, and growth into the stratosphere.

About the author

Sharon Emek, Ph D , CIC, is founder and CEO of Work At Home Vintage Experts (WAHVE). Work At Home Vintage Experts (WAHVE www.wahve.com) is an innovative contract talent solution that matches retiring, experienced insurance industry, accounting and human resource career professionals with a company ’ s talent needs. WAHVE bridges the gap between an employer’s need for highly skilled professional talent and seasoned professionals desiring to extend their career working from home From screening to placement, WAHVE is a comprehensive solution to qualifying, hiring, and managing experienced remote talent.

It’s easy to see why your windshield repair business customers need a home business insurance policy from RLI. While they focus on fixing cracks, chips and other windshield damage, you can give them the peace of mind knowing they’re protected against accidents, injury and litigation.

An RLI Home Business Insurance Policy includes:

Liability limits up to $1 million

Business property protection up to $100,000 (with a $250 deductible) Up to $5,000 per person for medical payments to customers or vendors injured on premises Affordable premiums

Also recommended? Optional garagekeepers coverage for your clients who take possession of customer vehicles in the normal conduct of business. Garagekeepers provides comprehensive and collision causes of loss at $30,000 and $60,000 limits on basis of legal liability, direct coverage excess or direct coverage primary.

Don’t let your windshield repair customers hit a blind spot in their coverage. Make sure it’s clear how an RLI Home Business Insurance policy can protect their investment.

For more information on the RLI Home Business Insurance Policy, contact Brandi Van Pelt at 225 236 1358 or bvanpelt@iiabl.com.

Tip #10

By Steve Anderson

TEST YOUR WEBSITE WITH GOOGLE

In 2015, Google expanded their use of mobile friendliness as a “ranking signal” to determine what websites to display on the search engine results page. In addition to mobile friendliness, how fast your site loads on a mobile device or desktop has been a significant “ranking signal” for quite a while. Do you know how fast your website loads on a mobile device or a laptop, or desktop?

Fortunately, Google provides a testing service (Test My Site) that will rank your website in three areas:

Mobile Friendliness

Mobile Loading Speed

Desktop Loading Speed

Your site receives a grade from 0 to 100 based on each of the above three criteria.

Using Google’s Test My Site

Your website is key to maximizing your Internet presence We often treat our sites as a project, and once completed, don’t think about it again. That is a mistake.

People are five times more likely to leave a mobile site that isn’t mobile friendly.

Nearly half of all visitors will leave the pages’ mobile site if it doesn’t load within three seconds.

According to Google: Fortunately, the test results provide some concrete steps you can take to improve your website in each of the three areas tested You can choose to have a report email to you or view the information on your screen once the test is completed

While some of the suggestions on what to fix are a bit technical, whoever created or managed and maintained your website should be able to take action to correct any problems identified.

There is no question that many (most?) people begin their search for insurance information online. If your agency is not visible to that online prospect, then you’ve lost the chance and don’t even know it

Click here to go directly to Google’s Test My Site.

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