Insurance carrier management can increase your income even when commissions go down

I’ve written in a previous blog the four things every agency owner must do to ensure survival and success during the COVID-19 crisis. While it seems that things are improving now the true extent of the economic carnage the virus has, and is, creating is yet unknown.

What we do know is that for insurance agency owners that carnage is just now starting. Common business sense, a basic knowledge of the business cycle, and no less an authority than the head of the Federal Reserve Jerome Powell say that it is going to last into 2021, if not beyond. 

In addition to what I’ve already written now is the time for agency owners to take positive action to manage their insurance companies to maximize their revenues, and carrier management should be on top of everyone’s to-do list. There are four things they should do as quickly as possible:

• Reevaluate the agency’s need for each carrier 
• Consolidate books of business 
• Renegotiate compensation
• Manage to maximize profit sharing and incentives

I’m going to discuss each of these in turn. I’ll tell you why they are important and how to go about it. I’ll have a fifth, bonus, idea at the end.

But first some introductory thinking.

“How many insurance carriers do you need in your agency?”

If you don't have enough companies, you won't be able to take care of all your potential clients—and you won't be able to offer competitive products to all the prospects you would like to sell to. Therefore, principal agents tend to seek and accept appointments from as many insurance carriers as they can. 

Many agents end up contracting with a lot more insurance companies than they really need to. This often leads to getting fired by some of those insurance companies because they don't produce enough business, and this is a very real risk as a COVID follow on as carriers must cut expenses. Insurance companies will soon, reluctantly, and ruthlessly pare back their agency force to save money. They will likely take a scalpel to agency compensation as well. More on that later.

According to the IIABA’s 2018 Agency Universe Study, the average small insurance agency (which they define as an agency with $150,000 or less in annual revenue) has 11.4 insurance carrier relationships, including:

• 6.3 personal lines contracts
• 3 commercial lines contracts
• 1 bond and surety contract
• 2.8 life and health contracts. 

Most of the time, those small agencies only represent about nine carriers because those nine provide some mix of personal, commercial, surety bond, and life insurance products. 

Larger agencies may need more carriers to satisfy their business goals. According to the same Agency Universe Study, the average medium-small sized agency (which they define as an agency with revenues between $150,000 and $499,000 per year) has contracts with thirteen companies across all lines. This includes:

• 6 personal lines carriers
• 5 commercial lines carriers. 

The average medium-sized agency (defined as $1.25 million to $2.49 million of annual revenues) represents 16.7 carriers, or, approximately:

• 10 personal lines companies
• 8 commercial lines companies. 

I think that, for many agencies, six is too many companies (and I think that most agencies, regardless of size, have more carriers than they need). 

Every carrier that you represent costs you time to manage the relationship. It costs you more time to understand their products and their unique market position. It takes even more time to learn their systems and how to operate them effectively. That is why most agencies have one carrier that writes nearly 50% of their business with only three or four other high-quality carriers writing almost all the rest of it. Carrier performance matters, and you should be the judge of it.

If you have more carriers than you need, you're wasting time, which is your most precious resource. 

Companies are going to increase their demands on agents as they seek to minimize the 20%, or more, revenue decreases they face. Worse right now is that it is very hard, even in the best of times, to receive (much less maximize) profit sharing for more than a handful of companies. 

To summarize, carriers cost agents money to manage and sell for, and reducing carriers saves money. Carriers will be increasing demands on agents to maintain contracts which costs agent’s money. Carriers make it tough for agents to receive profit sharing (an incredibly valuable source of revenue) in the best of times and this isn’t the best of times.

Reevaluate the Need for Each Carrier You Represent

Here are my criteria for continuing an agency relationship with any carrier. This is based strictly on the agency’s needs. 

You do not need to have a contract with any carrier who does not write at least ten percent of your book of business.

You can argue with my number. You could say the minimum threshold should be 15% for example. But the point is that if the carrier isn’t a significant market you don’t have the time to mess them right now. They are also probably hurting you as I’ll describe.

You do not need a contract with any carrier you don’t have a reasonable hope of receiving profit-sharing from. 

Now, if you have a good volume and good historical relationship with a company but your loss ratio this year isn’t what it needs to be, I’m not suggesting you cancel them. What I’m talking about here are the carriers you never seem to build adequate volume with, have historically poor loss ratios, and so forth.

You do not need any carrier that is not paying you “standard” commissions.

We can debate what standard means, but I’ll bet most owners would agree with me that 15% for most lines of business is “standard” with a few very typical exceptions like worker’s compensation. If the carrier pays less than standard there has never been a more important time to move business away from them. 

You are going to need the money. Most agencies face somewhere between 15% to 35% loss of revenue due to cancellations, audit refunds, lower renewals, decreases in coverage and less profit-sharing next year

You do not need any carrier that isn’t a “partner” carrier for you.

Partners, formal and informal, work together, and share burdens as well as rewards. Some carriers are like that and, as I’m sure you know, some just care about themselves. My criteria for a “partner carrier” include: 

• They provide resources to help sell insurance
• They include the agency in planning and decision making and don’t dictate (they don’t come in and tell you what your new business goal is, for example, they ask)
• They offer incentives to encourage new business production and retention instead of threats of loss of the relationship
• They help you find people when you need them
• They offer marketing dollars
• They do a variety of other things to help you grow your mutual business including being a consistent market for your clients. 

Carriers who don’t meet these criteria are ones that you should consider eliminating from your agency, or at a minimum reducing the business you write with them.

Consolidate Your Books of Business

As you make the decisions about the carriers you will keep, and those you will reduce, you will create several important income opportunities through consolidating your volume.

Right now, many insurance companies are offering aggressive compensation for book consolidations aka “book rolls”. In fact, I’ve never seen offers as high as they are right now! We’re seeing total agent compensation offers on moved business as high as 40% for the first year. 

Even when carriers aren’t offering book roll incentives, they will offer new business bonuses. Again, I’m seeing companies with very aggressive offers in this regard. Look, they need the money. Their income problems are greater by degree than most agents. So, they are willing to pay to get it. 

You should be aggressively seeking new business right now for your agency but the business you already have is worth more to you when you move it than when you keep it with the same insurance company. 

Finally, when you consolidate your books of business you will increase your odds of receiving profit sharing on each dollar of premium you write, and you will certainly increase the percentage of profit-sharing you receive. 

In the first place, by consolidating you will increase the number of companies for which you meet the minimum production thresholds. 

Secondly, you will increase the likelihood that your loss ratio goes down because the business you already have in the agency tends to have better loss characteristics than new business to the agency. 

Some profit-sharing agreements don’t pay if growth is negative, or below a certain threshold, and so moving business from another carrier mitigates or eliminates this risk. A lower loss ratio means more money to you! 

Finally, the more business you place with a carrier the higher the profit-sharing payout will be because of the gridded table in most contracts.

Renegotiate Compensation

For some readers, the idea that you can negotiate compensation may be a strange concept. But it is done all the time. Certainly, smaller agencies have less leverage than larger ones but if you step back and take a broader view of compensation it’s very possible.

Consider that insurance carriers are going to have top-line losses that will be difficult for them to rapidly offset. With large fixed expenses their ability to manage profits in an environment like this are very limited. If you can help them with these problems, you deserve to be rewarded.

You can help them. We’ve discussed book roll incentives as a way of increasing your compensation and theirs. It’s a win/win. 

Another win/win is new business incentives. Your commissions go up and so do their premiums. So, ask every carrier for new business incentives.

Perhaps you’re a bit squeamish about canceling a carrier contract. Or you don’t think you can move the business easily to another carrier you represent. But at least recognize that if it is business the carrier wants to keep that their risk of keeping it has gone up in the current environment. If they can retain it, they benefit. So, ask for a retention bonus. That makes it win/win. 

You may have a carrier who doesn’t meet the criteria for keeping that I outlined above. 

Perhaps it's because you don’t have enough volume to receive profit sharing. 

Remembering again that the carrier's income is going to be decimated with cancellations, audit premium returns and lower premiums on renewal due to lower exposures find a way for them to keep their business with you on a win/win basis. Negotiate a lower threshold to receive profit sharing. They may be reluctant to do this, but you could sweeten the pot by asking only for a one- or two-year exception. Or, just move the business.

Manage to Maximize Profit Sharing and Incentives

You must actively manage the book of business you write with each company. By book management, I mean that you'll want to monitor every book of business that you have. You’ll need to do this for each company at least quarterly: review the premium volume you're writing, both earned and written. Review the flow of business you're giving each carrier and your loss ratios. You'll want to look at your loss ratios quarterly and work with the carrier to minimize ultimate loss expense because that will affect your profit-sharing payout. 

Part of the agency owner’s book management responsibility is to be a good financial partner with her insurance companies. This means looking out for their interests as well as your own. Often insurance companies will give trusted agents some degree of pricing flexibility when quoting new or renewal business. This is particularly true in commercial lines, but it also happens in personal lines.

Some agents reflexively pass all available discounts on to the client even when they aren’t necessary to produce a good value for that client, and sometimes when they aren’t necessary from a competitive viewpoint. Not only does this reduce the insurance company’s income, thus hurting it unnecessarily, but it also violates the agent’s duty of loyalty to the carrier. 

How does all of this affect book management, you may ask?

If you reflexively and routinely sell a carrier’s products for the lowest possible price, you will inevitably raise the loss ratio of your agency experiences with that carrier.

Consider, hypothetically, that you always decrease pricing by ten percent. You will automatically increase the loss ratio by the same amount. 

Profit-sharing eligibility ceases for practically every carrier above fifty-five to fifty-six percent. It’s tough to keep loss ratios in the forty percent range in the best of circumstances because carriers tend to reduce rates when that happens. So, if you take this price-cutting to its logical conclusion, you will make it impossible to ever get a profit-sharing check. 

In a typical case, on a $500,000 book of business, this could mean a loss of $15,000 to your agency in profit-sharing income. But this isn’t the only loss. Remember, you voluntarily cut premiums $50,000. And the commission reduction, at fifteen percent, is another $7,500, making your self-inflicted income cut $22,500 (which means as much as $350,000 in agency value in today’s acquisition environment). 

The last point about this is that if you are a cut-the-price-to-the-bone type of agent, you’re always going to be a transaction-oriented producer, not someone focused on creating value for clients and customers via relationships, quality products, and so forth. Those kinds of agencies have a very limited future. 

Finally, as you think about where business should go and where you want to focus new business efforts there are two important steps to take. The first is to place new business with carriers that have given you attractive new business incentives. This rewards and encourages them for having done it in the first place and you make more money. The second step is to manage the process yourself and don’t leave it to your employees. Employees, even great ones, tend to take the path that is easiest. That’s human nature. You need to manage them, and your processes, to get them to take the path that is most profitable. That is the nature of the businessperson.

Bonus Idea

I hope you’ve found value – in terms of actual money for your agency – from some of the ideas I’ve discussed here. There is a way to make doing much of this easier and that is to join an agency network. An agency network provides market access and should make it possible for even smaller agencies to receive profit sharing on all their business. They can, and often do, negotiate the bonuses and other compensation on behalf of their members which makes that process easier, faster, and better. 

Their size creates leverage with carriers which minimize the downside risk many agents have during times like these, not to mention during normal times. Even larger agencies sometimes find that the fees the network earns are more than offset by the benefits created. 

During extraordinary times like these, that create extraordinary risks for agencies, it is wise to consider options that perhaps weren’t interesting during normal times. Perhaps this is the time for you to look at your options in that regard. If you’d like to explore that idea further, I’d encourage you to contact me.

If you’ve found this article helpful and would like to explore other ways to manage your way through COVID-19 I encourage you to read a book I co-authored called COVID Proof Your Agency, available at covidproofyouragency.com.  

I also have a new book, The UnCaptive Agent, that is chock full of ideas on how to maximize agency profits, which is available on Kindle, Audible and in print on Amazon.