Agency Cluster Primer

Definition of a Cluster

A group of agents who form an association or joint venture to aggregate their individual books of business with common carriers. Each agency member retains its own separate identity. Clusters can consist of just few agencies consolidating volume with common carriers in order to maximize contingency revenues to large groups with centralized infrastructure and other support. For the purposes of this primer, cluster is differentiated from an aggregators, franchisors and networks which include a profit element for the mother platform. An in-depth “Aggregator Guidebook” describing these other agency models is available at IIABA’s Virtual University and here.


Pros of a Cluster

  • Clout: Aggregation of books with common carriers results in more lucrative contingency agreements as well as increased influence that comes with greater control of volume.
  • Economies of scale: Opportunity for better access to and utilization of existing facilities, overhead expenses, automation and personnel.
  • Perpetuation: Potential market for a future buy-out when an agency owner wants to sell.
  • Attainment of new sources of competitive advantage: Opportunities to develop new agency offerings.

Cons of a Cluster

  • Lack of commitment: Clustering is like living together instead of marrying. Barriers to exit are low which can foster a sense of instability.
  • Management by Committee: Clusters are usually managed with a 1 member 1 vote process. Decision-making and execution can get messy if all aren’t good team members or there is a willingness to defer to designated leaders.
  • Added layer of accounting: Commissions and volumes across entities must be tracked and validated.
  • Carrier resistance: Carriers may balk if all t hey see is more bureaucracy and increased agency compensation.

Critical success Factors

  • Familiarity and mutual respect among prospective cluster members.
  • Shared understanding of purpose of and vision for cluster.
  • Recognized and agreed-upon responsibilities, revenue/expense sharing and decision making structure.
  • Proper organizational and operational contractual agreements created by qualified legal representation, preferably familiar with agency issues and addressing such issues as:
    • Membership criteria and qualifications.
    • Member financial requirements and default remedies.
    • Member trade secret protections and non-compete covenants.
    • Member perpetuation, ownership changes or death and disability.
    • Termination and withdrawal provisions.
  • Appropriate accounting and other operational procedures.
  • Adequate carrier communication before and during formation and partnering after formation.
  • Added value for common carriers: joint planning, improved front-line underwriting, centralized relationship management, more efficient processing and more effective marketing and production.

Typical Elements of Cluster Operating Agreements

Note: This is a layperson’s attempt to depict typical elements found and issues addressed in a cluster agreement. It is not intended as legal advice. Qualified legal advice should be engaged to create legal agreements.

  1. Identification of parties, operating entity, respective member or shareholder status and respective places of business.
  2. Statement of purposes and intentions.
    1. That each is engaged in business as insurance agent or broker.
    2. That members desire to associate so insurance companies can combine premium volume for the purposes of achieving certain economies of scale and managing loss ratios, such association commonly referred to as a “cluster.”
    3. That parties desire to maintain separate entities, operations and sales activities.
    4. The legal relationship between the members and operating entity is that of Independent Contractors.
  3. Definitions of key terms such as member, account, services, net annual commissions, book value and total permanent disability.
  4. Enumeration of responsibilities:
    1. Members service, invoice and collect on member accounts and render account currents to carriers as usual while operating entity receives contingent commission and distributes according to appropriate formula, usually individual member premium volume.
    2. In the event an individual member cannot make its required payment and to the extent carrier contracts require operating entity to make good, operating entity will receive proportional security interest in member’s book.
    3. Subject to approval of pertinent carriers, each member transfers agency agreements to the operating entity.
    4. Each member shall use its best efforts to enhance their relationship with common carriers and maximize the placement of accounts desired by common carriers.
    5. Each member will maintain e&o with terms, limits and deductibles (to be agreed upon by members) and name operating entity as additional insured.
    6. No members have any authority to incur any liability in the name of operating entity or any other member.
  5. Mutual covenants
    1. All information related to accounts written by individual members are considered their trade secrets and treated as such by other members and operating entity, both during the term of the agreement and after termination or expiration.
    2. Members agree to mutual non solicitation of accounts, employees and/or independent contractor producers, both during term of the agreement and after for a period of stated time, usually three years to five years.
    3. Until notification of and with 100% consent by other members, a member will not join another cluster without first terminating membership in this cluster.
  6. Representations and warranties:
    1. Each member is duly authorized by, licensed and in good standing in accordance with all state laws and regulatory authorities and agrees to maintain authorization, licenses and good standing.
    2. Except as other wised disclosed, no member is a party to any pending or threatened litigation nor investigation or hearing by governmental agency. Each member will notify operating entity of any and all litigation, investigations or hearings to which they may become a party.
    3. Except as other wised disclosed, each member owns all of its assets and is not encumbered by any agreement, contract or default thereof.
    4. Each member will adhere to operating rules, procedures, etc. as agreed to by unanimous vote of all members.
  7. Termination Provisions
    1. Terminations for breach of the agreement; Total Permanent Disability; injurious actions to cluster’s reputation as determined by 100% of other members; majority change of ownership of member unless agreed to by other members.
    2. Notice of termination: Usually 90 to 180 days.
    3. Right of withdrawal from agreement with advance notice
    4. Settlement and policy renewal/cancellation transition terms. Contingency bonuses earned provisions.
  8. Miscellaneous Provisions
    1. Binding arbitration for disputes.
    2. Means of conveyance of any notices required by the agreement.
    3. Prohibition to modifying the agreement, without unanimous consent.
    4. Failure to enforce one part or one time not a waiver of future enforcement.
    5. Binding to heirs but not transferable.
    6. Entire agreement clause.