Last December I heard about personal lines commission reductions from two carriers from agents who were concerned and inquiring about what they could do to combat this. So, I ran this issue by some experts and this and the previous post are two of those responses. Note that these guest posts are copyrighted by the authors, so if you want to reprint them, you will need to contact them directly for permission. Unless indicated otherwise, you are free to reprint any other blog posts on this web site as long as you follow the reprint guidelines. – BW
Are you Earning Your Commission? Are You Giving Your Companies Justification for Cutting Your Commissions?
by Chris Burand
The title alone, I’m positive, has already caused a handful of agents to hyperventilate. If the reader is an independent agent and is not reviewing, or at least not offering to review, each renewal in detail, is not being an advocate for their clients, and is not working with all their clients to assess their exposures, then the client does not need to pay an agent 12%, 13%, or 15% commission. The agency is not earning their keep.
Insureds do not need agents that “renew as is” each year. Absolutely no service is being provided when an account is renewed as is without ever asking the client, at the very least, whether their exposures have changed. That is minimal. A computer, for maybe 2% commission, can renew as is. The companies and insureds are wasting their money on agents that “renew as is.”
If a reader wants to defend this practice by saying, “We’ll be there if something goes wrong and therefore we earn our commission that way.” I suggest this is high level rationalization designed to make one feel better about one’s self. First, there are agents that will provide such service AND thoroughly review renewals annually. Second, if one thoroughly reviews each account each year, much less is likely to go wrong. Third, why in the world would anyone want to buy insurance from an independent agent that would not be an advocate? That is simply expected.
I’ve heard some agents say their company contracts prevent them from being an advocate. The only thing that keeps an agent from being an advocate for their clients is themselves. The legal precept of duality is what enables the independent insurance agency system to work. Under duality, an agency can represent a company and a client without having a conflict of interest because they never represent both at exactly the same time. The lines can be thin, but the lines always exist. (I am not an attorney and I am not providing legal advice and therefore, this is my layman’s interpretation based on reading case law and law school legal journals.) For example, when an agency takes a client’s money, they are representing the company but when the agency is discussing coverages, they are representing the client. When agents take claim information, they are representing the company but when they are reviewing a claim that is not being properly considered, they can be an advocate for the proper claim settlement. They can be an educator regarding to expect as a claim is settled. They can be a comfort. The insured bought their insurance from you and they have right to expect advocacy from you, if you are a professional earning your commissions.
The latter point is important, especially if an agent is claiming they’re earning their commission based on “being there in case something goes wrong.” An insured sometimes needs an advocate.
Even then, even if the agent earns his commission by “being there in case something goes wrong,” not enough usually goes wrong to justify 12%-15% on every renewal (the industry average is approximately 12.5% weighted to include workers’ compensation, personal lines, and commercial lines but excluding group benefits). A value proposition simply does not exist on a renewal as a business model when the value is, “I’ll be there if something goes wrong.” More is needed to justify these commission rates.
Neither does a value proposition exist when an agent advises he’ll match existing coverages but “at a better price!” It sounds like the valuation proposition is the better price but it is not if the coverages are wrong and odds are extremely high the coverages are not correct. As I have written many times, 90%+ of all agencies do not use coverage checklists and if an agency does not use coverage checklists, the odds of the coverages being inadequate are just about 100%. At this point, it is just a matter of reducing the price for inadequate coverage. Anyone can do this and this is why high commissions are not justified for matching price.
A value proposition does exist for agencies that provide true value. Simply providing a quote (I get a kick out of advertisements for free insurance quotes – seriously?) and a policy can be done by a computer. There is NO value in doing just this. A value proposition is delivery of the policy and the policy is designed, customized, and built specifically for that client based on their exposures and their decisions as to how much they want to self-insure. When an agent recommends a coverage and they decline, they are really advising they want to self-insure that exposure.
When an agent delivers risk management, loss control, and simple safety advice they are delivering a value proposition. Something simple, just guiding a client to the company the agency feels has the best claims service, for example, is a huge value proposition. Every agency should be giving their clients a phone app. That is another example of a value proposition. Value can be delivered with so many examples and these are just a few simple ones. If agencies are not delivering value, companies need not pay full commissions and contingencies.
If agencies are not delivering value, some companies also recognize this as a characteristic of laziness. The companies understand they can cut commissions for lazy agents because what’s a lazy person really going to do about it?
What is intriguing to me is that some companies have made specific agencies lazy or at least contributed by previously being over generous in their compensation. For years I have wondered why certain companies paid certain agencies so well when I know those agents are lazy and often incompetent. In a fashion, they were fattening up the Thanksgiving turkey.
Most such companies are not that insightful much less that strategic. They were not fattening up the turkey but it kind of worked out that way. Many of these same companies have huge internal profitability problems and they are blaming agency compensation. Agency compensation in these situations is an easy target. The agents are not doing much for their commissions and the companies are overpaying relative to their peers. On the surface this seems reasonable but agency compensation is just an itch. These specific companies’ problems lie much deeper. One such company is one of the few companies to not make any profits in five years. The last five years have been arguably the five most profitable years in carrier history so for a carrier to lose money requires some effort. Cutting agency compensation will not solve these companies’ problems. If agents had been providing real value and generating organic growth, the companies could not and would not feel so comfortable making drastic cuts.
There is another company or two that are much smarter and more strategic than the rest. They do not have profitability problems but they see the opportunity to cut commissions, all the same. So they are. They will go from quite profitable to even more profitable.
Most companies in my experience are not strategic in their thinking. Those that are though have to be considering cuts because insurance distribution is being and will be disrupted by a new breed of web based independent insurance agencies offering valuable value propositions but through a virtual relationship. These entities can provide the same services as an agency not doing much for less commission and they have a strategy. Companies have already appointed dozens of these virtual independent agencies.
It is interesting to me that many of the companies cutting commissions have not cut at all, or cut as deeply specific to my best agency clients who demonstrably provide organic growth and value propositions to their clients. Even when even these clients have incurred cuts, they have made up the difference with a quality, strategic fee program BECAUSE THEY ARE OFFERING QUALITY VALUE!
The commission cuts were inevitable by some carriers. I told my clients to expect cuts years ago carrier by carrier. My clients who responded strategically instead of putting their heads in the sand are doing quite well, not quite laughing to the bank but at least marching to the bank. More cuts are coming because some carriers have serious profitability issues and agents are spending too much time whining about commission cuts instead of investing in producers who can actually sell, firing those who can’t, aligning their agencies with strong carriers, and building true value propositions. The choice is yours.
Copyright 2016 by Chris Burand. All rights reserved.
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