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Coverage denied

Insurance agents who once sold policies exclusively for heavy hitters such as Allstate and State Farm are being stripped of commissions and benefits, forcing them into the ranks of the independents. The big insurance agencies say the changes benefit customers.

By JEFF HARRINGTON

© St. Petersburg Times, published March 18, 2001


When he became an Allstate agent in St. Petersburg 15 years ago, John Hogan thought he was joining the insurance industry's elite.

After all, agents working for prestigious companies such as Allstate and State Farm enjoyed job security and a steady flow of repeat business. Established employee agencies often brought in $1.5-million to $2.5-million a year in premiums, keeping something less than 10 percent of that in commissions.

Their commissions weren't as high as those earned by independent agents, but some office expenses were picked up by the home office, and they didn't have to scramble like the independents for contracts to write policies.

"It was sold to me that we were all one big happy family," Hogan said. "I fully intended that's where I would retire from."

His security bubble burst in late 1999.

That was when Allstate chief executive Edward Liddy moved to strip thousands of agents such as Hogan of employee benefits. At the same time, the company started selling insurance through company call centers and the Internet, moves the agents viewed as direct competition.

Swept out during the restructuring last summer, Hogan, 47, now teaches social studies at Countryside High School in Clearwater. No longer one of the "Good Hands People," he is lead plaintiff in a class-action lawsuit accusing Allstate of cheating agents out of overtime pay.

Allstate's case, though the most dramatic, is not isolated. State Farm also is battling a small cadre of disgruntled agents. It insists it has had a strong retention rate. Nevertheless, its head count of 16,000 agents is down about 1,000 from its heyday in the early 1990s even after appointing more than 1,000 new agents last year.

The upshot of the turmoil? More and more "captive agents" who once sold policies exclusively for Papa Allstate or Mama State Farm are joining the ranks of the independents.

Some companies such as Northwest Mutual are meeting the independent agent trend halfway. Its once-exclusive agents now can shop policies elsewhere after giving Northwest the right of first refusal.

"For us, it's a great thing," laughed Jeff Grady, president of the Florida Association of Insurance Agents, which represents 1,100 independent agencies statewide. "It makes more of the world look like us, which is the way we think it should be."

Whether it's a great thing for consumers is in dispute. Allstate says its shift helps keep rates and costs in check while meeting customer demand for more ways to reach the company. Some on the agents' side say customers lose out on personal service and the expertise neighborhood agents can provide.

According to 1999 data from researcher Conning Corp., independent agents are dominant in selling personal lines of insurance such as home, auto and life coverage while captive agents and other "exclusive" agents dominate in the commercial side.

All told, there are about 475,000 independent agents compared with about 700,000 captive agents. But the tide is turning, contends Madelyn Flannagan, vice president of education and research for the Independent Insurance Agents of America.

"I get calls here every day from agents who are captive and want to become independent," Flannagan said.

In its 2000 survey, the agents association found 17 percent of the agencies responding were new since 1995, 8 percent of them starting up in 1999 alone.

The newcomers' timing may not be the best. It's become tougher than ever for independent start-ups to survive.

Commissions have been cut. Large regional independents such as Brown & Brown of Tampa are seeking exclusive contracts with major insurers such as Hartford, shutting out the smaller independents. Competition is fierce, particularly as the Internet rewrites the way people shop for rates, if not the way they buy insurance.

And then there's that nagging problem of a slowing economy.

Allstate saw those storm clouds on the horizon 16 months ago.

Eager to increase revenues, CEO Liddy launched a restructuring that included telephone centers and an Internet site soliciting customers directly. The company saw the moves as the only way to stay ahead of low-cost competitors such as fast-growing GEICO; Allstate agents saw the changes as a direct threat.

At the same time, Allstate fired all 6,200 of its agents who were employees. It gave them the option of rejoining as part of its long-established force of independent contractors. They would continue selling Allstate exclusively but would be stripped of their pensions and other benefits and saddled with overhead costs.

Industry observers and analysts backed Allstate for giving consumers more options to get in touch with the insurer.

And Allstate expresses no regrets.

By the end of last year, the call center and Internet program was operational "on time and on budget" in 15 states and the District of Columbia, representing more than 40 percent of the Allstate network. Florida was the largest market to go through the transition.

Over the year, Allstate also rolled out about 20,000 computer workstations for agents that connect their offices with the online and call center operations so they could share in the benefits of new technology.

That didn't prevent an immediate backlash.

About 2,400 agents left Allstate by the company's deadline in July, the company said. Those who left could make several hundred thousand dollars selling their "book" of business to other agents. About 3,800 agents, or 60 percent, chose to become independent contractors working exclusively for Allstate, the company said.

Including recent hires, Allstate says it now has about 13,000 "exclusive" contractors working for it, down from 15,000 before its restructuring. In Florida, it has about 1,000 agents compared with 1,200 before the conversion.

The National Association of Professional Allstate Agents disagrees with Allstate's math. It contends that as many as to 5,000 agents have left nationally. "It's sort of like the Kremlin with trying to come up with accurate figures," said Rod Guilmete, spokesman and publications director for the agents group.

About 70 Allstate agents filed a complaint with the Equal Employment Opportunity Commission, criticizing Allstate's decision to give better severance benefits to those departing agents who agreed not to sue the company.

An official at the federal agency agreed. Lynn Bruner, EEOC district director in St. Louis, said in a letter that the action by Allstate amounted to "unlawful interference, coercion and intimidation." After talks with the EEOC broke off in February, Allstate anticipates the federal agency will sue. An EEOC spokesman last week declined to discuss the agency's options.

Separately, in December, 48 former Allstate agents joined John Hogan in filing suit in federal court in Tampa. The class-action charges the insurer with requiring its employee agents to work extra hours without paying them overtime compensation.

Guilmete said many former agents are reluctant to sue or speak out against Allstate because they are receiving termination pay on a monthly basis. "Some would be afraid Allstate would stop the payments" if they talked publicly, he said. "A lot of these agents are really terrified of Allstate."

Allstate spokeswoman Kathy Thomas said former agents are not prohibited from speaking publicly.

Not that change is going all that smoothly at rival State Farm.

In late 1999, a group of 40 current and former State Farm agents created an organization called State Farm Agents Who Care and peppered a Web site with allegations that the insurance giant was mistreating customers and employees. The allegations ran the gamut from inflated insurance pricing to "redlining," or refusing to do business in entire neighborhoods viewed as high-risk.

State Farm dismissed the organization as an isolated group of disgruntled ex-employees. Most of the group, State Farm said, had a vested interested in discrediting the company because they are involved in litigation.

Patrick Woodson, a spokesman for the agents group, said it has not given up, even after State Farm fired four employees who participated in a news conference.

The agents lately have focused their wrath on the company's decision to charge them for being linked to the company's new 24-hour call centers.

Convinced the company's new efforts are designed to undercut them, Woodson said, agents ask, "Why do we have to pay for you guys to get rid of us?"

State Farm counters that it has no intention of eliminating agents. On the contrary, it says, it steers business to the neighborhood agents when contacted by potential customers over the phone or Internet.

Unlike Allstate, State Farm spokeswoman Ana Compain-Romero said her company has no plans to peddle policies directly, bypassing the agents.

"We believe in the agents," she said. "We solidly and firmly believe that's why we are number one ... There's that relationship people can count on."

- Jeff Harrington can be reached at harrington@sptimes.com or (813) 226-3407.

A pessimistic outlook

Independent agencies that rely on personal lines such as auto or home for most of their business, rather than commercial lines, are most threatened by recent trends. Among such agencies, here is the percentage that agreed with the following statements:

This is a time of great opportunity for independent agents: 33 percent agreed

I believe the Internet is an opportunity, not a threat, for independent agents: 26 percent Business written direct without an agent is cutting into our personal lines of business: 50 percent

Banks selling insurance are a threat to independent agents: 46 percent

Direct writers are cutting into our commercial lines of business: 25 percent

Source: Independent Insurance Agents of America 2000 survey

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