Last month’s article was about the Five Profit Zones. Well, after it went to print I had one of my semi-famous BFOs (Blinding Flashes of the Obvious): There is a sixth and very important profit zone—your insurance carriers.
I would love to have just 1% of the dollars left on the table each and every year by independent agencies that aren’t managing what should be considered a stand-alone profit center. The figure would astound you!
So how does one earn greater profits in this area? It boils down to analyzing the insurance carriers you represent and your relationships with them.
We’ve often talked about the 80/20 Rule and the concept of knowing vs. guessing. It certainly applies here. Do you truly know what your carrier 80/20 analysis looks like? Probably not. I’ve been consulting and coaching agencies for more than 35 years now, and it’s clear to me that in the average independent agency, the top 20% of your insurance carriers will generate 80% of your premiums and thus your commission income.
Now I’m sure that many of you who are reading this are thinking, “That’s not me!” But are you guessing or do you know? If you’re still guessing, run a report that shows your commission income by carrier, from smallest to largest, and take a look at what’s there. People are always shocked. They never knew. Although they’re usually aware that the majority of their business is with their top three or four carriers, most agencies represent a lot more insurance companies than they realize. However, once they do the 80/20 and start analyzing it, then they can proceed to the next step.
Because there is no magic number concerning the carriers needed, it’s the subject of ongoing debate. However, over the years I’ve discovered the key to identifying the ideal number of carriers for any agency: Limit the number to those carriers you can keep happy.
Most agencies simply have more carriers than they can satisfy. However, if you move your premium dollars from those companies that you don’t write much with to those that you do a higher volume with, you’ll become much more significant in their eyes.
A carrier that I’ve worked with in the past has done some interesting studies on the number of companies agencies represent. When I ask agency owners how many companies they represent, they’ll usually estimate between 20 and 25. But in reality, when they look at their insurance company payable list, the number is usually closer to 50 or 60.
When agency principals finally sit down and look at their insurance company payable list, invariably I’ll hear things like, “Where did that one come from?” or “Why do we need that market?” The one that scares me the most: “Who is that?”
Usually what happens is that a single producer will stumble upon a risk and then seek out a carrier that specializes in it and will write that particular piece of business. However, very rarely does that one piece of business create a profit for the agency. (Note: It’s a different story if it’s an account that creates $20,000 to $30,000 in commission income.) But more often it’s the smaller risk that’s called in or that we met in passing at an event, and now we’re going to write their insurance, but we have to go find the market for them.
The problem is that there’s a cost associated with every carrier once it’s in your accounting system. Once you do your 80/20 analysis and move on to this second step, ask yourself: Why do we have this company? Are we making an acceptable profit representing it? Is it really a contributing partner to our agency?
Another big part of the carrier consolidation process is to look at moving your excess and surplus lines business to some of your standard carriers. Increasingly, many standard carriers are acquiring E&S facilities. So if a risk needs to be in an E&S facility, find one owned by one of your main carriers. Many times that volume will be credited toward the commitment you’ve made to the carrier.
Again, there’s not a magic number, but I know for a fact that far too many agencies have way too many carriers with which they are not meeting their goals.
As you analyze these profit centers and insurance carriers, look for soft dollars. Obviously they were more prevalent in the past than they are today, and not every company and not every agency will be able to obtain them from their carriers. However, the dollars are out there and available.
When you do your planning with your carriers and you commit to increase premium volumes, are you asking them for additional help? I’m sure you’re familiar with the saying, “Ask and ye shall receive.” Well, it’s really true. For instance, if you need to add a new producer or are looking to increase your marketing budget, there are carriers out there that will compensate you in soft dollars.
Several years ago I was doing a program for the senior leadership of an outstanding regional insurance company. As we discussed agency compensation, we examined whether agencies were taking advantage of everything this carrier had to offer.
Now prior to the program, I had asked these senior leaders to tell me how they compensate their employees. We identified nine specific ways that an agency could earn compensation and/ or soft dollars from this company. Compensation methods included vacations, co-op advertising, increased commission income and enhanced profit-sharing contracts, to name a few.
Next we examined the percentage of agencies representing the company that were taking advantage of all nine compensation methods. It was a mere 2%! Some of it was the agents’ fault and some of it was the company’s failure to sit down and have an in-depth discussion with their most important agencies about the kinds of assistance they had to offer them.
Blame aside, this exemplifies how an insurance company can be a strong profit center for the agency if it would just take the time to understand the various compensation methods available to it.
In the past we’ve discussed the need to proactively manage the Five Key Relationships in an agency. In addition to clients, prospects, centers of influence and employees, insurance carriers are among an agency’s most significant relationships. After all, these are the people who make the decisions about the business you write.
The reality is that in today’s automated underwriting world, very few people actually see the business that comes in. It either fits or doesn’t fit; if it does, it’s underwritten automatically and that’s it. However, I believe insurance is still a people business, dependent on relationships. There are going to be times you need a favor and times you need a friend.
So especially as you’re looking at your larger and most profitable accounts, it’s important to remember that underwriting decisions are often made based on the agency name and the producer’s name. How do the carriers view you? They want to do business with producers who are professional, thorough, trustworthy and honest, and with agencies that make their job easier, not harder.
This idea was validated last month when I met with 50 middle-market underwriters and sales reps for an insurance company and asked them if they made decisions on submissions based on the names of the agency and the producer. As always, the answer was a unanimous “yes.” Next, I asked how many of them had ever turned down a piece of business based on who it came from and the inferior quality of the submission. Again, every one of them admitted to doing so on occasion.
One of the keys to maximizing your relationships with carriers is to start profiling people. Understand them on a personal level. The more you know about the people you work with, the more you can do for them. Next, start making deposits—invest in the relationship. Taking a genuine interest in people tends to pay big dividends, but like any relationship, it’s all about deposits and withdrawals. So each time you see them, try to learn a little more about them and the things that matter to them.
I can tell you that the vast majority of agencies never take the time to scrutinize their agreements with their carriers. If you’re an average agency, I will guarantee that you do not have the best contracts from all of your carriers. One of the main reasons is that you can’t satisfy them all, and another is that you haven’t asked. I will also guarantee you that for 98% of the agencies out there, somebody else has a better contract than you do. That’s because they probably earned it and they probably asked for it.
How can you do the same? Start by knowing the 80/20 analysis I mentioned at the start of this article. Next you must go out there and have a formal meeting/discovery session with each of the top 20% of your carriers. Ask them what specifically your agency can do to produce more business with them and earn more money from them. Make it clear that you’re not asking them to give you money, but that you want to earn it; you just need them to tell you what you need to do.
Unfortunately, only 2% of agencies will actively sit down and talk with their carriers on an annual basis. And usually when they do have a planning meeting, it’s an absolute joke.
Early in my career, a senior executive at a major insurance carrier taught me a lesson that I’ve never forgotten. He said, “From a carrier perspective, you never lose money paying contingency income.” You see, the carriers don’t mind paying an agency a bonus because the payment is predicated on the agency’s increased profitability. In other words, that income gets paid only when the carrier makes more money. Contingency income is earned by the agency. Therefore, it’s a completely justifiable expense for the carrier (which should welcome it wholeheartedly!).
As I just mentioned, few agencies take annual planning seriously. However, one of the best ways to improve your relationships with your carriers, and thus improve your profitability, is to rethink your approach to planning. You must be different. Go see your carriers. Tell them your story. Let them know what you do that’s different from the traditional commodity-based agency. Differentiate yourself from the other agents and agencies.
Again, only 2% will do that! For most, it’s not a strategic focus. Also, they’re really too busy just “doing stuff.” A final reason they don’t bother with planning is that they’re making “enough” money, so there’s no real incentive for them to make the extra effort.
In case you aren’t aware, “profit” is not a four-letter word.
In fact, a consistent record of increased revenue—whether it’s from net new business written or a history of soft dollars coming in—has a dramatic impact on the value of your agency. And for the vast majority of agency owners reading this, the agency is your largest personal asset. If you can just do a few of the things outlined here and you can increase your profit by $150,000, you’ve increased the value of your asset by more than $1 million. You know, that’s real money, whether you perpetuate internally or externally.
I hope you make the choice to maximize all six profit zones. If not, you’ll be okay because “average” is still pretty good in this business. You’ll be as close to the top as you are to the bottom—the best of the worst or the worst of the best. And when you retire, you can look back and say you did okay. At the end of your career, is that what you want? A legacy of mediocrity? As we like to tell our pro- ducers, if you’re going to put the time in anyway, why not be great at it?
As always, it’s your choice.
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