If you don’t think you’re subsidizing your producers, you might need to think again.
The average agency spends between $1.02 and $1.04 for every commission dollar earned (“Growth and Performance Standards,” APIS, 2000). The cost of producer-generated new business is even higher. Burand & Associates studies have found that most agencies spend $1.20 to $2.25 for every commission dollar a producer generates in new business. A lot of money is lost for every dollar earned. An agency spending $1.20 to $2.25 on new sales and $1.03 overall must be making money somewhere else. Where does the money come from to subsidize producer sales?
RENEWALS
One source is renewals. Many contend that businesses in all industries lose money on new sales. Because the loss is erased with repeat sales, why worry? Most insurance renewals are definitely less expensive than new business. Although many agents believe that renewals are more profitable because producers are usually paid less, compensation alone isn’t that significant.
Hit ratio is the critical factor. The hit ratio on renewals is usually in the high 80s, versus 25% at best on new business. Although hit ratio is the key to making renewals more profitable, poor hit ratios make new sales unprofitable. If a producer had an 85% hit ratio on new business, new sales would be almost as profitable as renewals in most agencies.
Even with higher profits, a producer’s repeat sales (renewals) usually aren’t profitable enough to turn an agency’s loss into a profit. In fact, our studies have found that some agencies spend as much as $1.70 for every renewal commission dollar earned!
HOUSE BUSINESS
Because renewal profits alone can’t support producer’s new sales, another key source of subsidies is house business. House business is usually the most profitable because no one gets a commission on it. It helps to subsidize the entire agency, especially producers with small books.
OWNER SUBSIDIES
In many agencies, renewals and house business combined still aren’t profitable enough to cover losses on producer-generated business. Many owners must also subsidize their producers. Owners are often world-class salesmen with books of $350,000 to $550,000 in commissions, but they don’t pay themselves what they would a non-owner producer with the same book. As a result, they subsidize unprofitable producers.
How big are these subsidies? Here’s an example of a common scenario:
Producer’s book: $170,000 commission
Producer’s cut: $68,000 (40% of the agency’s commission)
CSR salary: $30,000 (the average agency has one CSR for every producer)
Benefits: $9,800 (10% of the producer’s and CSRs compensation, including employment taxes)
Sales Costs: $27,200 (16% of commissions, the national average for medium-sized agencies*)
Operating Expenses: $61,200 (36% of commissions, the national average for medium-sized agencies*)
Total: $196,200
Loss $26,200
* 'Growth and Performance Standards,' APIS, 2000
Earn $170,000, spend $196,200. This doesn’t even include management or owner compensation, staff other than the CSR, benefits for anyone other than the producer and CSR, profit sharing, or profit. The agency has to pitch in, or subsidize, a minimum of $26,200 — 15% of the producer’s book — just to break even! The agency has to spend $26,200 to cover the producer’s book, new business, and renewals.
Independent agencies push hard for more and more Commercial sales, yet these are often the least profitable. Agencies can only write so many unprofitable accounts before the subsidies run out. To solve this problem:
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Know how much you spend to make a sale.
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Identify the hidden costs.
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Recognize the subsidies provided by renewals, house accounts, and generous owners.
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Pay producers for profitable sales, rather than any sale.
Finally, agencies must value their resources and their staff’s time adequately. By undervaluing their staff’s time, many agency owners hire additional CSRs when none are required. For example, many agencies can do with one less CSR if they simply stop quoting over the phone and quoting every unlikely prospect a producer finds.
Limit subsidies, and make each producer and department pay its own way. Your agency’s profits will skyrocket by doing so!