Steve Fallon began his career in insurance 22
years ago, overseeing employee benefits at Hamilton Dorsey Alston
Company, an Atlanta-based independent insurance agency. About 14 years
into his employment, the agency’s principals decided to sell the firm to
Wachovia, a bank that, back then, was growing and still financially
healthy. Selling to the bank was not an exit strategy for the principals
who stayed on, as did Fallon—for a few years, at least.
Eighteen months ago, Fallon did something he had secretly thought about
for years—he launched his own independent insurance agency.
“I left Wachovia because I felt the deal had soured over time,” he
explains. “The insurance brokerage and consulting business is much more
of an entrepreneurial business than banking. They gradually squelched my
entrepreneurial spirit, with so many do’s and don’ts that the culture
was ruined. I was disheartened and discouraged about where the
organization was going, and felt it was time to leave.”
Today, Fallon is president of Fallon Benefits Group, an Atlanta startup
focusing on employee benefits. Despite the high risk of failure in all
new businesses, Fallon remains undeterred.
“What I love about the insurance business is working with clients to
solve their problems,” he says. “To do that meant I had to take a great
risk. I walked away from a huge amount of security, and a large book of
business that I had built up over 20 years. It was a bold move, but I
was resolute.”
Agency Numbers Hold Firm
The intrepid agency principal is not alone in starting an insurance
agency, despite the dark economic climate and a soft insurance market.
According to findings in the recent Agency Universe study, there is a
definable trend toward more agency startups. The biennial survey found
an increase in the number of smaller agencies, and an interruption in
the trend toward fewer, larger agencies. Overall, the number of
independent agencies across the country remains essentially the same as
it did in 2006.
While the abatement in the trend toward larger agencies is easily
explained by the fact that there are far fewer acquisitions and mergers
among larger brokerages and agencies of late, the increase in the number
of startups and smaller agencies is surprising. Although the survey was
conducted prior to the collapse of the financial system and the
bloodletting on Wall Street, starting a new business is always a risky
endeavor, particularly when the insurance market is as soft as it has
been these last few years. Given the financial cost of leasing a
building, investing in technology and securing contracts with carriers
in the highly competitive insurance market, the prospect of failure is
unnerving to most.
And yet the numbers don’t lie. The Agency Universe study indicates that
the proportion of small agencies (determined by annual insurance
revenues) increased from 12% to 17% of total agencies between 2006
and2008. According to the study, there are approximately37,500
independent insurance agencies in the U.S., roughly the same number
posted in the 2006 study. Of the agencies participating in the recent
survey, 11% are considered “relatively new”—with 4% founded in 2007or
2008, and the remainder incorporated since 2004.
There are several hypotheses for the phenomenon, but one looms largest.
As Madelyn Flannagan, Big “I” vice president of education and research,
puts it, “This is still seen as a very viable business. Obviously, many
entrepreneurs out there still see the independent agency system as an
industry of opportunity. They perceive value in providing close
interactions with consumers and businesses, and in offering them the
advantages of(insurer and insurance product) choice. The study tells me
that this remains a very resilient profession, in good economic times or
bad.”
Digging into the Details
The survey findings about the increases in small agencies and
startups have many fathers. Some startup agencies have been inaugurated
by people like Fallon, whose previous agency was snapped up in the
banking industry’s move into the insurance business. Others were
launched by principals or producers at an agency that subsequently was
acquired by a much larger agency—the trend of the last five to six years
that now seems to have stabilized. As these larger entities gorged on
each other, creating behemoth brokerage organizations, some felt left
out. “There are always people who don’t like being part of a bigger
group; they prefer to be independent and in a small operation,” says
Shirley Lukens, senior vice president at Reagan Consulting, an Atlanta
based management consulting firm. “Many seek to buy their book of
business, and then spin off and start their own operations.”
This is especially true once a former principal’s non-compete agreement
with the new owner expires or when contracts requiring the principal
and/or producers to stay on at the organization to ensure its continued
success elapse. “Many times when people are free to stay or go, they
often choose to go,” Lukens says.
Certainly, this was the case for Fallon. Although he had signed a
non-solicitation agreement with Wachovia, meaning he was prohibited from
contacting his former clients for business, he no longer was bound by a
non-compete contract. “I went down to the bank’s headquarters in
Charlotte, N.C., and met with the president of Wachovia Insurance
Services to tell him that I was leaving and planned to compete against
the bank,” he says. “He asked me to stay on for 30 days to transition
the accounts, which I did.”
Although he could not solicit business from his former clients, Fallon
was permitted to contact them and tell them that he was leaving Wachovia
to start his own insurance agency. Many soon made the decision to follow
him. “It made launching the agency a lot easier,” he says. “I knew there
would be a ramp-up period for a time and I wouldn’t make a profit the
first year, but having loyal clients stepping out with me, including
some large public companies, was a relief. I knew in the end it wasn’t
the name on the door—Wachovia—that brought them into the fold, it was
me, the trusted advisor doing the work that they had come to rely on.”
Wide Open Spaces
Another factor spurring an increase in agency startups is the
desertion by some direct writers and captive insurance companies of
challenging geographic markets like the southeastern United States.
Former agents of the carriers, suddenly left without employment, are
starting up their own independent agencies. “We’ve seen an increase in
the number of startup agencies by people who previously were employed by
the direct writers or captive companies, and have now become
independents,” says Bob Pettinicchi, executive vice president at
InsurBanc, the bank founded by the Big “I” to assist members financially
in their growth strategies.
Like others, Pettinicchi believes the increase in the number of startups
has less to do with individuals entering the insurance business for the
first time and far more to do with disgruntled, longtime professionals
seeking to make their own way. “Many new agencies are splitting off from
banks or larger agencies and direct writers, acquiring their books of
business and putting their names on the door,” he says.
All Roads Converge
While the emergence of clusters, networks, franchises and their kin are
a factor in the rise in startup and smaller agencies, the collapse of a
network also seems to be spurring the trend. When Brooke Corp., a Kansas
City-based franchise, filed for Chapter 11 bankruptcy protection in
October, many of its 250 franchisees were not surprised—they reportedly
had complained for months about not receiving their commissions. At one
time, Brooke listed about 900 franchisees and company-owned locations
around the country. Several former franchisees are now said to be
launching their own insurance agencies.
Such is the case in Oklahoma, where several agents have contacted the
state association to secure errors and omissions liability insurance for
their planned startups.“They told us that Brooke hadn’t been paying them
commissions since August, and they were hurting and wanting to be
independent, but needed the E&O, which is difficult for some given their
lack of (loss) experience,” says Lyra Roberts, E&O program manager at
the Independent Insurance Agents of Oklahoma. “Nevertheless, we’ve been
fairly successful helping most of them. We’ve quoted about 10agents, and
half are now moving to startup their own businesses.”
Among them is T.K. Hendrickson, president of newly minted Safeguard
Insurance, an agency in Norman, Okla. Hendrickson had joined Brooke in
June 2006, having previously worked as a producer for a captive
commercial lines insurer. He soon regretted leaving. “Within three
months of joining the network, I felt that the fee was paying for the
service I was getting was not justified,” he says. “I planned to get out
of my contract and start up my own agency, but then they announced the
bankruptcy and made the decision easier. Frankly, when I heard (about
the filing) I was happy and relieved.”
While securing his release from Brooke to transition his book of
business to the new agency, Hendrickson obtained appointments with
several carriers, a process she says was less difficult than he had
imagined. Although he had access to about20 markets at Brooke, he has
fewer today but still enough to provide a range of product choices and
related coverages and costs to customers. “Some said ‘yes’ and some said
‘no’, but the latter weren’t doing much business with me anyway, which
might explain the ‘no’,” he says.
The agency is in the same building as before, although the sign out
front now reads Safeguard Insurance. How does Hendrickson like being his
own boss? “I love being independent,” he says. “Back when I was a
captive agent, I hated it when I had to tell a key client that rates had
shot up 20% and there was nothing I could do about it. Now if one
carrier’s rate is 20%higher I always have others I can go to for a more
competitive premium.”
Banham (Russ@RussBanham.com)
is an IA senior contributing writer.