Weather The Economic Storm: Increase Life/Health Sales

WEATHER THE ECONOMIC STORM: INCREASE LIFE/HEALTH SALES

by Carol Hammes

With all of the recent lay-offs and questionable earnings reports from major corporations — not to mention the jitters on Wall Street — it’s clear that for at least a short time many of the factors that impact Property/Casualty insurance rates will be heading downward. These include payroll, inventories, construction jobs, etc. So, the impact of the harder market on insurance agency revenues will definitely not be as great as it would’ve been in a robust economy. No independent agent can let down their guard at this point.

Now’s the time to focus on Life and Health sales, particularly in the group arena. These premiums have been increasing steadily and are now predicted to have growth rates of 20%-30%. Saving accounts from a 10% increase in premiums might make you a hero in Property/Casualty Lines. But you can be a savior in Employee Benefits by keeping the increase to 20% — and make a lot of extra commission in the process.

Although most independent insurance agencies sell some Life and Health insurance, the average agency receives less than 10% of its total income from this source, and only about one in four agencies has a separate Life and Health department. Statistics show that agencies receiving more than 25% of their income from Life and Health coverages have higher levels of productivity and profitability. Writing Life and Health insurance takes more work up front, but requires far less servicing. And everyone agrees that cross-selling to customers is one of the best ways to stave off competition and increase retention.

Why have relatively few agencies 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 certainly isn’t for lack of trying. The Property/Casualty landscape is littered with the bones of many a failed Life or Employee Benefits insurance venture. The problem is that the differences between Life/Health and Property/Casualty make it difficult to carry out a comprehensive marketing plan. As many banks and other entities have found out, providing a full line of financial services to customers is simply not that easy.

For example, in Life insurance supply is relatively stable with few market swings. The salesperson’s biggest challenge is to stimulate demand. In the Property/Casualty arena, demand is stable but the supply fluctuates, often dramatically. This leads to differences between the two products in underwriting, as well as in the agent/client relationship. Life producers who send leads to the Property/Casualty producers often can’t understand why they don’t get the results they want. Property/Casualty producers might feel that Life people aren’t sensitive enough to the finer points of maintaining client relationships.

Another problem is that many agencies are looking at Life and Health as a means of rounding out existing Property/Casualty accounts. They aren’t expanding their vision into the development of a stand-alone profit center with reverse expansion opportunities. More than half of the independent agencies in this country have less than $600,000 in total revenues. They can’t support a separate Life/Health salesperson whose sole job is to expand Property/Casualty accounts.

Directing agency resources into developing a separate department or profit center only makes sense 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. They must make up the balance through the direct solicitation of other non-agency accounts. All of the agency owners must make a conscious and unanimous decision to develop this profit potential and support it. Half-hearted dabbling will cost the agency more money than it makes.

Compounding the problem is the difficulty of finding and keeping good salespeople. Having one producer try to sell all insurance products usually doesn’t work because of the differences in products and approach; it’s too demanding. Some agencies decide to hire 'Life people,' who are often even more difficult to work with than Property/Casualty producers. A good Life producer has little need to associate with an independent agency and tends to act that way. Although the Life/Health salesperson might be attracted initially by the chance to work the Property/Casualty files, why would they give up 100% of the commission for a lower split? For a few leads? When asked to produce additional business to meet agency sales goals, they often balk and head out on their own.

Many people have vast amounts of technical expertise, but can’t sell Life and Health without assistance or service personnel, taking up an inordinate amount of the time of a key salesperson or agency principal. The result: Life and Health income well below goal, and Property/Casualty opportunities squandered on time spent trying to get the Life/Health department off the ground.

Although it’s impossible to wave a magic wand to overcome all of these obstacles, it’s feasible to expect 25%-30% of the agency’s income from Life/Health sources after less than four years of concerted effort. The operative phrase here is 'concerted effort.' Once you decide to proceed, select a structure that fits your management philosophy, organization, size, and operating style. Develop a marketing plan and budget for this option to include the selection, training, motivation, and compensation of personnel, as well as the implementation of necessary systems and procedures. Monitor progress weekly. Be ready to make changes quickly when even one facet of the program isn’t working out according to plan.

Opportunity One — Existing Agency Personnel. Some agencies will have to use the same people to sell and service all insurance products. If this is the case, train producers and CSRs to identify and approach prospective Life/Health customers, to explain the products, and then to make the sales. Give them specific objectives (e.g., one sale for every five P/C accounts) and compensate them appropriately. Provide close supervision and act as a technical resource, particularly when the existing staff isn’t comfortable with these products. If you’re lucky, one of your employees might prefer this side of the business. Once the existing book of Life/Health business reaches $50,000 or so, you can direct most of the activity to that person.

Opportunity Two — Insurance Company Representatives. In the past, many independent agencies tried to produce Life/Health insurance by using the expertise of their company field reps, together with existing agency personnel. What makes this approach attractive is that the agency can often receive all of the commission with little or no expense. It can also be relatively successful if it’s carefully managed. Don’t turn a company person loose on your files. Spend some time acquainting the representative with your agency’s goals, sales strategies, and client relationships. Select customers who fit the profile for a 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 the account.

Unfortunately, the downsides to this option often outweigh the advantages. In order 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. But these people work with other agencies, so you can’t expect them to share your priorities. And you can’t expect them to develop new leads for you. The best that you can hope for is an expansion of existing accounts. If, however, you have good producers who can generate leads and are comfortable working with company representatives, this approach can be marginally successful.

Opportunity Three — Relationship with Outside Broker/Firm. By contracting with an established financial services firm or broker you can provide your existing clients with instant expertise with no substantial investment up front. Select a professional partner with a reputation for integrity; a commitment to continuing education, and a portfolio of Life/Health companies/products.

Review their E&O coverage to make sure that your policy covers such participation. Maintain control over appointments with your agency clients, preferably by going out on the initial call with the broker. Set specific sales targets and make sure that the arrangement includes provisions for P/C referrals from the Life/Health personnel. Put all agreements in writing, preferably in the form of a legal joint venture document. Be sure to delineate who owns what portion of the business. Include provisions for terminating the arrangement with buy-out 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 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 to base it on.

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%-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. Try these approaches for distributing brokerage arrangement income with producers: 1) Split all income 50/50. 2) Retain a flat commission or dollar amount to cover expenses and profit, and give the balance to the producer. Again, we recommend an initial review period before finalizing the split.

Opportunity Four — Subsidized Producer. If you wish to develop a separate Life/Health department eventually, but you’re unwilling or unable to make the initial outlay, approach your companies for assistance with a producer subsidy. These programs vary widely, but most of them 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 you might also receive preferred status in the company’s Property/Casualty relationship.

In return for the initial financial assistance, you’ll need to meet company production goals. This is where the arrangement can begin to break down. The company might not have competitive Life/Health products, its goals might be unrealistic, or it might be overly aggressive in encouraging the producer to sell their 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/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 isn’t what you or the company executives expected it to be.

Opportunity Five — A Separate Life/Health Profit Center. In order to achieve the highest profit potential you’ll need to set up a separate Life/Health department or profit center. This option is the most expensive initially. 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 the agency achieves production of $100,000 in Life/Health commissions by the end of the first 18 months (one-half from existing accounts and the balance from new leads), you should be at a break even level by the end of the second year.

One of the first issues that you must address will be whether to have a separate corporation and who’ll own it. 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 as Property/Casualty expirations, Life insurance and individual Health insurance policies generally don’t 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 producers expect a piece of the action and it’s not possible to apply producer renewal vesting formulas to this type of business. We strongly recommend that the existing agency (or its principals individually) maintain 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, but only the portions of general expenses appropriate to this type of business. For example, the Life department shouldn’t 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 might have less residual sales value than the Property/Casualty book does.

Remember, whichever structure you choose it’s vital to make sure that all agency personnel participate in some way, even if it’s simply to refer leads.