Meeting Volume Requirements Presents a Challenge for Agents

Independent agents who have been in the business for several decades will say that insurance company-mandated volume requirements have been around as long as they can remember. Most will also admit that the practice makes sense from the carriers’ perspective; if companies are going to grow, chances for growth are greatly amplified if they work with agents who can produce growing books of business. It costs less to deal with such agents as opposed to agencies that might be dubbed “stagnant.”

“One of the things that a lot of companies will tell you is they’re writing ‘x’-number of dollars of business now with fewer agents…and the way they’re doing it is by these volume requirements,” said Scott Hauge, president of the independent agency CAL Insurance & Associates Inc. in San Francisco.

For the most part, when carriers appoint an agency, they look at such issues as how long the agency has been in business; its type of operation; its potential capabilities for handling volume; how it markets; who it markets to; and how it services accounts. Based on that, a company usually has a set premium volume, which is sometimes negotiable.

Feeling the pressure
But from the agents’ perspective, the other side of the coin is that there are a lot fewer pros than cons presented by the demands of meeting the volume requirements set by a number of carriers. This can put a lot of pressure on agents.

“Clearly there could be some advantages if you’re talking about overrides or some kind of benefits provided for hitting certain thresholds,” Hauge said. “But what agents generally think of when you talk about volume requirements is the requirement that you have a certain dollar amount with the carrier in order to keep the appointment.”

Hauge noted that one of more significant problems agents encounter now is that the requirements are becoming much, much higher. About five years ago, a standard figure for national carriers’ volume requirements may have been about $500,000; these days the amount one hears most mention of is $1 million.

“And keep in mind when they throw out the $1 million, you’ve got to press the point—is that $1 million total commercial and personal or $1 million for commercial?” Hauge said. “If it’s $1 million commercial, is the $1 million for small accounts and large accounts, or just one or just the other? You’ve got to push it beyond just that number.”

Breaking it down
Twenty or 30 years ago, when an agent was dealing with a company, the agent was dealing with all of that company’s lines of insurance for the volume requirements. “What companies have done is separate it out,” Hauge said. “They now will have volume requirements for a personal lines appointment, and some volume requirement for a commercial lines appointment, where it used to be combined.”

Furthermore, a number of companies have even broken down the commercial lines. There are volume requirements to have an appointment for whatever the company has deemed the definition of small accounts, one for larger accounts, and perhaps one for bonds—that is, there are volume requirements in each sector of the company.

“If an agent isn’t growing, they are being squeezed to a large degree to keep the appointments with their major carriers,” Hauge said. “If you’re talking about a brokerage relationship, you may not have volume requirements, depending on what that relationship is. But if it’s an agency appointment, the volume requirements generally come with it.”

In fact, not all carriers impose volume requirements, AIG being a prime example. But agents explain that approach wouldn’t necessarily work for a lot of other insurers because of the unique nature of the markets AIG pursues.

Getting preferred status
Hauge observed that another influence is rooted in technology. As companies seek to provide new technological efficiencies, it can push those companies to look for more and more volume to cover the costs. “If agents do not get involved in upgrading their technology abilities, they become very inefficient to deal with from the insurance company standpoint,” Hauge said.

“Another thing—you have volume requirements for a company appointment, and that’s your very basic level,” Hauge continued. “Then you get gradations of volume requirements to get to be a preferred agent, a standard agent, whatever criteria the companies use. Then they gradate their agents under the old theory of 80/20 rule.”

Consequently, an agent may have an appointment with a company and meet the minimum volume requirements to keep the appointment, but the company can’t provide the same kind of service to a smaller agent as it can to a larger agent that has a more preferred status with that company.

“They may get quotes quicker. They may get a little better service than the other agent because they’ve got a bigger volume,” Hauge said. “The third phase is, you get companies that will provide overrides when you hit certain levels, which obviously makes it more attractive to the agent that can come up with those volumes—they’re getting paid more.”

The way carriers approach volume requirements really depends on the company. While national companies may take a fairly similar approach, with regional carriers, there can be vast differences on what is and is not required. And what can become even more of a challenge is when a company changes philosophy as to what classes of businesses it wants to write. Difficulties arise for agents when—even though a company has changed its appetite—it has not changed its volume requirements.

Hauge noted, “There used to be an old philosophy with agents, and it makes a lot of sense: you try to have as many companies as you can because that gives you as much opportunity as possible. To some degree, agents need to keep their markets at a place [where] they’re working in the most efficient manner. Depending on the size of the agency, it [can be] very expensive to represent 15 companies and understand what all the companies are doing…You need to figure out exactly what markets you do need, if they mesh with your philosophy, write your type of business, and try to work with those companies—not try to write for everybody.”

Accessing the minority market
Given these conditions, it’s not surprising that smaller companies may be especially impacted by these requirements—even to the point of having to drop certain contracts. In fact, it has been theorized that one of the things driving some of the consolidation and mergers is the aspect of agency volume requirements, where agents need, or believe they need, to have “x” number of companies in an agency to be able to serve customers but don’t have enough volume to keep that number. At that point, those agents may look to merge or sell to another agent so those volume commitments can be met.

Another dimension to the issue, which is perhaps even more significant, is a prevailing belief that the industry as a whole needs to be able to reach out to the changing demographics of this country—the so-called minority, inner-city, or urban markets, which includes potential insureds of Hispanic, African-American and Asian ethnicity.

The problem is that the way to reach out to those people is by using agents who are of similar ethnicity. But how do they get into business and serve that market if they can’t get a company?

The first thing that makes it harder for small agencies, particularly inner-city and minority agencies, to meet requirements is that those agents generally deal with small dollar amounts of personal lines policies, making it harder to get the high volume requirements that the companies require.

There have reportedly also been some situations where a small inner-city agency has a loss ratio that’s very low, but some companies will still hesitate to work with the agency because of volume requirements.

Eric Miller, communications director for Insurance Brokers and Agents of the West (IBA West), noted that a few years ago, the organization formed a task force called the Urban Opportunities Working Group to address the needs of agents in urban areas that are underserved. Miller also said that the “IBA West is working with at least one major carrier right now to create a lower volume requirement for small agencies.”

Joe Hernandez, president-elect of IBA West, and vice president and one of the principals at Hamman, Miller, Beauchamp, Deeble Inc. in Long Beach, served on that task force.

“In the old days, there used to be maps that were drawn for specific communities. That’s where the word ‘redlining’ came from,” Hernandez explained. “They actually drew red marks around certain areas of communities, and they would tell the underwriters not to write any business within those boundaries because they thought they were high risk areas…We tried to dispel that with the insurance companies because in a lot [of cases], the agents that served those communities weren’t able to procure a regular agency contract with standard carriers.

“In some manner, they seemed to find reasons why they didn’t want to particular write in those areas and appoint agents,” Hernandez continued. “For some guy that’s in an area where they know the company’s not going to want to write any business, there’s no chance of them ever getting a standardized contract with one of the [larger] carriers.”

Consequently, some agents that have been in the inner-city or minority communities for several years are forced to go to the alternative market, primarily nonstandard auto on the personal lines, and surplus and excess on the commercial side. “Those guys are surviving, but only because they’re using companies that [are] in most cases…non-admitted companies,” Hernandez said.

Hernandez said the work done through the IBA West, with both regional and some national carriers, was to familiarize them with inner-city neighborhoods and communities, demonstrating changes going on there and that the majority of the people living in those communities are blue-collar type workers.

“The point we wanted to try to bring home was that these people were willing to pay what I would consider an adequate, not a really expensive premium…but it wasn’t being offered,” he said. “Until the companies were able to come in and write a volume of business in there that was profitable, they would not be in a position to be able to adjust the rates to reflect that.”

Another issue presented to the companies was that, especially in California, there is large growth in the Hispanic community and that those people are the future buyers of products. “A few of the companies decided they would take a chance,” Hernandez said. “As a result, a few of the agents in some of those areas were given the opportunity on some contracts, and the premium volumes were reduced.”