Many insurance companies try to boost profits by reducing contingency payments - not a smart move. A good contingency contract is one of the most effective and least expensive ways of increasing profits. Having analyzed hundreds of contingency contracts, I've observed that the ones with the best contingencies result in the lowest combined ratios.
In a well-designed contingency contract, bonuses are not expenses. They're incentives for the agency to bring in good business and help the insurance company increase its profits. As a reward, the company shares a portion of the profits.
Many contingency contracts allow an insurance company to limit an agency's bonus if profits are too high in any given year. Think about this for a moment. If the agency does a good job of underwriting risks upfront, the insurance company enjoys low loss ratios and high profits. What kind of incentive is it when the insurance company responds by cutting the agency's contingencies?
More agencies are reading their contingency contracts thoroughly to determine which ones are better. A smart agency shifts some of its business away from a company that decreases the contingency bonus or makes the bonus more difficult to earn. Agencies can move business more easily now than ever before. Increasingly, they're looking to move their most profitable business to captives, and they'll continue to do so unless companies start sharing more profits. Most companies are paying big bonuses for book rolls. The days of subsidizing high loss-ratio agencies with low loss-ratio agencies are over.
Many companies are creating their own sales forces or are establishing an Internet presence to counter the power of a few large agencies. Compared with the cost of creating a direct sales force, contingency bonuses are not expensive. If companies pay profitable agencies well, small agencies will stay in business, counteracting the growth of large agencies.
Companies can make much more money by giving agents high-paying contingency contracts than by cutting contingency bonuses.
All it takes is a few basic steps:
- Identify the company's top three goals, and list them in order of importance. Examples include profits, growth, volume, retention, low loss ratios, automation, and mix of business.
- Write a contingency contract that pays agencies well for achieving goals. Companies that pay well get their share of the profits and more.
- Get your agents' opinions about the contract to see if it's a good deal for them. When companies change their contingency contracts without considering their agencies' needs, the results can be disastrous. Badly written contracts may work as disincentives for agencies. Companies have lost millions of dollars because of the unintended effects of a single clause.
- Provide a lot of explanation when introducing a new contract. An insurance company should demonstrate how a new contract is a profit-sharing opportunity for the agency. It's an excellent opportunity to strengthen agency relationships. The results could be similar to those achieved by firms practicing open-book management, which results in a 1.66% faster growth rate, according to research by the
National
Center for Employee Ownership. The reason open-book management works is that employees trust management more and work harder to give the company good business. Surveys show that few agencies trust their companies to compensate them fairly. In particular, they don't trust contingency calculations. Too often insurance companies don't explain the numbers. Large loss reserves are added during the last week of December. As a company rep once said, 'Reserves rise once the leaves have fallen.'
With well-designed contingency contracts, companies and agencies can watch their profits grow!