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Read the Fine Print in Your Insurance Cluster Agreement

Exploring an insurance cluster membership? No two clusters are alike, so be sure to read the fine print in the contract and then ask questions about the practices of the cluster that go beyond that document.

When investigating membership in a cluster be sure to request and read the member contract, paying particular attention to provisions dealing with the following:

  • exit penalties
  • account ownership
  • profit sharing
  • commission sharing (continued in next blog post)
  • carrier-agency relationships, contracts and authority (continued in next blog)

Since you’re unlikely to find a section entitled “Exit Penalties” in the member contract you’ll need to keep these questions in mind when investigating the cluster’s contract.

  1. Under what conditions is my commission revenue reduced and for how long and by what percentage?
  2. Am I able to approach carriers for independent appointment without penalty?
  3. How will my profit sharing revenue be impacted?
  4. For what period may I renew policies through the cluster after my membership ends?

The value of your book of business is dependent on your ownership of your accounts’ expirations, so be sure to determine the following.

  1. What percentage of ownership, if any, does the cluster accrue for accounts placed through shared carrier access?
  2. What is the purchase formula for buying back 100% of my interest in my book of business?

Profit sharing plans present the potential of increasing your revenue from participating  carriers by 20 to 40% so be sure to obtain answers to these questions.

  1. How is profit sharing apportioned among the member agencies?
  2. Are there any criteria that preclude my participation in profit sharing from carriers (eg, loss ratio must be <60% or earned premium must exceed $150,000)?
  3. Is a profit sharing estimator available that estimates my profit sharing I would have received over the last 3 years if I  had been a member?
  4. What are the loss ratios and premium volumes for the last 5 years for the top 10 profit sharing  carriers?
  5. Am I able to avoid profit sharing participation with the cluster for individual carriers I’m already doing business with?
  6. How does the cluster protect my profit sharing  against poorly performing agencies and/or poorly performing territories, industry segments or policy types?

For more information regarding this topic, or any question you may have, please contact:

Jack Harbert,Vice President