Posted on 15 Apr 09
In this issue we’re addressing a topic that has become increasingly critical as companies in every sector, including the insurance industry, are looking to maximize resources and find avenues for growth during an economic downturn that has unemployment at record highs in several states around the country and financial uncertainty driving decisions. Those with a view to the future are continuing to invest in their firms and capitalizing on opportunities available at this time in order to build revenue while others are struggling to determine what makes sense for their business.
To provide our ProgramBusiness members with tangible steps to increase revenue, even during tough economic times, we spoke with Virginia Bates. Virginia has more than twenty years of experience consulting with agencies and carriers as well as managing insurance operations for both a carrier and a large regional agency. She is co-founder of VMB Associates Inc., and has worked with many agencies/brokerages on intelligent selection and successful use of technology, profitability, reducing E&O exposure, internal operations, marketing strategies, and carrier relationships.
Annie George (AG): In your evaluation of agencies throughout the country, what fundamental issue needs to change in order for growth to happen, even more so in this economy?
Virginia Bates (VB): “The same commercial account that an agency wrote three years ago is probably netting the agency 27% less premium this year, due to the soft market of the last three years. In fact, combined with the reduction in exposures, as agency clients invest less on upgraded equipment and new purchases that require insurance; natural attrition of clients due to company sales, mergers, deaths, etc.; loss of unreasonable clients; and inflation that pushes agency expenses up at least 1-2% (but will probably increase with the trillions of stimulus dollars being spent), an agency has to write about 25% of its total commissions in new business every year just to keep its bottom line even! And even if the soft market stabilizes, the agency is still left with a 16% deficit to be made up in new business sales. A daunting feat – and this is just to remain in exactly the same bottom-line position; an agency that wants to grow must write even more new business.”
Virginia explains that many agencies during this economic downturn are cutting back on staff, aren’t taking measures to upgrade technology, and are putting off marketing programs. As a result, financials look better but these actions are not helping an agency to grow. “It’s like putting make-up on a person who is ill. It doesn’t improve the situation, it simply masks it,” says Virginia.
RUM and the Right Mix
AG: What needs to be done then?
VB: “Agencies need to look at their Revenue Under Management (RUM). This is the amount of revenue that is handled by each service person and each producer in an agency. It is the most important productivity measure in an agency. Regardless of the size of the agency, each service account manager (customer service) should have a goal of handling accounts that generate $300,000 in commission. If an agency does that, it can afford to pay a good person and it will be worth its investment. It is better to have a few highly paid individuals who are motivated, of a higher caliber with an entrepreneurial spirit, account-managing more revenue than people who are paid less but handling fewer accounts with no motivation for both self-growth and agency growth. Producers need to be writing at least $100,000 in new commission annually.”
Virginia explains that if you have the right mix of existing business being managed by the right people and the appropriate amount of new business being generated, you will have an overall revenue-per-employee ratio that works. Payroll, typically the highest expense in an agency, will then be relatively low in comparison to revenue. “If these two metrics are correct in an agency, you can’t go wrong,” according to Virginia.
AG: How do you get the right talent to accomplish this mix?
VB: “In a word, investment. Smart agencies during more lucrative times held onto profits as retained earnings, and they invested in a higher caliber of personnel, in training and technology. They continued with their marketing campaigns to support producers. And they continue to do so now. It’s akin to not selling your stocks while the market is down, right now it’s a time to buy, to invest. The same applies here.
“Evaluate whether your current staff is the right staff. The hires you made years ago might not be what’s needed today. Look for people who are better educated, have a strong work ethic and are technology-savvy. Insurance knowledge is secondary…that can be learned. What you want are bright, motivated individuals who are go-getters, who ‘get it’. Most account managers (or customer service representatives) have no business or sales training to help round out accounts. These individuals should serve as a “business friend” of their customers. Agencies need to change the model of the type of person they want in order to get the results they want. The vision, the model of the ideal hire, needs to change dramatically.”
When it comes to producers, Virginia recommends hiring individuals with a known track record in sales, not insurance. In fact, the current climate with high unemployment offers an opportunity for agencies to tap into a wide range of talent. “Treat this time as an opportunity, not as a set-back,” underscores Virginia.
Virginia reinforces the need for producers to let go of “parenting” an account, to get producers away from servicing. “Many producers still think that once they write an account, they must oversee the management of it,” says Virginia. “There can be one parent who has the baby [the customer] and another who can feed it, teach it, nurture it.” In having producers servicing accounts, you are limiting the ability for them to earn more income and, ultimately, putting up obstacles for the agency to achieve the needed 25% growth.
AG: I’m surprised this is still happening…it was an issue years ago when I worked on the agency side.
VB: “It still goes on in many agencies. Principals don’t want to antagonize their producers; they don’t want them to leave. But this fear perpetuates the problem. If you hire the right individuals as account managers, and you have producers who don’t allow them to take care of accounts, you’ll drive away good talent. Principals have to take ownership and control of this issue. One way of doing this is to change the producer compensation package. For example, don’t pay producers for renewals or pay less for them. Set up a compensation structure in which producers get paid a competitive rate for new business, less on some renewals and nothing on others. It’s the standard in best practices agency to change renewal commissions. More often, producers end up making more money when they concentrate on new business, not on maintaining renewals. Agencies have to create a meaningful and ongoing formal turnover process of new business to the service account manager.”
AG: What other steps should be implemented in order to achieve that 25% of new business?
VB: “Principals need to conduct performance reviews that evaluate policy-per-account improvement for account managers and new commission for producers. Look at the average number of accounts being written in a book of business per person. If it’s 1.5, establish a target of 2 or 2.5. Look at how many lines of business are being written for one account, and establish a sales culture within the agency, so that your service people are rounding out accounts, selling that umbrella coverage. Again, to do this, you need the right people who are motivated and take initiative to seize opportunities.”
Virginia goes on to explain that in order to foster a sales culture, to implement a system of account-rounding, the information that’s garnered from your database has to be right, reliable. You have to be able to depend on the integrity of the information. In many agencies, this is not possible. “I was in one agency where they explained that a particular coverage in the database was defined in different ways, making it difficult to conduct a performance review based on how many accounts a specific service person had written. For example, sometimes an umbrella is listed as an endorsement, sometimes as a policy, a new line of business. If the database is not good, if the information is inconsistently input, we deny ourselves the ability to give performance reviews that are meaningful in terms of concrete objectives.”
In terms of evaluating producers, Virginia recommends that agency principals should begin booking commissions at the point of binding so production reports are accurate, timely, and used to monitor sales. “If you book commissions at the point of binding, you can compare sales from month to month, year to year,” says Virginia.
Additionally, Virginia suggests making it a requirement for producers to have submissions that are complete so that an agency placer can get his or her job done right. “Many producers want to get to market as fast as possible and don’t do all the legwork needed to get a complete submission. This involves a lot of back and forth with the account placer, prospect and producer. And many times it’s too late because a competitor has already gotten his/her submission in,” explains Virginia.
The Database is King
Perfecting an agency’s database has wide implications and benefits beyond the ability to set up sound performance reviews based on achievements. Virginia discusses the need to set up standards in general. “Only a few elite agencies are capitalizing on technology for growth,” explains Virginia. “Within many agencies, as I mentioned before, you’ll find individuals putting information in the system in a number of different ways and also including carrier downloads which jeopardize the integrity of the system. So when a client calls to find out about a specific coverage, the data is not available in real time or is not fully reliable until double-checked. An account manager has to call back because there are too many steps involved to access the information quickly. The client detects in the person’s voice a lack of confidence, sees that information is not readily available. Opportunities are then lost.”
Technology when used effectively is a marketing tool employed by those at the top of their game. “Your carrier has a new program for a specific industry, you access your database to find out which clients and/or prospects in that SIC fit the new program so that you can conduct a marketing campaign,” says Virginia. “But if you don’t include the SIC codes in the database, you’re unable to run a report. Another lost opportunity.”
“The database is king,” says Virginia. It’s a battle cry we should adopt in the industry.”
Virginia also stresses investment in continuing education and training, and relying on testing staff, both for attitudinal factors and for basic insurance knowledge. Virginia has helped many agencies in making new hires and pinpointing areas of improvement for existing employees. She developed VMBhits, an on-line facility for testing insurance knowledge and assessing the skills necessary to perform in a modern insurance environment. “This allows you to find the employees you need to establish your goals and to implement an effective training program for existing staff,” says Virginia.
If you would like more information about any of these issues and making changes in your agency to increase growth, you can contact Virginia at VMB Associates at 781.665.0223 or at firstname.lastname@example.org or using the contact link on www.VMBhits.com.