HOW TO BE A HIGH-PERFORMING FIRM
by Catherine Oak, CIC, AAI
The more effectively you sell, market, and service, the more valuable your agency.
The secret to peak performance is employing the right people, in the right positions, based on their talents and the needs of the firm.
Every firm must perform four major functions regardless of revenue size or number of employees. These functions are sales, marketing/placement, service, and accounting/administration. Any firm that wants to achieve its growth and profitability objectives needs to manage these functions properly to operate at a high-performance level, which in turn leads to high value. Let's explore how a successful firm should manage these four key functions.
MANAGING SALES
New sales, which are the key to growth, are measured by new customers, not additional commissions that materialize from renewals. New customers are necessary to replace business that's lost through circumstances both within and outside of the firm's control. People die, move, or go out of business every day. This natural attrition is inherent in the book of business and, for the most part, is outside its control. The rate of attrition in any firm usually ranges from 8% - 20% annually. On the other hand, attrition can come from factors within the firm's control, such as dissatisfied customers, uncompetitive pricing, and lack of technical expertise in meeting the client's needs.
Do high-performing firms use different sources than anybody else for new business? Not really. They simply go after new business more aggressively. Often, they don't even depend on the source of new business favored by most independent insurance agents/brokers: referrals. Instead of waiting for new business to knock on their doors, producers and CSRs in high-performing firms vigorously seek out prospects. Everyone working in the firm has a sales personality and is motivated to bring in new business.
The producers in these firms are not being paid 'out of sight' commission splits (such as 40% or more for new and renewal business). A producer compensation plan is established that is reasonable for the services performed and affordable so a profit can be realized. Generally, a well-run firm can't afford to pay an average Commercial commission of more than 30% if it hopes to generate a 15% - 20% profit. Some firms pay more than 30% for new business to motivate producers to bring in new accounts.
Top producers are carefully coached and given the tools they need to be successful salespeople. These tools are sales skills training, performance measurements and reviews, individualized attention when needed, market knowledge and — most important — service support for their accounts. If producers are basically glorified service employees without in-house support, how can they be expected to have time to sell new accounts? Producers must also be able to deliver professional proposals to clients and make professional submissions to company underwriters.
What constitutes an acceptable level of producer performance? In the average firm, producers handle $150,000 - $250,000 in commissions, while a high-performing producer often handles much more, depending on the location and size of the firm, the average commission per account, and the amount of service support the producer receives. In one area, $150,000 in commissions per producer might be considered high-performance. The type of insurance clientele, local economic conditions, and the level of producer expertise also need to be weighed in defining an acceptable level of performance. Performance standards should be set that make sense. For example, one guideline could be the volume written by the best producer the firm has ever had.
In our consulting work, we've come across many owners and non-owner producers who are comfortable with their incomes and have become complacent — some actually have retired in their chairs, especially if they're older. In a multi-owner firm, this is a familiar profile. Owner compensation also can be a real profit drain on a firm if compensation is not based on the individual's contribution — both as a producer and as a manager. Ownership percentages often dictate how profits (if any) are distributed.
Good sales activity (prospecting, quoting) and measured results (closed sales) should be expected from producers, including the owners. Goals must be communicated to producers and the tools and support they need provided to them to build a winning team.
MANAGING MARKETING/PLACEMENT
Good carrier relations can make the difference in the firm's ability to survive market cycles and its potential to reach growth objectives. Price is not the key, even in a soft market, since a client is likely to get a lower price elsewhere — perhaps from a direct writer or another firm in town.
Professionalism and honesty in dealing with underwriters and branch officers is paramount. If the firm shotguns applications to most markets without screening those clients properly, relationships will deteriorate.
Underwriters need to indicate to the firm what would enhance the firm's ability to write business with them. It might be a surprise to find that they are eager to help place business. The easier they make the firm's job, the more successful the firm will be in marketing and placing new accounts.
Strive to improve the firm's hit ratio. This is defined as the number of risks written divided by the number of risks quoted. Producers with the best hit ratios have screened prospects that call or walk in; gathered enough information to put together professional submissions; marketed prospects to a few select carriers for quotation; sometimes also rated the risk; and often have contacted the underwriter about the risk before mailing it to them. These firms have developed positive carrier relationships, and they can place business competitively despite market cycles.
A central marketing department is also effective for many firms. Usually, this department is used only for new business over a specified premium or commission level. Firms with central marketing departments or personnel generally have at least $1,000,000 in revenue.
Do you need a central marketing department?
Regardless of size, your agency probably needs central marketing if you meet one or more of these criteria:
- Several producers submitting new business regularly.
- CSRs have little or no time to assist producers with new business.
- Company relations are strained and need attention.
- Company volume commitments have been promised.
- In-house underwriting authority is in place.
- The firm can afford to separate this function.
If you decide to establish central marketing in your firm, its success depends on choosing the right person to do the marketing. This position is critical. The successful candidate must be able to deal effectively with producer egos, CSRs, and underwriters — and should be the most technically qualified Commercial CSR in the firm. Both producers and underwriters should have a high regard for this individual to ensure a good working relationship.
MANAGING SERVICE
The next critical function is client service. Firms that are successful in account retention recognize that they need to continue selling the risk through good service so renewal is virtually guaranteed. Due to the cost of producing and servicing an account, the average firm today needs to retain an account for three or four years to make a profit.
Producers need to delegate the service burden of their accounts to free time for new sales. They must feel confident that the service staff is technically qualified to handle account service.
We define 'service' to include handling the mail and most phone calls, taking claims, and processing requests from clients and underwriters. Service might also include gathering renewal information, expanding existing accounts by selling broader coverages or additional policies, and account marketing/placement. Mail and phone calls should go first to the CSR, and then to the producer if the CSR needs assistance. This helps relieve producers of day-to-day service activities and affords them more time for new sales.
How should the service activity in the firm be organized and managed? This depends on the number of employees, the revenues, and the average account size; however, certain elements apply to any firm that wants to maximize performance and profitability.
The first element is staff stratification, which is the delegation of the commission dollar's service burden to the least costly qualified employee. As additional personnel are contemplated, it is best to consider first what the firm's CSRs or producers can delegate to an assistant. Assistants can be hired for less money. Since the insurance business is paper intensive and a number of clerical activities are involved in both sales and service, many tasks could be delegated to a properly trained assistant.
The second element is conducting an analysis of the book of business to determine the servicing needs of properly defined segments. This must be done for both Personal and Commercial lines before a restructuring of the service function can take place. The analysis should include both the number of accounts and commissions involved in various size ranges. Once completed, management can work toward matching the skills and technical expertise of the CSRs with the service needs of the firm's accounts.
SMALL COMMERCIAL ACCOUNTS
Many high-performing firms have determined that small Commercial accounts should be handled by salaried CSRs and that producer involvement should be minimal unless the account is tied to a VIP client.
What is a 'small' account in a particular firm? That depends on the size and type of accounts in the firm's area, most often they are the Business Owners' Policy (BOP) type, which can be slot-rated and easily fit into BOP carrier packages.
Small, monoline accounts are difficult to place, usually undesirable to most carriers, service intensive, and/or problematic when it comes to collection. If these accounts can't be expanded and they're not tied to VIP Commercial accounts, they shouldn't be renewed.
Small Commercial accounts should be direct billed and handled similarly to Personal lines accounts, with little or no producer involvement. The number of markets CSRs use for BOP-type submissions should be limited to three or four markets.
MEDIUM TO LARGE COMMERCIAL LINES ACCOUNTS
While an individual or a separate department might be needed to handle small accounts, it should be decided who will service the medium to large Commercial accounts and how best to organize this. There are two common options to servicing these accounts in a firm: an alphabet split or the producer/unit concept.
Smaller firms generally use the alphabet split concept, especially if there are few producers and if the CSRs are equally competent. In managing an alphabet split for Personal and Commercial lines, it is essential to keep the workloads for the CSRs as evenly balanced as possible, especially if the CSRs are equally experienced. Assistants handling clerical activities should be shared among the CSRs.
The producer/unit concept, (in which CSRs are assigned to service and market the accounts of certain producers), is more common in larger firms and very common in national and public brokerage firms. There can be a problem, however, with the producer/unit concept. Often, 'firms within a firm' can develop, resulting in a lack of team spirit. CSRs might be reluctant to help producers in other units if there is turnover or someone is out due to illness or vacation. Producer/units can work quite effectively if either an office manager or Commercial lines service manager is involved in the managing, training, hiring, and firing of all CSRs employed by the firm.
PERSONAL LINES ACCOUNTS
In Personal lines, we often see the supervisor or manager also handling the firm's VIP Personal lines accounts. The only organizational structure that works effectively in Personal lines is an alphabet split.
PERFORMANCE STANDARDS
What are acceptable standards of performance of CSRs in the average (versus high-performing) firm? The average commission per account in both Personal and Commercial lines greatly affects the amount of commissions a CSR can handle. In Personal lines, there isn't as wide a spread in average account size as there is in Commercial lines. In Personal lines, it is more common to judge performance based on the number of accounts as opposed to commissions handled.
The employee productivity table (at the end of this article) shows the commission and number of Personal and Commercial accounts handled by a CSR employed in the average firm. The table also shows overall revenue per employee, per producer, and per CSR. Our definition of CSR includes managers, assistants, claims people, and marketing personnel, since their number varies greatly from one firm to the next. The key determinant of who is a CSR is whether that person deals directly with the firm's clients.
Servicing costs in a firm can be analyzed best by looking at the CSR payroll and operating expenses relative to commission. Typically, firms have servicing costs ranging from $ .30 - $ .45 per dollar of commission. Obviously, the lower the servicing cost the better, leaving more dollars available for selling and administrative expense, as well as compensation to owners and non-owner producers.
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