Building Equity Value

Small business units

Reaching efficiency in the handling of small commercial accounts

By Craig Niess and Kel Plasket

We see organic growth among insurance brokers today averaging in the 0% to 6% range. Some agencies are experiencing declining growth, while a select few continue to realize double-digit increases. But maximizing sustainable bottom-line earnings growth is becoming increasingly difficult and costly. Maintaining account handling efficiency is important to the enhancement of both revenue and earnings.

Agencies that understand account efficiency metrics have the best chance to realize strong sales and expense control and, thus, higher earnings. One of the first steps in setting appropriate account size goals and servicing objectives for an agency is to compare actual results to those of comparable agencies. Agency executives must define what criteria to use in comparing their firm to others, such as lines of business, average account size or geographic area.

This article will examine productivity levels for small business units (SBUs). We will provide benchmarks to help you gauge how your agency is performing relative to peer agencies. We will also make the case for creating a small business unit and provide insights into the best practices of those agencies that operate with an SBU.

More than 83% of high-growth agencies report having a small business unit. SBUs allow agencies to efficiently service small accounts, thereby balancing the internal cost with the revenue generated by such business. The goal is to maximize client retention and internal profitability. Agencies that have not established such SBUs often find that small commercial accounts consume an amount of organizational time, resources and services that outweighs the account commissions. In essence, while an individual account looks nice from a revenue perspective, the agency is losing money by over-serving the account. When hundreds of such accounts are viewed collectively, agencies often find that they are losing thousands of dollars on accounts below a certain size.

The chart below, based on MarshBerry data, illustrates the composition of various small business units by agency size and average account size within the SBU.

Looking at the figures shown in the chart, we see that the total commissions handled by a CSR in an SBU increase as the average account size increases. This is similar to what we see for both commercial and personal lines accounts.

Typically, the SBU is designed to handle accounts that generate commission levels below a specific dollar amount. Such dollar amounts on the commercial lines side typically range from $1,500 to $3,200, depending on the agency’s geographic location and average account size.

However, some agencies are still using premiums, rather than commissions, as the measurement criterion to make decisions regarding staffing, distribution and servicing of accounts based on premiums. While commissions are a much better form of measurement, we believe that the commission dollar amount should be only one of many factors that need to be considered before placing an account in the SBU. It is very important that each agency review its current definition of SBU. For peak-performing agencies, SBUs are characterized by: direct bill; reasonable commissions with growth incentives; BOP, niche or program business; low-touch and low-cost client interaction; quick to rate, order and issue; and no producer commissions for renewals.

Most agencies start out building their SBU with the above parameters in mind but, over the years, the definition begins to blur. A number of important questions should be addressed to determine the value of an SBU to an agency. What is the agency’s goal for the SBU? Do you want the SBU to be proactive in soliciting new business or simply to service accounts reactively? What is your profitability target? Who will service the accounts?

Specific guidelines typically are well intended and exist for the types of accounts an agency wants to write in the SBU, but they are not routinely followed. We suggest that an agency give someone the authority to act as gatekeeper and hold that person accountable for maintaining the agency guidelines. When determining which accounts may belong in a SBU, it is important to perform an 80/20 analysis on each producer’s book of business. While we all understand that 80% of revenues typically come from the top 20% of accounts, we must also dissect the bottom 20% of accounts.

The bottom 20% of a producer’s book often generates only 1% to 3% of his or her total commission. As an example, a producer may have a $350,000 book of business with 150 accounts. If we ranked those accounts by commission size, the bottom 20% of the accounts would be the smallest 30 accounts (150 accounts X 20%). These smallest 30 accounts will typically generate between $3,500 and $10,500 in commissions. Assuming the producer is paid a 30% renewal rate, this would equate to $1,050 to $3,150 in producer income.

Based on the above example, producers with the highest new business production rates are more than willing to transfer the bottom 20% of their accounts to a SBU every year. Why? Because they are trading minimal compensation for more time. Time to prospect larger accounts. Time to sell. Time to over-service larger accounts.

Try to choose your clients instead of having them choose you. A lot of time is spent trying to be too many things to too many people. The end result is a lot of quoting, but not a lot of sales. Unfortunately, service staffs are trained to serve the prospect and go out of their way to satisfy. As a result, they have lost their focus. Identify the types of business that your agency wants to write, contract with competitive markets that support this business, and then be the best at what you do. Your staff needs to know where to draw the line and avoid accounts outside the agency’s established guidelines. The alternative usually leads to adding clients who will “shop” you every year. These are the same clients who have all the problems and are constantly on the phone wasting your staff’s time.

The ever-increasing remarketing of accounts seems to be monopolizing a large part of the staff’s day in the typical SBU. Many agencies have too many markets to choose from, and the staff may not have a good handle on each carrier’s specific underwriting guidelines. The most successful high-growth agencies have limited the number of carriers they represent in their SBU to fewer than five. They focus on carriers that are competitive for the types of business the agency wants to write and that can support agency software system downloading capabilities.

The jury is still out on the use of carrier service centers. The effectiveness of a given carrier’s service center depends on how well it is organized and operated. If service centers are used, we recommend that the agency refrain from getting involved in any future transactions.

A problem in many agencies is the continued involvement of commercial lines producers in SBU accounts. Once a prospect has been introduced to the SBU staff, the producer no longer should be involved in servicing the account. For this philosophy to become reality, two things need to happen. First, producers must sell the value of the agency and the SBU so that the client understands who the appropriate agency contacts will be. Second, producers should not be paid renewal commissions on such accounts. If producers are paid renewal commissions on SBU accounts, they will continue to service such business and/or the agency will lose money by paying multiple people (producer and CSR) for the renewal function. *

The authors
Craig Niess, a consultant with Marsh, Berry & Company, Inc., can be reached at (440) 392-6584 or at craig@marshberry.com. Kel Plasket, a vice president with Marsh, Berry & Company, can be reached at (256) 765-9953 or at kel@marshberry.com.