INSURERS SHARE INSIGHTS ON AGENCY PROFITABILITY

Rough Notes, Jan 2004 by Willis, Dave

Panelists at NAMIC meeting explain process for monitoring their agency forces

Experts say the key to building strong relationships with clients and prospects is knowing what drives them. Get into their heads. Know what their pressure points are. The same holds true in dealings with carriers. Achieving solid relationships with them requires knowing what they want, understanding their perspective and getting into their minds.

Agents can get a glimpse of what goes on in a carrier's mind, thanks to information shared by company executives at a panel session that took place at the National Association of Mutual Insurance Companies (NAMIC) Annual Convention in New Orleans in late September. NAMIC's 1,300 member companies underwrite some 40%-or nearly $125 billion-of the property/casualty insurance premium in the United States. Members include four of the seven largest P&C carriers, as well as regional and national P&C insurers, and hundreds of farm mutual insurance companies. A few NAMIC member companies deal exclusively through captive agents, but most work with independent agents.

Importance of agency profitability

Company executives who took part in the session, titled "Focus on Agent Profitability," shared why companies care about making sure agents do well. Sharon Hall, vice president of personal lines underwriting operations at Grange Mutual Insurance Company, Columbus, Ohio, who moderated the panel, explained, "We licensed these folks, and if we can find a way to help them with profitability, it's in our best interest to do so as an industry."

Panelist Doug Albohn, assistant vice president in Grange Mutual's marketing operation, echoed Hall's thoughts and shared his passion for helping agents stay profitable. "When carriers terminate agents for poor performance, three bad things happen," he said. "The first is the agent has to waste time re-marketing all of his clients and placing them with other carriers. They wind up allocating resources that could be better spent elsewhere.

"From the company side, it's troublesome because we've spent a lot of money acquiring that book of business; and when you cancel an agency, it has all gone out the door," he said. "The third thing really bothers me because it gives the industry a black eye. When a policyholder gets a cancellation notice from the insurance company, it's a personal thing. Most of them have not had a problem in the past."

Gary Ford, who is in charge of research and planning for Shelter Mutual Insurance Company, Columbia, Missouri, says profitability for his company's captive agents is critical, since an unprofitable book means an unprofitable agency overall. Shelter works with 1,300 agents in 13 states and ranks in the top 25 or so of personal lines carriers, Ford said. "When we discuss profitability, we are actually working to keep our agencies in business, instead of just moving a specific book to profitability," he said. "We use a carrot-and-stick approach." Shelter works with agents on an annual production program, combining incentives, such as commission bonuses and award travel, to recognize good performance.

Definitions of performance

Joel Brown, resident vice president at State Auto Insurance, which writes through 3,500 independent agencies in 16 Midwest and Eastern states, said his firm uses a matrix in assessing how well an agency is doing. "We determine agency profitability by, first of all, establishing a permissible loss ratio for every line of business in every state," he explained. "Then we take it one step further and develop a permissible loss ratio for each agency. We do that by taking into account the mix of business within that agency. Obviously an agency that writes a higher percentage of personal lines with us would have a higher permissible loss ratio, since that business is more automated and can be written and serviced more efficiently. An agency that has a predominance of commercial lines with us would have a lower permissible loss ratio, since that type of business is more often manually intensive.

"When you are looking to assess an agency and its profitability, it's important to view a trend or pattern within that agency's book of business," he added. "The key component is the importance of analyzing the individual book of business, and the losses within it. When evaluating an agency, you have to be careful not to have a preconceived notion regarding characteristics of that agency book. Go in with an open mind. Look at every possible characteristic within that agency, compared to the company profile and the state profile, to see what may be the root cause of that agency's unprofitability," Brown told fellow carriers in the audience.

Insights into causes of unprofitability

Steve Nunan, vice president of underwriting at Pekin Insurance Company, an independent agency company in Pekin, Illinois, which writes in four Midwestern states, says a few factors most commonly contribute to poor agency results. "Poor risk selection on an agency's part is one factor," he said. "When it gets down to it, no matter how good of a job a line underwriter does trying to underwrite a risk, he's just looking at a piece of paper in front of him and the information on it. We hope the agency knows something about the applicant at the time of the application. All members of the agency, from the top all the way down to the clerical, should know the importance of risk selection at the time of the sale.