Building Profitability With Life And Health Sales

by Carol Hammes

Although most independent insurance agencies sell some Life and Health insurance, only about one-fourth of them have a separate Life and Health Department, and the average agency in this country receives less than 8% of its total income from this source. Statistics compiled by numerous consultants and organizations show that agencies receiving more than 20% of their total income from Life and Health coverages have higher levels of productivity and profitability. Writing Life and Health insurance is more work up front, but it's much less labor intensive from a servicing point of view. And just about everyone agrees that building extended relationships by cross-selling to customers is one of the best ways to stave off competition and increase retention rates. Why is it, then, that relatively few agencies have established Life and Health Departments -- or for that matter, even have ad hoc marketing programs to focus on rounding out their books of business?

It's certainly not for lack of trying. The Property/Casualty landscape is littered with the bones of many a failed Life insurance venture. The problem is that in the real world, the differences between Life insurance and Property/Casualty make it extremely difficult to carry out a comprehensive marketing plan. In Life insurance, the supply is relatively stable, with few market swings, and the salesperson's biggest challenge is to stimulate demand. In the Property/Casualty arena the demand is stable but the supply fluctuates, often dramatically.

This leads to differences between the two product groups in the underwriting process as well as in the agent/client relationship. Life producers who send leads to the Property/Casualty producers often have a hard time understanding why they can't get the end results that they want. Or the Property/Casualty producers might feel that the Life people are not sensitive enough to the finer points of maintaining client relationships. As a result, initial enthusiasm wanes and follow-up calls are not made on either side.

Another part of the problem is that many agencies are simply looking at the Life and Health arena as a means of rounding out existing Property/Casualty accounts and are not expanding their vision into the development of a true stand-alone profit center with reverse expansion opportunities. More than half of the independent agencies in this country have less than $500,000 in total revenues and therefore can't support a separate Life/Health salesperson whose sole job is to expand the Property/Casualty accounts. Directing agency resources into developing a separate department or profit center makes sense only if there's a reasonable expectation of at least $100,000 in commission income by the end of the second year. Most agencies don't have that kind of potential in their existing files, so the balance must be made up through the direct solicitation of other non-agency accounts. A conscious decision has to be made to develop this profit potential, and all of the agency owners must support the effort. Dabbling will most certainly cost the agency more money than it makes.

The differences in environment and the narrow vision are further compounded by the age-old problem of finding and keeping good salespeople. Having one producer try to sell all insurance products usually does not work because of the difference in products and approach; it simply demands too much of people. So the decision is often made to hire a 'Life person.' But agency principals who have a hard time hiring and motivating a Property/Casualty producer will find it even more difficult to work with a Life producer, who is often a very different animal. A good Life producer has little need to associate with an independent agency and tends to act that way. Why give up 100% of the commission for a lower split just to get a few leads? Although the Life/Health salesperson might be attracted initially by the chance to work the Property/Casualty files, when they're asked to produce additional unrelated business to meet agency sales goals as well, they often balk at giving up commission and head out on their own again after several years of frustration on both sides.

So, more often than not, the Property/Casualty agency settles for a mediocre Life/Health salesperson. There seems to be an awful lot of people with vast amounts of technical expertise who simply cannot sell Life and Health insurance without being hand fed by other agency sales or service personnel. These 'producers' (often people who had worked previously in a comfortable insurance company environment) generally are not able to work the existing files, much less sell new accounts, without taking up an inordinate amount of a key salesperson's or agency principal's time. The result is total Life and Health commission income that remains well below targeted goals, and lost opportunities for the sale of more Property/Casualty business because of the management and sales time spent trying to motivate a lackluster producer to get the Life and Health department off the ground.

Although it's not possible to wave a magic wand to overcome all of these obstacles miraculously, it's nevertheless feasible to expect to receive from 20% to 25% of the agency's income from Life and Health sources after fewer than four years of concerted effort. The operative phrase here is 'concerted effort.' Once the decision is made to proceed, select the following structure option (or a combination thereof) that best fits your management philosophy, organization, and operating style. Develop a marketing plan and budget for that option to include the selection, training, motivation, and compensation of personnel as well as implementation of necessary systems and procedures. Monitor progress weekly, and be ready to make changes quickly when even one facet of the program is not working out according to plan.

Option One: Relationship with Outside Broker/Firm

By contracting with an established financial services firm or broker, you can provide your existing clients with instant expertise and products without a substantial upfront investment in salaries and training on the part of your agency. Select a professional partner with a reputation for integrity, a commitment to continuing education, and a portfolio of Life and Health companies/products that can meet the needs of your type of client. If you have a number of salespeople, you might want to select a larger firm that also has several producers to increase the chances of compatibility among individual producers in both organizations.

Review their E&O coverage and make sure that your own policy covers participation in such an arrangement. Maintain control over appointments with your agency clients, preferably by going out on the initial calls with the broker. Set specific sales targets and make sure that the arrangement includes provisions for P/C referrals from the Life and Health personnel. Commit all agreements to writing, preferably in the form of a legal joint venture document. Be sure to delineate who owns what portion of the business that is produced. Include provisions for terminating the arrangement with buyout formulas and dual non-piracy restrictions during the program and for at least two years after the arrangement ends. Carefully determine the initial commission splits for all possible products and services to be provided, and set up a formal review process for the end of the first 12 months. If both the agency and the broker are new to this type of arrangement, it might be difficult to estimate expenses until you have some experience on which to base it.

Most of the time, the commission percentages are separated by new and renewal. For example, in the sale of Individual Life insurance, there's often a new business 'finder's fee' of 20% to 30% of the first-year commission and then nothing on renewal. On the other hand, the P/C agency split for Group Health might be as much as 50% new and renewal if the agency's producers are to remain active in the servicing and renewal process. Once it's received from the broker, two different approaches can be used to split up the income between the agency and its producers.

1. All income received from the brokerage arrangement is split 50/50.
2. The agency retains a flat commission or dollar amount to cover expenses and profit, with the balance going to the producer. Again, we recommend an initial review period before finalizing the split.

Smaller agencies lacking the resources or opportunities to select other options might find that they have to use the same people to sell and service all insurance products. If this is the case, producers and CSRs must be trained to identify and approach prospective Life and Health customers, to explain the products, and then to make the sales. They should have specific objectives (for example, one sale for every five P/C accounts) and must be compensated appropriately for handling the functions. An agency principal must provide close supervision and act as a technical resource, particularly when the existing staff is not comfortable with these products. If you're lucky, one of the employees might prefer this side of the business. Then once the existing book of Life/Health business reaches $50,000 (or so), you can start to direct most of the activity to that person, allowing the others to specialize in Property/Casualty while providing leads to the in-house 'expert.'

In the past, many independent agencies have tried to produce Life and Health insurance by using the expertise of their company field reps, often combining the practice with the use of existing agency personnel. What makes this approach attractive is that the agency can often receive all of the commission with very little or no expense. It can also be relatively successful if it is managed carefully. Do not turn a company person loose on your files. Spend some time acquainting the rep with your agency's goals, sales strategies, and client relationships. Select those customers who fit the profile for that Life company's products and maintain strict control over client appointments. Make sure that there's an agency producer who stays in active contact with that account.

Unfortunately, the down sides to this option often outweigh the advantages. To be able to provide the wide array of products that most of your customers need, you might have to work with a number of company field reps. And since these people will also be working with other independent agencies, you can't expect them to have the same priorities that you do with respect to your accounts. Most important from the perspective of trying to develop a profitable book of business, you cannot expect these people to develop new leads for you. The best that you can hope for is an expansion of existing accounts. If, however, you have some good producers who can generate the leads and who are comfortable working with the company field reps, this approach can be marginally successful.

Agency owners wishing to develop a separate Life and Health Department eventually but who are unwilling or unable to make the $50,000+ outlay to start from scratch can approach their companies for assistance with a producer subsidy. These programs vary widely, but most of them tend to have the producer employed by and housed in the agency. Training, and sometimes compensation, are handled jointly by the company and agency, with part of the initial producer salary/draw subsidized by the company in the form of a loan or commission overrides. An added benefit in setting up such a program is that the agency might also receive preferred status in its Property/Casualty relationship with that same company.

In return for receiving the initial financial assistance, the agency and producer agree to meet company production goals. This is where the arrangement can begin to break down. The company might not have competitive Life and Health products, its goals might be unrealistic, or it might be overly aggressive in encouraging the producer to sell its products rather than what's best for your clients. The company might also expect the producer to sell its Property/Casualty products as well as Life and Health, thus diluting the development of the separate Life/Health department. As with any such subsidized arrangement, the entire agency-company relationship can be put in jeopardy if this one aspect goes sour. Enter into a subsidy with your eyes open, and be ready to end it quickly if it's not what the agency principals or the company executives expected it to be.

Most of the time, to achieve the highest profit potential, an agency must bite the bullet and set up a separate Life and Health department or profit center. This option is the most expensive in terms of initial funding. Even if you start gradually by hiring one producer/manager and assigning a small portion of a support person's time to the effort, the expenses can easily exceed $50,000 for the first year. But the rewards of a successful operation will more than offset the investment. If your agency achieves production of $100,000 in Life/Health commissions by the end of the first 18 months (half from existing accounts and half from new leads), you should be at a break-even level by the end of the second year.

One of the first issues to address will be the question of whether to have a separate corporation and whether to allow the producers and/or department manager to share in the ownership. There are several good reasons for maintaining a separate legal entity.

First, although a book of Group insurance might be valued at or close to the same multiple that Property/Casualty expirations are, Life insurance and individual Health insurance policies generally do not have much renewal value. Treating these types of business separately will make internal ownership perpetuation transfers, mergers, or external sales easier and perhaps more equitable. Second, many of the better Life producers will expect a piece of the action, and it's not possible to apply producer renewal vesting formulas to this type of business. We recommend strongly that the existing agency (or its principals individually) maintain the controlling interest in the new entity. And if you anticipate having more than one producer, it would be best not to give or sell 49% of the equity to the first one.

Whether or not the department is set up as a separate legal entity, it should be maintained as its own profit center. Charge all direct expenses and just that portion of general expenses relevant to this type of business. For example, the Life department should not be charged for a portion of the salary of the agency bill accounts receivable clerk. After several years, this department should be producing a profit margin equal to the contributions of the Property/Casualty book plus some additional points to make up for the fact that it has less residual sales value.

The following is a suggested approach to use in planning for the development of a Life and Health Department. Every agency is unique, so make appropriate adjustments to these general guidelines:

1. Determine the expected hit ratio by type of business, if possible (It appears from our research that a good Life producer can get four paid cases for each 50 qualified leads, and we would expect a higher percentage for Group Life/Health).
2. Calculate average commissions per case to be sold.
3. Expect producers to contact 50 leads per week, either from agency files or from their own contacts for the first year. Reduce this by the number of group renewals thereafter. Determine average commissions per case in your marketing area or from your existing clients (If average commissions are $400, total annual production per producer would be $80,000).
4. Pay the producer a draw (including benefits/expenses) based on half of anticipated annual production-in this case, $3,333 per month. After the second year, the producer should be on a commission basis. The following is an average commission schedule, which should be adjusted to fit your situation:

5. If one producer/manager is a part owner of the profit center and will share in the profits, the sales compensation might need to be different than it is for other producers. Or perhaps there should be a bonus structure based on profitability once you're all comfortable with the allocation of expenses to the department. Allocate initial operating expenses and sales management cost at $25,000 per year until you have more exact experience. Note: The allocation can be the source of much frustration and can actually destroy an otherwise successful venture, so be sure that you determine the expenses fairly.
6. Figure one-fourth of a CSR (approximately $7,500 in salary and benefits) for each $50,000 in production. Eventually the department should be able to achieve these optimum productivity measures:

Whichever structure you choose, it's critically important to the success of the venture to make sure that all agency personnel participate in some way, even if it's simply to refer leads to the Life/Health people. The Property/Casualty producers and CSRs need to be up to speed on how to identify, estimate, and respond to the more common Life insurance needs of the clients: Key man, partnership, Buy-Sell, estate tax, family maintenance, mortgage and educational insurance, retirement planning. Personal Lines service personnel should also be trained to look for any triggering event that changes the life of the insured such as marriage, divorce, or children.

After more than 20 years of observing Property/Casualty agencies trying to sell Life and Health insurance, we can unequivocally state that what approach you take matters less than how actively you pursue the course that you've chosen. It goes without saying that the agency principals must make a personal commitment to the program. If an owner does not want to take the Life person out to his/her accounts for fear of embarrassment or losing the account, what kind of message does this send to the rest of the organization?

The late Carol Hammes, principal of The Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission from The Middleton Letter.