The Rule of 55: When Producers Become Maintainers

When the Rule of 55 was first explained to me in 1981, it didn’t have much impact. In fact, I had never heard of the rule. After all, I was 42 years old and in charge of a rapidly developing insurance agency. I didn’t see it then, but as time evolved it became more meaningful and important. In general terms the rule stated that at the age of 55 insurance agents have reached a point in life where their business mentality turns from production to maintenance.

It is at that time when the development of an exit strategy must begin in earnest. This rule does not only apply to an agency owner, or to a perpetuation strategy, but is doubly important for a growing agency. It is even more meaningful to a front-line producer. For the agency owner who employs a sales staff, the Rule of 55 should be a red flag.

At age 42, with a handful of producers of similar age, 55 years old was far into the future for all of us. The production of new business, building and maintaining our books of business—that was what it was all about. Our theory at that time was what we called the “basket theory.” That was, and still is: Every producer has a certain size basket that represents the size of their eventual book of business. To fill that basket, you can fill it with a single watermelon, or a combination of melons, peaches and grapes.

We preached the idea that you wanted a basket that got larger in size, but filled with melons, oranges, peaches, but no grapes. At that time in our careers, we believed we would go on producing and increasing our individual books of business forever. How wrong we were.

In retrospect, it was a mistake not to have considered the Rule of 55 and planned for it at that early stage. But no other agency we knew of was giving it much, if any, consideration. In fact, I doubt if anyone had even heard of the Rule of 55. Little did we realize how soon 55 would come, and how many years it takes to deal with the issues revolving around the Rule of 55.

In 1979, I became the president of the Western Association of Insurance Brokers (now IBA West). I had become close to many agents throughout California, most of whom were older than me. After my term in office was finished, I stayed active with the association, which gave me the opportunity to continue to observe both agents and agencies of all types and sizes. In 1984, I became chairman of Assurex Global, a national partnership of large, privately-owned agencies.

And we joined the Council of Insurance Agents and Brokers, an opportunity that gave us a closer look at the operations of some very large organizations. One fact became more and more apparent: as agents and producers reached their mid-50s, new production was no longer the primary thought on their mind. It appeared at first these agents and producers had reached their goals, that they didn’t need the business and already had all they could handle. But that wasn’t correct. They had all reached their mid-50s and the Rule of 55 was a serious issue. They were in maintenance mode. Age had changed their priorities and sapped their energy levels.

But more important was the observation that as each slowly approached 65, they began slowing down from the maintenance level toward burnout. Their careers resembled a bell curve.

I don’t have the benefit of any solid theory on why this happens in the insurance agency business. I don’t even know where the Rule of 55 developed, or if it is an accepted theory. I do have my thoughts, for what it’s worth. And that is the pressure of new sales (cold calls, etc.) combined with dealing with customers experiencing the numerous cycles and changes in our business and being the messenger of frequent bad news results in early burnout. Those types of pressures are unique to our business.

As the CEO of a growing agency, all around me I saw signs that the Rule of 55 was a reality rather than just a theory. I watched as many fine agencies—mostly one-producer shops—slowly died until they had nothing worth selling. But I also saw larger shops face the same problem with their production staff. And many, like ours, had producers in a similar age range as the owners. When they all reached the mid-50s, production and a strong sales culture slowly died. Many of those agencies are not around today.

The perpetuation plan
In 1992, at the age of 53, my brother and I had already bought into the Rule of 55 four or five years earlier. We had what we thought was a solid perpetuation plan and exit strategy. It was believed we had a professional organization and an ambitious growth plan. We had started a hiring program of youthful individuals: some experienced, some new to the business. It was a long-term plan designed to have three groups of producers. Those in their 30s, those in their 40s—and the “mature group” was in the third category. Group two, the 40-year-old group, would move into the mature group as that group moved out … or maintained.

But in 1992, open rating became a reality and our key producers had all reached their mid-50s. The youth had not yet fully developed and were not quite ready to replace the mature group. Open rating added a new pressure for producers and that, we believe, was the catalyst for them to quickly, rather than slowly, change their mindset to customer maintenance rather than aggressive production.

It was sudden, and surprised us, but we had seen it before in other agencies. It curtailed our new production efforts for a couple of years as the mature producers were the ones bringing in larger accounts. The newer producers were still more comfortable with smaller accounts.

Today, Bolton & Co. has a carefully designed plan for producers. The Rule of 55 is a major ingredient and consideration in that plan. The first stage of perpetuation was accomplished in April when my brother Jim and I sold our interest to a large group of highly qualified, younger employees. And the stage has been set for those owners to perpetuate the agency to the next generation and for that generation to move up into management and ownership. The understanding of the Rule of 55 and experiencing its consequences allowed us to build the perpetuation plan we wanted.

My brother and I purchased Bolton & Co. from our father in 1974. With about $600,000 in commissions, and having never taken much of a role in management, we now had a company to run all by ourselves. Plus, we had to pay our father. Production was a must. So was good management. But we did it. There were three factors that made us into a large, professional agency. We were active in industry activities and learned from those activities. We reinvested in the future. We built a solid business organization.

Participate in industry activities
We didn’t know how an agency was run. Our father was not around much to help us. So we became active in the Western Association of Insurance Brokers. We kept our eyes and ears open. Almost every meeting we attended has resulted in another $10,000 idea. Meetings are a great way to talk to your peers. And most agencies are proud of what they do well and are willing to share. I think this is a positive aspect of our business—we will share our ideas even though we are fierce competitors. This is how we learned.

No matter who you are, participation in industry activities provides you with current and vital information that cannot be obtained elsewhere. Those who are not active suffer in terms of new ideas and concepts because they depend entirely upon the originality of their own senior management. There is a good reason why the larger agencies throughout the country are so active in industry affairs.

Reinvest in the future
You can’t grow or prosper unless there is reinvestment in the agency. Reinvestment in people and training tops the list. Growth is difficult. You need top, professional producers. Their results lead to growth, but that requires professional customer service representatives to maintain the business. Good people equals good results. And with those results comes a better selection of companies and more clients.

As growth continues, every agency hits a wall. Climb that wall, and you will surely hit another. And the only way over the wall is by reinvestment. It may take a new, upgraded computer system, larger quarters, or a new key employee. All of this takes money. But unless one gets over the wall, there can be no sustained growth in the future. Over the years, I have seen many fine agencies sell because they just couldn’t jump that hurdle.

Build a solid business organization
The one thing I remembered in business school was the three stages of organization: entrepreneurial, intermediate and professional. So many agencies sold and did not realize the true value for their agency, because they couldn’t introduce professional management to the organization.

A producer starts out on his own and has soon developed some nice accounts. He or she has a small staff. But the owner/producer soon realizes the need for more producers and staff. And this results in more growth. At some point the original owner/producer realizes the need for some management beyond what he or she has been providing. So he or she must move the company into the second stage where the entrepreneur recognizes his or her shortcomings—most entrepreneurial people have only limited ability beyond the original skills needed to get the company started.

Too often agencies do not recognize the need to move some of the authorities away from the original founders, or the founders take on management roles they are usually ill-equipped to handle.

Delegate, delegate, delegate
I know one agent who couldn’t grow beyond a certain size because he was a micro-manager, a meddler who had to be involved in everything. He couldn’t delegate. He was a great producer, but couldn’t manage people, and couldn’t trust in people to do the job. And so his investment in his agency never realized its full potential and he sold out far too early. He hadn’t developed a good business organization.

Too few agents want to give up control, even though they are inept at running a business, hiring and setting clear goals and standards. They are salespeople first and foremost. They have never had experience, or a natural ability to run an organization of people. For example, rarely is your best salesperson a good sales manager. The two jobs require skills completely different from one another.

Look at the regional brokers. They have all developed from small agencies where the original entrepreneur has stepped aside early to allow certain areas of his/her agency to be run by professionals. The larger they become, the more areas of management are delegated to others. These founders are not micro-managers, they trust in their people, they know how to delegate, and they recognize their weaknesses and strengths. They hire well, instruct the employees as to what they want and then get out of their way.

At Bolton & Co., we invest in our people. Our success has been attributed to our people and the corporate culture which gives them the freedom to work within broad parameters and free of criticism or fear. Let people fly and you will be amazed at how professional they become.

William “Bill” Bolton serves as director of Bolton & Co. He began his career at Industrial Indemnity Company and joined Bolton & Co. in 1967. After 42 years in the industry, Bolton sold his interest in Bolton & Co. to its management and is now semi-retired. He can be reached at wbolton@boltonco.com.