It seems that everyone has a strong opinion on profit potential in personal lines. The larger agencies with most of their activity centered in larger commercial accounts are the ones that are having the hardest time demonstrating to themselves that it is financially advantageous to be in the personal lines business. Smaller, rural agencies seem to make some profit in personal lines but it is our observation that this is primarily because the owners spend more time with that business and end up receiving a proportionately lower 'hourly wage' than do the owners of larger agencies.
It's the agencies in the $800,000 to $2,000,000 commission range that offer the most results. We have reviewed our files as well as the information sent to us by our readers and have found bona fide instances of personal lines profit in excess of 35%. We have also identified actual departmental losses that are as much as 50% of the agency's personal lines commissions.
It would be most informative to do an in-depth study on why and how this type of variance exists. Certainly it should be a top priority market research topic for those carriers that are dedicated to: a) the independent agency system and b) personal lines. These companies must be active participants in the development of agency business and operational plans that demonstrate the opportunity for the agency to make money selling and servicing their product.
Our preliminary observations, developed from many years of dealing with independent insurance agencies as well as from the most recently received data on personal lines profit centers, have helped us identify several key factors that seem to make the difference between agencies with red ink in personal lines and those where that department is supporting the commercial operation during these soft market times.
Some of the agency characteristics (such as geographic location) are largely outside the control of the agency. But some can definitely be accomplished in any agency if the owners and managers want to do so. As with any decision, the pros and cons have to be weighed carefully. The owners must decide whether the rewards of having a profitable personal lines operation are worth the effort because of changes that may have to be made in the overall operation of the agency.
Agents wishing to turn around a lackluster personal lines situation may have to completely alter the agency's way of doing business in personal lines, give up a carrier that has been with the agency for 100 years, get further into bed with one company, sign on with a direct writer, let long-term employees go, hire different kinds of people than have been considered before, cut or eliminate producer compensation for this business, become more automated-perhaps even go to transactional filing, or become more heavily involved in the running of the department themselves.
Whatever it takes, the owners have to be willing to do it. If the changes that must be made are not personally acceptable to you, then you must recognize the fact that you will not make as much money (if any) in personal lines as many other agents are. Once you come to an understanding of the sacrifices that you are or are not willing to make in order to create a profitable personal lines operation, you will be in a better position to decide whether to stay in the business at all. Unless the agency is located in metropolitan area, it may make more sense to keep personal lines at break even or a slight loss rather than face the public relations problems and potential loss of commercial business that would result from pulling out of personal lines.
Characteristics Of Successful Personal Lines Operations
Location. Sometimes the agency is lucky enough to be located in a marketing area that affords the opportunity to write larger accounts. An agency we encountered in Houston that had an average personal lines account size of almost $300 in commissions in 1991 could afford to pay producers 40% new and 20% renewal for personal lines . . . and still make a lot of money. Agents in Wisconsin who barely got $300 in premium per account can ill afford to pay any sales compensation.
Automation. An agency in rural Iowa has achieved more than $100,00 in revenues per employee despite very low average account sizes. Their secret is automation handled by a dedicated group of employees with relatively high morale. By interfacing with major companies and operating a totally paperless office through the use of transactional filing, this agency has cut many of the headaches associated with handling personal lines-lots of paper and poor/slow company service.
Other agencies have had similar results without going the route of transactional filing or sometimes without loading complete policy file information into the computer. If it is not possible to interface with the major carriers, effective use may mean that the bulk of the policy file information should not be loaded on the agency system. Agencies can still become very efficient through the extensive use of word processing, spreadsheet and sort programs such as Lotus or Q&A, and rating systems.
There is no doubt that the effective use of automation is critical to the operation of a profitable personal lines department. Agencies that are still using a typewriters for correspondence or to do billings usually need more people than they can really afford in order to properly service the book of business.
Producer Involvement. A number of agents took exception to our assertion several months ago that it is difficult to make a profit in personal lines if you have extensive producer involvement. They have assured us that it is possible to pay producers and yet make money. We agree to a certain extent, but still believe that other factors must be present for this to work out successfully in most agencies.
An agency in rural New England with a marketing area of 25,000 in population is able to pay producers 24% new and renewal. The agency has two-thirds of its personal lines business with Allstate (a very efficient company with which to do business), the balance with three regional companies, also easier to get along with than the nationals. Direct overhead labor is managed carefully by a CSR/Supervisor and the result is that the department is able to achieve over $150,000 in commissions per person (including the senior person and part-time back-up). And these people also handle their own claims! The agency owner believes that it is the producer involvement in sales that is making the difference but the very well-managed group of CSRs and the company relations are also obviously playing a major role.
Well-Defined CSR Position. We firmly believe that a good servicing CSR is worth her/his weight in gold. Too many agencies have tried to force these people into selling personal lines new business and have destroyed a good thing in the process. One of the two major testing organizations used by independent agents, The Omnia Group, has developed a very good outline of the traits of a successful CSR and has compared them with the traits necessary to be a good salesperson. Their research corroborates our own observations. Using scripts and client information forms, good CSRs can take orders and develop ex-dates from existing accounts, but they have a difficult time taking new business leads and running with them. They are simply not motivated the way a salesperson is and tend to become very frustrated when agency owners and managers assume that they are.
If the agency is large enough and has access to the right type of employees, we recommend that the good CSRs do their thing and put the responsibility for new sales activity on an inside salesperson. And don't rely solely upon your own judgment to decide which current or prospective employees are CSR types and which are more sales oriented. Have them tested. Omnia is at (800) 525-7117 and Caliper, another good testing firm, can be contacted at (609) 924-3800. Many of the agents' associations have information on these organizations as well. Given the cost of hiring and training people, it's definitely worth the relatively minimal expense involved to get an outside opinion on the personality traits of prospective hires.
In those situations where the agency can afford it, outside producers can also be paid to produce new personal lines business in addition to commercial. If the internal operation is running smoothly, you might be able to pay 40% on new business and a decreasing percent of perhaps 20% the second year and 10% the third year. A changing commission scale may be difficult to administer, however, so make sure that you will not have to hire another bookkeeper to keep records before you implement such a program! It may be better to set it up at 50% for new business and forget about renewals.
Company Support. In other instances, the relationship with one or two insurance carriers has been the deciding factor in personal lines profitability. If the company provides the agency with at least several of the following support features, the agency can do a much more efficient job of handling personal lines.
These items include: innovative and flexible underwriters at the branch or underwriting authority for the agency, preferred or at least competitive rates, combination policies or total account discounts, lucrative profit-sharing arrangements for personal lines, on-line computer access, co-op advertising, producer assistance programs, lists of qualified prospects with ex-dates, excellent policy processing and claims service, and last, but certainly not least-consistency and stability.
A number of insurance companies have decided to 'solve' the personal lines problem for agents by taking over account processing duties that have traditionally been handled by agency personal. Regional service centers have been set up to have company personnel rather than agents handle policy changes and renewals directly with the insureds. In return for providing this service, the company reduces the agent's commission by from one to six points. If the starting commission was 15%, this is a reduction in agency income of from 7% to a very hefty 40%.
The theory is that the agent will have lower personnel costs because the company personnel will be doing most of the CSR work. The actuality is that, unless the agency has almost all of its business with that carrier, the savings (if any) are minimal. If there are a significant number of non-service center accounts, two sets of procedures must exist in the agency. This is inefficient and produces extra E&O exposure.
Things become even more cumbersome when an individual insured has policies with more than one company, one of which is in the service center. And because of competitive pressures, it is often necessary for the agency to be able to switch companies in order to retain accounts. Doing this in and out of service centers is much more disruptive for the clients. Imagine how confused an insured would become if he had an auto policy with one servicing company, a homeowners with another, and boat and umbrella policies still handled by agency personnel. He would be a prime target for the direct writer ads.
Even with all of those negatives, we are not totally convinced that the service center idea is a bad one. Properly handled, it can reduce redundancy. And there is no doubt that the companies have better facilities to train CSRs than do most agencies. Agents who can remember back twenty or thirty years (ten years if you are in Texas) when direct billing was introduced may be able to recall their initial reaction to that revolutionary concept. The company was going to take over invoicing and collecting premiums and would cut commissions by 25% to 30% for doing so. Agencies that were good collectors would also lose the income that they generated on investing the float. 'The customers would never stand for it.' It was, in short, a very bad idea.
Today, there are few agents that do not like direct billing. The industry has come around to recognize that this is one function that can be handled reasonably well by companies (once automation responded adequately). We do not mean to imply that service centers will catch on the way that direct bill did. We do, however, think that each agency should carefully weigh the pros and cons of the program, if and when it is offered. If the bulk of your accounts can be placed with that company, if that company provides a good product at competitive rates, and if it is difficult for you to attract and retain good CSRs in the agency, it just may be your salvation. You'll never know whether it would be good for your agency if you summarily reject the whole idea of service centers as unworkable.
What does make it more appealing is when the insurance involved deals with each agency individually. Some companies know that not all of their agents will handle it well, so they are selective in offering the opportunity. They don't force the agent to take it if they want to keep their contract. They are sensitive to the agent's desire to handle the account expansion activities and therefore provide the agent with the ex-dates obtained rather than solicit the additional policies themselves. They provide a copy of all correspondence to the agent. These more understanding carriers know that the agent has the primary responsibility to provide the best coverage possible for his or her insureds at the most reasonable cost. So they allow the agent to be selective about which clients are put into the service center.
If you review the list at the beginning of this section of the newsletter, and if you look at which carriers are trying to handle the service center approach with the agents' and insureds' best interest at heart, you will find that the national companies have not (with some notable exceptions) been treating personal lines in a manner that makes it all easy for the agents to be profitable with it.
In retrospect, it may turn out to be beneficial for agents and their insureds to have most of the national carriers pull out of the personal lines business. There is no doubt that the transition is acutely painful for all concerned (well, maybe not for the insurance companies but certainly for the agents and insureds that have been left high and dry.) But the end result may be for the best. We see an opportunity for the regional companies and for those national carriers that specialize in personal lines to eventually take up the slack left by the exodus of so many carriers from the personal lines market. We believe that these companies are generally in a much better position to provide the type of products, pricing, and services that agencies need to handle personal lines profitably.