The Customers Of An Independent Insurance Agency

by Gary Holgate

As a consultant, the first questions I ask agency owners concern their customers. This provides me with a feel for the agency and how it operates. Therefore, I thought I would devote my first article to showing how to analyze an agency's customers. Once you understand this, you will also have a much better understanding of the agency.

Conducting a customer analysis is not hard. It is usually just a matter of analyzing and measuring certain aspects of a book of business in an agency.

The first statistics to gather in an agency are the number of customers and the income they generate in the following three categories:

1. Large Commercial Lines customers
2. Small Commercial Lines customers
3. Personal Lines customers

I have found that the most efficient method of performing this analysis is as follows:

Large Commercial Lines customers-Have the agency run a list of all customers in descending order, by commission, for the last fiscal year.

Take the total number of customers the agency has and multiply by 3%. This will give you the number of large Commercial Lines customers.

Once the number of large Commercial Lines customers has been identified, add the commission generated by these customers to determine their total commission.

Small Commercial Lines customers-To determine the total number of small Commercial Lines customers, use the following formula:

Total Customers

• Large Commercial customers - Personal Lines customers = Small Commercial customers

The same type of formula is used to determine the commission generated by small Commercial Lines customers:

Total Commission

• Large Commercial commission - Personal Lines commission = Small Commercial commission

Personal Lines customers-List Personal Lines customers in descending order by commission. This list will provide the total number of Personal Lines customers and the total commission generated by this class of business.

Once you've gathered the previous information, compare it to these statistics:

Studies have shown that in the average independent insurance agency, the following holds true:

1. Large Commercial Lines customers represent 3% of the agency's total customers and 54% of P/C commission income.
2. Small Commercial Lines customers represent 17% of the agency's total customers and only 16% of P/C commission income.
3. Personal Lines customers represent 80% of the agency's total customers and 30% of P/C commission income.

It is amazing how consistent these percentages are from agency to agency. When looking at the results as far as P/C income is concerned, the average independent insurance agency is primarily a large Commercial Lines agency; followed by a Personal Lines agency; and finally a small Commercial Lines agency.

Let's take a closer look at each customer category, and I will relate to you some trends and information that I've learned in 22 years of consulting with independent insurance agencies.

First of all, let's dismiss the myth that Personal Lines business is unprofitable for the independent insurance agency. It has been proven over and over that Personal Lines accounts can be profitable, if properly managed.

Here is some general information that I have accumulated over the years regarding Personal Lines.

Studies show that, on the average, approximately 66% of the Personal Lines customers in an independent agency have only one policy with the agency. I know this is hard to believe, but it is one of the most consistent statistics I have observed from agency to agency.

My first question to owners regarding this topic is, 'Do you know what percentage of your Personal Lines customers are one-policy customers?'

If the agency owner answers with an actual percentage, without hesitation, you can assume to figure is accurate. I have also found that agency owners who know the percentage generally have fewer one-policy customers than the average agency because they have already taken corrective action.

When I encounter an agency owner who does not know the percentage of one-policy customers, I recommend that an analysis be conducted to determine the percentage. I also find that this type of agency usually has more than the average number of one-policy customers.

There are two ways to determine the percentage of one-policy Personal Lines customers in an agency:

1. If an agency has recorded individual Personal Lines customer statistics in its computer, a list can be produced by all Personal Lines customers showing the number and the types of coverages each customer has purchased.

2. If the agency has not recorded individual Personal Lines customer statistics in its computer, the analysis must be performed manually. This is done by reviewing every 10th file to determine how many active policies exist, according to the above categories. Continue doing this until 100 files have been reviewed, then add the totals to determine the percentages.

At a seminar I attended many years ago, the speaker made a statement that I have never forgotten. He said, 'The average independent insurance agent will drive by more premium on his or her way to work each day than he or she will ever write in his or her lifetime.'

That statement has had a tremendous impact on my consulting with agencies over the years. I ask agents, 'What percentage of the total available premium within a 25-mile radius of your agency do you write?' In most cases the answer is a minuscule percentage. I then ask, 'Do you think you will ever write it all?' The answer is always, 'No.'

For an agency to be profitable in Personal Lines, management must do everything possible to minimize the amount of work that Personal Lines customers generate. One way of doing this is by target marketing.

I strongly believe that if agencies would solicit only business that insurance companies want, the agencies and the companies would benefit by lowering their workloads and employee expenses.

Once desirable business has been identified, agency management can then formulate a plan-such as direct-mail advertising-to solicit prospects who meet the guidelines.

I call the Personal Lines Department the 'Action Department' because this is where the most transactions (new business, policy changes, renewals, billing questions, claims, etc.) occur. One or two inefficient procedures can mean the difference between profit and loss in Personal Lines.

When I began agency consulting, agency owners believed that they had just two general categories of P/C business: Personal Lines and Commercial Lines.

As I gained experience and began analyzing the types of customers and the income generated by each type of customer (as we did earlier in this article), I found that there were two types of Commercial customers: large and small.

I call the large Commercial Lines customers in an agency 'Exceptional Customers.' These are customers for whom the agency must individualize procedures because of their importance and size. Each one is treated as an exception.

Remember, 3% of the customers in an agency qualify as exceptional customers based on their size, on average. If an agency had 3,000 total customers, only 90 would qualify as exceptional, but those 90 would generate in excess of 50% of the average agency's P/C commission.

The qualifications for exceptional Commercial Lines customers are:

1. Size, as we have discussed
2. If the customer has the potential to become exceptional as the business grows
3. If the agency has written only a small portion of a large account
4. If the customer is related to a center of influence or an exceptional customer

Each exceptional customer is different and required special treatment. The agency can afford to provide this 'special service' only because of the larger commission per transaction that these customers generate.

It may be shocking to most people to find that small Commercial Lines customers are the most unprofitable customers in an independent insurance agency. How could this be?

There are many reasons that I will discuss, but first let's look at some statistical information I have gathered throughout the years:

1. As mentioned earlier, small Commercial Lines customers represent 17% of the average agency's customer base and only 16% of its income. Yet when I perform an Account Profitability Analysis in an agency (to determine the profitability of Personal, small Commercial, and large Commercial Lines customers), I find that nearly 50% of agency-employee expenses are generated by small Commercial Lines customers.

2. Agencies need improvement in the account development of small Commercial Lines customers, as the following averages indicate:

Once all of this information is determined, the following recommendations can be made to assist agencies in making small Commercial Lines customers profitable:

1. Do not treat them as exceptions. Determine the 'agency's way' of servicing these customers to reduce the time necessary to service them.
2. Target-market only those small Commercial customers that the agency's insurance companies want to write, just as I recommended for Personal Lines. This will eliminate the labor-intensive job of insuring a 'hard-to-place' risk.
3. Attempt to write additional coverages for existing customers. I feel the best time to do this is 60 to 90 days prior to when the existing coverages with the agency expire.

I also recommend that annually, a complete renewal review be performed in which the customer is invited to the agency.

Understanding your customer base and the percentage of income generated by your clients is the first step toward effective target marketing.