REFERRALS: LET’S TALK ‘BOOK’ VALUE
by Gil Simonds
In the last article, after talking about how to avoid getting referrals that were less than desirable, I noted that when producers get an undesirable referral, they often hate to say no, because of how it came to them.
It’s human nature that if you have a referral source feeding you, you want to take care of that source, right? Because the producer, or account manager doesn’t want to offend the source, he or she compromises by writing the account even though it’s less than desirable.
Such an account is:
- Often monoline
- Usually too small in size, even if not monocline
- Probably a price-shopper
- Burdened by past – and future— payment issues
Notice that this doesn’t mention class in, but size & quality of the “account.”
So, what happens when a producer (or agency) makes repeated compromises and sells what comes their way? This type of working by default, instead of by design means that, the producer’s or agency’s book takes a hit over time.
We all know that many producers and agencies will write whatever comes their way After all, it’s revenue isn’t it? True, but what about the longer-term implications of writing this kind of business? After I analyzed one agency’s book, the principal said to me, “I can tell that I’ve written the ‘Cream of the Crap,’ haven’t I?” It was hard to disagree.
The bottom line: A producer or agency that has compromised for many years (whether accounts are coming via referral or via cold call), will earn between 50% and 75% of the book’s potential value, compared to an agency or producer that’s selective in avoiding this type of account. Here’s why:
- The book is usually smaller because of lower revenues and higher service costs.
- Higher support costs reduce profits.
- Account and revenue retention is usually lower.
- Comparison ratios relative to average size of account and commission are poorer than those of their Best Practices agency/producer counterparts.
Lower revenues, profits, retention, and BP ratios mean that an agency isn’t worth as much to most third- party buyers (internal sales might be an exception) as are agencies or books that have a more selective, higher-quality profile of accounts.
The old expression “an ounce of prevention is worth a pound of cure” hold true here. If you want the value of your book to grow near the top of the range, the best prescription is to concentrate on the quality of the business you write from the get-go.
Gil Simonds, CPCU, is president of Total Management Resources (Atlanta, GA) an agency sales and management consulting firm. You can contact him at (404) 250-9007, e-mail [email protected], or visit www.totalmanagementresources.com.