We all know about the Pareto Principle, the 80/20 rule. It also applies when analyzing the profitability and the work required for an agency’s book of business. Roughly 20% of the accounts generate 80% of the revenue, and 20% of the accounts take 80% of the staff’s time to service them. Problems occur when the accounts that require a lot of service work are not the ones generating considerable revenue.
To improve profitability, the agency needs to focus on medium and large commercial accounts only. There is not much margin to sell and service small accounts. Many of those accounts could also cost the agency in profits.
When analyzing the profitability of a business, it is essential to consider the production costs and the servicing costs. “Costs” can involve time or money. There is a minimal amount of time required by the producer and the service staff to acquire a new piece of business. The smaller the account, the more likely the agency will lose money to acquire it. Once the account is a client, the amount of time required to service the account, and the renewal commission paid to the producer will determine its profitability. For a small account, a few hours of service work and a 30% renewal commission to the producer will not let the account break even for your agency.
The definition of “small” will vary based on the geographic area (urban/suburban/rural) and the local business demographics (type and size of businesses), as well as the resources of the agency (talent of sales/staff and available carriers). In New York City, there are a lot of large accounts that can be written. In Truckee, Calif., (Lake Tahoe area), a good-sized account might be a local restaurant. Agencies without adequate resources (talent and market access) will not be competitive on large accounts, regardless of their location.
Each agency needs to establish its own definition of size. For example, a small account can be defined as one that generates less than $1,000 in commissions, or $10,000 in premium. The threshold can be adjusted periodically. As an alternative, the accounts in the bottom 20% by size in the book of business can be defined as the “small” accounts.
How to Handle Small Accounts
Once the small accounts are identified, a game plan needs to be established. There are three common approaches to handle them: 1) establish a Select Business Unit, 2) outsource the service work, or 3) sell or non-renew the small accounts (“fire” the accounts).
The first step to consider is the role of the producer for small accounts. It might be tough to implement, but producers should not be involved with small accounts. Going forward, commissions for accounts written should be subject to a minimal size threshold in order to be compensated, including renewals.
A book of business report for each producer should be run in descending order by commission. This will help establish how much each producer will be affected financially by not compensating them for the small accounts. It is also helpful to determine how much time they spend on those accounts.
If there is a real financial impact on individual producers, the level may need to be lowered, or their commissions might need to be grandfathered on existing accounts for a period of time. For new business, some agencies will pay a first year only commission on the small accounts, but nothing on renewals.
One noticeable benefit of removing small accounts from a producer’s book is the amount of time it will save the producers. Even if only a couple of hours per year are spent per account, that time will add up. This approach lets producers have more time for new sales and cross-selling. The time saved not handling small accounts can be spent to acquire one or two large accounts that could easily offset the income lost from the small accounts.
Set Up a Select Business Unit
It is very common for commercial accounts under a certain level to be handled only by service staff in a specialized commercial lines department. It should be called the “Select” Busines Unit (SBU) or “special” as opposed to “small,” as sometimes the business owner put in this department might feel they are less worthy of the agency’s attention.
The SBU service personnel have responsibilities similar to that of personal lines service staff. In other words, the SBU personnel completely handle the account once it is already on the books. They are often the ones to initially sell the accounts as well. Responsibilities include rating and preparing quotes, placement and marketing (new and renewal), day-to-day client service and insurance company relationships associated with client service.
If an agency chooses to let producers continue to sell new small accounts, once the account is sold, the producer should introduce the SBU service person that will handle the account going forward to the client. This can be done in a cover letter sent to the client with the new policy, or the service person will contact the client via the telephone to introduce themselves.
Outsource the Service Work
Instead of an internal small business department, some agencies will outsource the service work. There are a few different routes for outsourcing service work, so understanding the costs and types of service offered is imperative.
The first means of outsourcing to consider is the service departments that some of the insurance companies offer. These are reasonably cost-effective and specialize in the clients’ policies since they write them. The one downside is that most agencies will have multiple carriers, and not all carriers offer this type of service. That means only a portion of the small accounts can be serviced this way. Also, clients need to be “trained” to directly contact the insurance carrier for their service work rather than calling the agency first.
Another approach is to contract with businesses that provide outsourced services to insurance agencies. There are differences between these companies, but generally, they can provide full customer service to an agency, and it can be done seamlessly. Most of these services send the work offshore to India, China or the Republic of the Philippines. These services are usually not cheap, but with a large enough book of business, they can be cost-effective. Some services charge a split of the commissions and handle it from start to finish, as well as account rounding. Patra is such a service some of our clients have used, and they charge 50% of the commissions. Other services exist, such as ResourcePro and eDesk.
‘Fire’ the Accounts
Agencies should consider getting rid of some or all small accounts. This can be done by a combination of non-renewing the accounts or selling them. This will be a reduction of revenue, at least in the short term, but it will improve profitability and establish the platform for better future performance.
Often, the smaller clients can be challenging to deal with, take up a lot of time to service or can be a placement issue that usually ends up in an excess and surplus lines (E&S) market. As accounts renew, producers and service staff should be able to recommend the non-renewal of “problem” accounts. These would be accounts that are costing the agency a lot of time compared to the commissions generated. If there are just a handful of “problem” accounts, they can be referred to a competitor down the street. This approach makes the “termination” more amicable.
Although a non-renewal is lost commission to the agency, when the staff is allowed to clean up the book and rid the agency of these headaches gracefully, then the staff will have more time to focus on tasks that help the agency, including new business sales and cross-selling. It will also improve the morale of the staff.
If the agency has a sizeable book of small accounts, it can be packaged up and sold. Some agencies specialize and like to work with small accounts. New agencies are also willing to buy accounts to increase their volume. This can be a win-win-win for the buyer, seller and clients. Regarding price, everything is negotiable, but a 50% split of renewal commissions for two or three years is usually fair for the buyer and seller.
For an agency to make money on small accounts, they have to be handled less, more efficiently and by fewer people, i.e., no producer involvement. Also, using less expensive commercial lines service staff or account managers for the SBU is recommended if the accounts are handled internally. A specialized unit allows that service staff to gain more knowledge in small accounts since many are often harder to place and can end up being placed with an E&S wholesaler.
It is always recommended that producers are paid for what they do. However, it is equally important to make sure that what they “do” cannot be performed by a perfectly qualified commercial lines account manager or CSR. Producer compensation expense for small accounts often makes small accounts much less profitable for an agency.
Agencies that focus on medium and large accounts will find that producers and service staff have more time to improve service, generate new sales and cross-sell accounts. The best place to start is to “fire” problem accounts and delegate small commercial accounts to a specialized internal agency unit or to someone else outside the agency.
About Catherine Oak
Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Oak & Associates. Phone: 707-935-6565. Email: firstname.lastname@example.org.