The bumpy route to independence: when insurers divest of their captive agents, custody battles and lawsuits can follow. (Industry Strategies).

When an insurer decides that its career, or captive, agent force has become too costly to maintain, it can cut back on the number of agents, change their working relationship or eliminate them to transform this distribution channel into low-overhead independents.

This growing trend has spawned a variety of outcomes. For example, in the midst of a major overhaul that dates back to 1994, Prudential Financial Inc. has pared its 18,000 career agents to about 4,500. Boston-based John Hancock Financial Services Inc. converted its career-agent force into a general agency system, called Signator, in 1999. Late that same year, Allstate Corp. announced a sweeping reorganization of its business model and gave its 6,400 captive employee-agents six months to decide on several options, including selling their books of business and leaving the company.

Veteran agents caught in the middle of these company transformations--the employees who have spent years of their working lives serving a single company and selling only its products--often face a critical choice: stay on with their carriers, even if it means a loss in company benefits, or strike out on their own as independent agents.

Client Custody Battle 

"The career agency system is dying quickly," wrote Michael Siefe, a former Equitable Life Assurance Society agent, in an article posted on the Web site for the Association of Current and Former Equitable Agents. "This means that the divorce between agents and career companies is almost final. The custody battle now will be fought over the ownership of the clients."

In Joseph A. Scavone's case, after 27 years as a captive agent and agency owner with Nationwide Insurance Co., he joined seven fellow agents who formally resigned from the company and formed their own independent insurance agencies. Scavone had become dissatisfied when changes arose in Nationwide's company policies that affected his customers. For one thing, Nationwide decided to add a mandatory 2% windstorm deductible to all homeowners policies in Westchester County, N.Y., while other area insurers did not, Scavone said. He began to see good policyholders go to other carriers.

"My clients were at stake here," he said." I needed to do something or I would lose them all."

On top of that, Scavone was troubled over Nationwide's succession program and the issue of just who owned his book of business. He said that Nationwide had long told him that when he wanted to retire, there would be no problem in handing over the business to his two daughters who work with him. "Then suddenly, they told me my daughters would have to qualify and pay for the book of business," Scavone said.

After researching the marketplace, he decided that MetLife Auto & Home was the primary carrier he wanted to offer his clients. "It was all above board--we did it the right way," Scavone said. He called his clients to inform them of the change after he officially resigned. Then he had clients sign a policy cancellation request in acceptance of the new policy. In the meantime, Nationwide transferred his book to other agents who actively solicited his clients. Even so, "we were fortunate to maintain over 90% of the block of business," he said. "We also started to get calls from former customers we had lost over the last few years."

Scavone, who owns Scavone Insurance Center, White Plains, N.Y., said he's better off for having taken the plunge. "The markets are now tight, but at least we have markets we can serve our customers in," he said. "We're very happy because our customers are happy and we're still looking after their best interest."

For its part, Nationwide Insurance said it is committed to efficient and effective succession planning in its agency distribution system. "Succession planning helps Nationwide prepare for the transfer of business from the stewardship of an outgoing agency principal to a new principal with minimal impact on our customers," the company said in a statement.

Nationwide said that contractually, it retains the right to determine what happens to a book of business when its relationship with an agency principal ends, whether through retirement or other circumstances. When business is transferred from one agency principal to another, the new principal must meet the requirements that the company has established for all of its agency principals, Nationwide said.

"As between Nationwide and the exclusive agent, Nationwide contractually controls the renewals to its business," the company said. "Nationwide may transfer the right to receive renewal services fees from a book of business to a new agency principal, or an existing agency principal in the case of a merger. Various plans are available to agency principals for the purchase of these rights."

The company said it is committed in New York and other states where it does business to growing the business written through its agents, and has invested in programs to strengthen the agency distribution system in those states. "Nationwide is benefiting from a strong, loyal agency force in New York, which is increasing its earnings and enjoying a strong customer retention rate," the company said.

See You in Court

Some career or captive agents have taken battles against their employers into the courtroom.

Members of the ACFEA brought a successful class-action lawsuit against Equitable Life Assurance Society, a wholly owned subsidiary of Axa Financial, over major-medical commissions due to agents. This lawsuit had a second count that dealt with health benefits which, the group said, the company had promised.

Siefe, the president of ACFEA and a consultant to its E-Group, the association's own producer group, became an Equitable agent in July 1979. His father was an Equitable agent for about 40 years.

But Siefe grew dissatisfied with the company in the wake of demutualization and ownership by the French insurer, Axa. His big complaint with Equitable began in 1992 when, after selling a number of Equitable major-medical insurance polices, he learned that the company was freezing service fees on such policies. "The decision seemed to violate Equitable's agreements with its agents, the terms of its commission and service fee schedules and Equitable's written and oral assurances to agents," Siefe said in a 1998 affidavit.

Also, year after year, Equitable had promised agents who attained specified aggregate production levels that they would receive "permanent" subsidized health insurance for life, regardless of subsequent sales or production levels achieved by such agents. Also in 1992, Equitable canceled these rights, Siefe said.

Even though he faced a loss of $15,000 because of the major-medical commission change, Siefe said he was concerned about protesting the freeze because he feared termination, "which effectively ends a lifetime's work at building renewal payments," he said. On termination, Equitable would demand that the agent hand over client files and often would tell clients that they had a new agent. After termination, Equitable would not release information to the agent about his or her clients, making it difficult for the agent to retain them, Siefe said.

However, Siefe continued to feel that the freeze was a violation of Equitable's contract with its agents. He contacted the company's legal staff, and personally raised the issue at the local National Agency Forum meeting, an Equitable-sponsored organization of agents. They, in turn, brought up the issue at the national level. After losing hope of remedying the situation, however, Siefe said he finally consulted an attorney, who filed a class action lawsuit against Equitable on other agents' behalf in October 1996.

Also in 1996, Siefe and other Equitable agents formed ACFEA to protest what they believed were unjustified terminations of Equitable agents and other financial mistreatment of agents by the insurer. Siefe said he and the others thought that by organizing disgruntled agents, they would have some leverage with the company. Slightly more than four years after it was instituted, the commission freeze was rescinded, Siefe said.

In 1998, the association launched E-Group, which has an arrangement with Centaurus, a broker-dealer in Irvine, Calif., to handle agents' variable and other securities-related business. E-Group was formed to help dissatisfied Equitable agents have a high-commission alternative to placing business through Equitable. Siefe said more than 100 ex-Equitable agents have participated in the group.

Siefe was fired by Equitable in 1999, but before then, he sensed that the action was coming. "I was taking an incredible pro-agent position, and my role in litigation was well known," Siefe said. But in fairness to the company, when Siefe was fired in spring 1999, the company had a legitimate reason, he said. Because he knew his time with the company was limited, he had deliberately bypassed Equitable to write deals with other insurers which would have the effect of leaving fewer clients and consequent renewal income behind with Equitable. As a result, Siefe was writing no new business with the carrier and said he was probably terminated for lack of production.

He now operates Michael Siefe & Associates, an insurance consulting and brokerage firm. "I'm not bitter with Equitable--I'm making great money since I left," Siefe said.

In May 2002, Equitable agents won their case in federal district court on the health benefits lawsuit. Siefe called it "one of the more significant agent victories in the industry" and said it far surpassed the $20 million settlement on the major medical commissions. "It probably means tens of millions of dollars to agents for past losses and that much or more for benefits in future years."

Axa Financial said it couldn't disagree more with Siefe's views on the viability of the career sales-force model.

"Our retail distribution system, based on the career model, is the centerpiece of one of the most successful distribution platforms in the industry and is a testament to the vitality of the career model," Axa Financial said in a statement. "Our career associates are among the best credentialed, most professional and most successful in the business. We remain totally committed to investing in the continued growth of career associates who aspire to a level of professionalism, trust and performance consistent with our strategic vision."

Axa said it plans to hire nearly 1,000 new associates-the company's term for its agents--in 2003 and continues to spend "significantly" on training and technology to enhance their sales efforts.

"We are extremely proud of them and their accomplishments," the company said. "The ACFEA is a small group of disgruntled individuals formed to advance its own agenda. We believe the group is not representative of the Axa Advisors' associates generally."

Relationship Management

Allstate, the nation's second-largest automobile and homeowners insurer, is facing several lawsuits that have grown out of the company's plan to streamline its operations.

"A group of our agents isn't particularly pleased with the direction we are going in," Edward M. Liddy, Allstate's president, chairman and chief executive officer said to a New York City press luncheon in September. "Anytime you have 11,500 people, you'd like it if everyone loved your strategy, understood it and embraced it. But it's tough when you have 11,500 people. There are folks who resist change, who would just as soon stay where they are. We think staying where you are is not a good strategy."

Allstate announced in November 1999 that it would cut spending by $600 million by the end of 2000 and channel the savings into call center and Internet capabilities, while phasing out company-employed insurance agents. The action affected more than 6,000 of the company's 15,200 agents at the time. The agent force now is closer to 11,500.

By Liddy's reckoning, Allstate's captive agents were working under as many as 10 different employee programs forged over the years. As part of its streamlining and cost-cutting measures, the company moved to consolidate all of those agents under one banner: independent-contractor agents who would remain captives in the sense that they would continue to sell Allstate products exclusively. In the process, these agents would lose company payment of business expenses and benefits. On the flip side, they would receive an enhanced commission structure and would own their books of business, meaning they had equity interests in those books, Allstate said.

About 2,500 agents chose to leave the company rather than sign on as independent contractors, Liddy said. "But about 2,200 existing agents stepped up and said, 'I want to buy that book of business. I can do a better job of it, managing it and cross selling.' And that has worked extremely well," he said.

So well that, he added, Allstate agencies in 2002 sold about twice as many financial services products as they did in 2001 when they sold $750 million in premiums and deposits. "In fact, we hit that level at the end of the second quarter" of 2002, Liddy said.

"Asking our agents to get bigger and get broader, to become independent contractors--which means they have a stake in the business, they have an economic interest in how well that business does because they can sell it if they so choose--really has released some energy and drive that perhaps was dormant before," he said.

But former Allstate agent Gene Romero has a far different perspective. Romero, who worked for Allstate for more than 13 years, was 51 years old when the company terminated him on June 30, 2000, along with more than 6,000 others. All of these agents were terminated as part of the conversion process, Allstate said. When Romero first learned of the company's policy change, he had a feeling of helplessness and betrayal, he said. "Termination really was a surprise to me and everyone else," Romero said. "I think a lot of the agents were in a state of denial, possibly even shock."

The company offered four options for its captive agents to consider. Allstate said that three of the options included significant financial incentives and required the signing of a release in exchange for these benefits. With these options, agents could choose to become exclusive agents and continue to represent Allstate; become exclusive agents to receive an economic interest in their book of business, then sell it; or leave the company with an enhanced severance benefit. The fourth option, which did not require the signing of a release, provided a severance payment that was smaller than the third plan but comparable to what an agent might normally have received under Allstate's existing severance policies, Allstate said.

Romero and some other agents first turned to the Equal Employment Opportunity Commission. The commission weighed in, filing suit in U.S. District Court for the Eastern District of Pennsylvania, in Philadelphia, alleging that Allstate's agent-conversion plan included improper "pre-emptive" retaliatory measures. The EEOC's lawsuit focuses on the release that Allstate required its newly independent agents to sign in order to receive enhanced severance pay.

Romero, also joined by other agents, has taken legal action against Allstate on two other fronts.

He is a plaintiff in a lawsuit filed in Philadelphia's federal court that seeks class-action status on behalf of the terminated agents. Originally, the lawsuit was filed by 27 current or former agents in August 2001. Now, more than 100 agents have signed on, said Romero's attorney, Michael Lieder, of the Washington, D.C.-based law firm, Sprenger & Lang. Co-counsels are Zevnik Horton and the AARP Foundation.

The complaint seeks injunctive relief and monetary compensation estimated "in the hundreds of million of dollars." It alleges that Allstate violated federal regulations under the Employee Retirement Income Security Act and the Age Discrimination in Employment Act, as well as Allstate's contractual and fiduciary duties.

Meanwhile, Allstate has filed a series of counterclaims against the plaintiffs seeking compensatory and punitive damages. Allstate claims that by joining in this lawsuit, agents broke promises they had made in the company releases they signed.

In the second lawsuit, also filed in Philadelphia's federal court, Romero is contesting Allstate's freezing of the agent pension plan so that captives would not accrue any more benefits, he said. Allstate has moved to have this case dismissed and the judge has yet to rule on that motion, Lieder said. Here, too, Lieder has requested a class certification.

"We believe that Allstate was motivated both by age discrimination and by the desire to rid itself of very expensive employee benefits to agents that totaled in the hundreds of millions of dollars a year that it was saving if these people became independent contractors or left," Lieder said.

Allstate has long maintained that its strategy regarding the agents is fair and follows normal business practices.

Romero remains unemployed.

Agent-Owned Cooperative

In some cases, captive agents don't get the chance to stay on with the company--even in a changed role.

Nicholas Argeros, president of all-Mass Group Inc. and owner of Argeros Insurance Inc. in Reading, Mass., used to be a captive agent for Allstate Insurance Co. in Massachusetts, like his father, Michael, before him. In the 1980s, rumors began circulating that Allstate--like other insurers--might leave the difficult Massachusetts auto insurance market. Then on a fall day in 1988, the carrier summoned Argeros and other agents to meetings at six locations around the state and showed them a video announcing the company's pullout.

"I was only working for Allstate for five years; I was in my early 30s, so it wasn't too shocking to me," he said. "However, it was extremely shocking to a majority of the Massachusetts Allstate agents because the average agent was working for the company about 20 years. I looked around the room and there were all these gray-haired men holding their heads in their laps."

Allstate released the news simultaneously to the media, and independent agents jumped immediately into the breach, promoting their services to Allstate customers. "We had no preparation," Argeros said of the company's decision. "We lost clients galore. People were jumping ship like it was the Titanic going down. We probably lost 5% of the business initially--in a couple of days."

The agents had no choice, Argeros said. "It was either go to work for somebody else or hang up our own shingle," he said. "Most of the guys hung up their own shingles."

In his case, the course was obvious: he and his father joined forces, consolidating their two agencies into one. Things weren't so smooth, though, for some others who decided to partner. "A lot of the guys who joined up went through terrible break-ups-divorces,

I like to call them--because no one really had an independent agent frame of mind," Argeros said.

As captive agents with Allstate, Argeros said he and fellow agents were receiving commissions of 17.5% for new policies and 6.5% for renewals. As independents, they garnered commissions of 20% on either, but had to pay their own overhead. "We were making some pretty good money when we had 17.5% new business commissions, plus health insurance benefits, life insurance benefits, retirement benefits, and we could write off our cars and business expenses," Argeros said. "Everything was provided to us-the office, stamps, pens, pencils--all we had to do was come to work four hours a day and wear a shirt and tie."

It soon made sense for these former Allstate agents to band together to save on their overhead costs. They thought of creating one enormous independent agency with all of them as producers, but no one wanted to give up his or her autonomy and ownership. Finally, they hit upon the idea of operating as an agent-owned cooperative.

Today, allMass is Massachusetts' largest network of independent insurance agencies with 23 agencies spread across eastern Massachusetts, the Greater Boston area, Gape Cod and the Worcester, Mass., area. Membership gives access to personal and commercial lines markets through a subsidiary, the allMass Insurance Agency. Belonging to allMass also provides independent agencies with branding through the cooperative's logo. A vendor program offers members preferred service from a wide range of vendors.

All in all, life as an independent is better than being a captive agent, Argeros said. For one thing, he can pursue whatever business he wants beyond the bread-and-butter homeowners and auto that he sold for Allstate. "I can pick up or drop companies as I want to," he said. "I have a significantly better rapport with my clients because I'm not an employee anymore--I'm perceived as an insurance professional who's looking out for them, being a liaison between them and the companies."

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