SURVEYS SUBSTANTIATE THEORY: RETENTION EQUALS GROWTH
When striving to make an agency grow, most agency managers focus on increasing new business. But it's just as important to address improved retention.
Growth in net commission income results from two things: New business written and retained business. Rarely does growth result from enriched commission sharing agreements between agents and companies.
DEFINING RETENTION RATES
How do you define retention rates? It's easy. Follow this formula: 1) Decide what to define - for instance, Personal Lines in force (Home, Auto, or both). 2) Choose a time frame - monthly, quarterly, or annually. 3) Count the opening number of policies in force (PIF) at the beginning of the specified time frame, and the number in force at the end of the specified period of time. 4) Divide the remaining balance into the opening balance. That is your retention rate.
To determine how well the agency is doing, ascertain the retention ratio and add new business. This reveals the net increase or decrease in growth.
Consider this example:
- Opening PIF Up For Renewal = 250 Auto Policies
- Policy Cancellations = 31
- Renewing Polices = 219
- Retention Rate = 87.6%
- New Business Added For The Month = 35 Policies
- Net Growth = 4 Policies or 1.6%
New business is a function of a prospecting program, which includes the strategies for growth:
1) Regular customer contact via newsletters with response mechanism
2) Target or niche marketing programs
3) Disciplined cross-sell programs
4) Policy growth and add-on coverages
5) Direct response and telemarketing.
'DEFECTION' RATIOS
Many agencies consider retention to be a matter of loyalty, but it is far too important to view it from this standpoint alone. Retention rates indicate the quality of customer service your agency provides, pricing fairness, loyalty, and the basis upon which the business was originally sold (price, product, or service). The average Personal Lines agency has a retention rate of about 88%. This means that 12% of customers leave each year.
At this rate, if 100 new customers buy insurance from an agency at the end of year one, only 88% (88 customers) will renew their policies. At the end of year two, only 77.4 of the original 100 customers will be on the books. By the end of the fifth year, 48% of the original customers (48 customers) will have departed from the agency. Viewing retention from this perspective clearly shows why many agencies are spinning their wheels.
THE RETENTION-LEVEL FACTOR
Trivest Insurance Network of Canada conducted a practical study of this topic in order to assign a specific value to retention levels. The firm's study of an American agency - and of Trivest partners - indicated that a 5% improvement in retention rates improved profits by 50%. Thus, a million-dollar-commission agency with a 90% retention rate and pre-tax profitability equal to 28.5% of commission income can increase its annual pre-tax profit roughly $90,000 by increasing its retention rate to 91%.
EXISTING CLIENTS MORE PROFITABLE
As all businesspeople know, existing clients are far more profitable than new clients because they've already expressed satisfaction with the agency. Less time is spent on the sales process, there are no advertising expenses, and producer expenses are lower. In addition, the agency has all the needed information about the client to develop other insurance needs in-house.
A study conducted by one of the largest direct writers in North America showed that single-line business lasts an average of three years. Two-line business (Auto and Home) lasts about seven years, while three-line business (Auto, Home-owners, and Life, or any other combination) lasts eleven years. No agency should allow itself to have only a single-line business.
On average, adding a new single-line account costs the agency the first 2.5 years of commission income. Thus, when an agency loses a customer, it loses more than the current level of income it receives from that account. It's crucial that all agency employees recognize this, as well as that every time a new piece of business is written, an x-date is gathered for the other lines of business. The agency's Life specialist (if there is one) should then telephone the client introducing available services.
This is just as true for Commercial Lines accounts. It's clear that retention of existing accounts is far more valuable to an agency than an increase in new business.
Special thanks to Trivest Insurance Network for providing information that made this article possible.