Setting the record straight
on small commercial lines
Turning loss into profit
By Roger Sitkins
I have a reputation in this industry as someone who believes agencies shouldn't sell small commercial lines. While, to a degree, that might have been the case years ago (based on the facts and figures available back then), times have changed. Today, that reputation simply doesn't reflect my views on small commercial accounts.
Years ago, when I was working with my mentor in this business, Gary Holgate, The Hartford was getting ready to introduce its Select Commercial Lines product. For all you "youngsters" out there, this was the debut of a direct-billed product for commercial lines.
The senior executives of The Hartford asked Gary and me to come to Connecticut to discuss small commercial lines and their impact on an agency's operations. Select Commercial had not been announced yet and we were somewhat surprised that they were going to focus on it. Our studies had shown that most agencies were losing money writing small commercial accounts.
The Hartford was aware of this and believed they had a product that could make small commercial lines profitable for agencies to pursue.
In conjunction with The Hartford, we completed more than 1,000 profit center studies on agencies that represented The Hartford. These studies were called Account Profitability Analyses (APA). We analyzed personal lines, small commercial lines (under $1,500 of gross commission income) and large commercial lines accounts on a stand-alone profit center basis.
For example, if your agency wrote only personal lines, what would be your Income, your Sales Expenses, your Service/Administrative Expenses, and your Profit or Loss for that Profit Center?
We took the same approach in analyzing small commercial and large commercial lines, as well. What we found was that the average agency was losing 54% a year on their small commercial lines book of business, i.e., it cost $1.54 to sell, place and service every $1 of income that was generated.
The main reasons for the loss were fairly obvious. First, the agencies had always paid producers renewal commissions on small commercial lines, even though these accounts were basically maintenance-free for producers. Consequently, producers regarded income from these accounts almost as an annuity. However, because someone else did all the service work, it still cost the agency.
Another reason behind the loss was that the average revenue per account was quite low, mainly due to single-policy accounts. In fact, we found that 25% of accounts were package-only policies and 24% were mono-line accounts (GL or WC). Thus, only 51% of the customers had two or more policies with the agency.
The Hartford Select program tackled the cost side by creating the direct bill system. (Can you even imagine having to do an agency bill on a small commercial account today?) The company also addressed the revenue side with enhanced products that bundled all coverages into one package. I believe The Hartford was one of the first to create a BOP (Business Owners Policy).
So much for the history lesson! Now that you have the foundational data, let's build on it with Pareto's Principle (The 80/20 Rule).
Cost > Income = Loss
We consistently find that the average agency's book of business (and also that of the individual producers) breaks down as follows:
• "A" Accounts. The Top 5% of accounts that generate 50% of the commission income
• "B" Accounts. The Middle 15% of accounts that generate 30% of the commission income
• "C" Accounts. The Bottom 80% of accounts, which generate 20% of the commission income.
Combined, the "A" and "B" accounts comprise 20% of all accounts and 80% of the commission income, so the 80/20 Rule applies.
With the Pareto Principle in mind, we believe that all accounts should receive the level of service they have paid for. Consequently, an A account should receive A-level service, B accounts get B-level service and so on. You should not treat them equally because if you do, you'll over-service your smaller relationships and under-service the larger, better ones.
But this wasn't happening with small commercial accounts which were all treated the same and lumped together in the same servicing unit where staff would jump at the chance to write a commercial account, just because it was different from personal lines.
Does any of this ring a bell with you? If so, you're one of the few who will admit it. Most people will deny that their agency operates that way until I ask them to run their numbers. Almost without fail, the results prove my point that the 80/20 Rule applies to their agency.
The conflict in our distribution system
A huge difference between successful and unsuccessful agencies is the difference between knowing and guessing. Unless you actually know the critical indicators in your agency, you're guessing. And that's why I'm known for opposing small commercial lines—because the numbers in the average agency simply don't work.
To set the record straight: I'm actually a huge fan of small commercial lines IF … and that's a big if … you follow the strategies outlined below.
Having said that, I do believe there is a conflict in our distribution system. The main product most insurance carriers want agencies to sell is small commercial lines. Why? Because insurance carriers normally make money in small commercial lines. The conflict is that most agencies lose money selling what the carriers want you to write.
I firmly believe that every account must be profitable for the agency. You simply cannot allow profitable accounts to subsidize unprofitable accounts! After all, you're not a grocery store that loses money on a gallon of milk just to attract customers. Small commercial is not a loss leader for the agency! In fact, it's where most of the growth in our economy and industry will come from in the near future.
Making small commercial profitable
So how do you make small commercial lines profitable? Here are some of The Sitkins Strategies that we strongly recommend implementing within your agency.
• Have a separate small business unit (SBU). You can't mix large and small commercial in the same servicing unit. In reality, some of your service people are great at servicing large accounts and don't like dealing with small accounts, while others are just the opposite. What are your service people's unique talents and abilities? What do they love doing?
• Pay producers a first-year-only commission on the account—no renewals. You simply cannot pay producers renewal commissions on accounts they "never" touch.
• Write the total account. You must have full-time clients only. Doing so not only will increase your revenue per account, it also will increase retention because it makes it tougher for clients to leave.
• Be totally automated. Your SBU must be completely automated and tied in directly to your insurance carriers. Get rid of the paper! You should be able to communicate and send/receive all documents and other "paperwork" electronically.
• Create carrier partnerships. It is vital to create a true partnership with a small number of carriers and get the best possible deals from them. Most agencies represent far too many carriers for their small commercial accounts, which is a real problem. Partner with two or three carriers that really want your business and will work with you to negotiate outstanding deals.
• Maximize your service center. Move as much of your business as possible to a service center and then leave it there! Clients will think they're calling the agency when, in fact, all customer contact is routed to the service center. But it's imperative that agency staff maintain a hands-off approach to service calls.
A former head of one of the top carrier service centers told me that 52% of their incoming calls were actually from agency personnel calling on behalf of the client. So in other words, the agency was receiving less income and yet it was still doing the work! To get the most from your service center, clients must either be instructed to call the center directly via a toll-free number, or all service calls should be automatically routed from the local agency number to the service center.
• Have a select/small commercial selling system. Our Sitkins Members now have a small commercial lines version of our Risk Reduction Approach®. It's a simplified approach and totally different from the traditional approach of most agencies.
Pursuing small commercial lines with the correct approach should also greatly enhance your contingency income. As you know, most of you have growth or profit addendums on your contingency income contracts that require specific production in small commercial.
The bottom line
So let the record show that I am a fan of small commercial lines when agencies implement the right strategies and behaviors that guarantee an operating profit. Profit on these accounts is not a four-letter word! What's more, it's well within reach if you take the right approach. As always, it's your choice.
Roger Sitkins is founder and chairman of Sitkins International, a private client group and membership program for some of the top independent insurance agencies and brokerages in the United States, Canada, and Latin America. Members participate in training, advising and networking opportunities focused around innovation, sales, growth, profitability and value. Sitkins International is inventing the future of the independent insurance system by providing intellectual property that empowers agents and brokers to become the innovators.