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The world is not fair.

This week, I saw a report by Standard and Poor s that said the aftermath of the Wall Street bid-rigging scandal is largely over for the "Big 3" insurance brokers, but that they still face difficulties. Standard and Poor's said the brokerages have pretty much recuperated, but the market is softening and rate pressure will continue, so lack of organic growth will slow down broker resurgence in the wake of the bid-rigging and price steering scandal.

Forgive me if I seem flippant, but so what? We're all facing difficulties ... and the rest of us didn't engage in illegal activities to deserve it. It's a soft market. Now that the first quarter is over and our hard-earned profit sharing checks are banked, I have to ask, did anyone sit down with their accountant to see if they made or lost money before profit sharing? I bet most agents throw profit sharing in with their yearly earnings. When my accountant does my books, I have him calculate my numbers prior to profit sharing, and then add it in. It allows me to take an honest look at how much I need the profit sharing package.

About a year ago, the Travelers agreement with New York's then-attorney general began a trend of "regulation by settlement." In conversations I had with several Travelers executives, they said they felt the settlement was best for their company and for their agents in order to maintain a compensation program that would benefit both parties. But I can't help but think some other company executives sat around a table and thought to each other, "Hey, these agreements may not be so bad for our company ..."

Eliminating profit sharing plans is a way for regulators to move the sales distribution system away from the independent agent and the smaller, regional companies that depend on independent agents. An inequitable disclosure requirement is another. I predict when disclosure is mandated by authorities in Albany, "exclusive agents" and direct writers will be excluded. And that is going to result in unfair competition. Many so-called "exclusive" agents actually have access to wholesalers (think: disenfranchised Allstate agents who have now been let loose because their company will not write property business downstate), and for many years they have regularly brokered some business through their friendly independent agent.

Profit Sharing. Pays the Bills

The problem is that profit sharing pays agency salaries. It pays for all those things my agency, and, I dare say, most other agencies, has undertaken as the companies have shifted their cost of doing business to us.

In the old days, I received 25 percent commission on my business. Nowadays, I'm lucky to get 12 to 15 percent. And even so, I had to invest hundreds of thousands of dollars to upgrade technology and hire new underwriters to accommodate insurance companies' increased underwriting requirements of my agency last year. This is one reason profit sharing is so important to the agent: this income allows us to keep our business running. And the cost of doing business has gone up.

Meanwhile, company financial input has gone down. Independent agents are spending more and more of their own resources on work that traditionally would have been done by the companies. We are responsible for increased spending on skilled people to do front-line underwriting, loss control (for example, we buy and use digital cameras for pictures), claims support, improving technology, advertising, and increasing our own knowledge of ever-changing products. It's a trend of cost-transferring that will ultimately end in the demise of many small agencies.

A new paradigm is occurring before us. I said it in a previous column: we are becoming an industry of "haves and have-nots". The smaller guys are losing out and major insurance companies are winning.

If you want a douse of cold water as the weather warms up this season, do a reality check for yourself: Run your financials without the profit sharing portion of your income--see what shape you are in.

N. Stephen Ruchman is president of Ruchman Associates Inc. in Rockville Centre, N.Y. and a past president of the Professional Insurance Agents of New York State Inc. As an active supporter of PIANY, Ruchman also served as first vice president and vice president of the association. He also chaired PIANY's convention and membership committees. He is a member of PIANY's government affairs, nominations and membership programs committee. Ruchman also is chairman of the Long Island Advisory Council. He is a member of PIANY's political action committee where he serves on their executive committee.

In his community, Ruchman is past president of the Peninsula Counseling Center and a member and past president of the Rockville Centre Chamber of Commerce board of directors. Additionally, he is on the business advisory board of The First National Bank of Long Island, and past division chairman for the Insurance Division of the United Jewish Appeal.
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Title Annotation:THE AGENTS' VOICE
Author:Ruchman, N. Stephen
Publication:Insurance Advocate
Date:May 21, 2007
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