Is there such a thing as too high
a level of growth and retention?
It is important to define acceptable levels of growth and
retention … . Metrics matter; be sure to define your goals, and how each staff member will contribute.
By Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary Belka, CPCU, ARM, ARe, RPLU, CIC
Like so many things in life, owning and operating an independent insurance agency is a balancing act. While sales and new revenue generation may be the lifeblood of an agency, retention of clients is equally vital to its overall financial health. In terms of metrics, it is easy to calculate organic growth, and many agency management systems can provide owners with this information quickly and easily. Retention, on the other hand, generally involves a manual calculation but also is not difficult to measure.
The real question, however, is whether a “right” combination of growth and retention actually exists. An agency experiencing both low growth and low retention is likely in trouble, although it is amazing that even lacking those two key success components, a typical agency can limp along for a good amount of time until the asset can be disposed of, generally through a sale to another agency.
Is there such a thing as too high a level of growth and retention? Let’s consider the following scenarios and how each might ultimately lead to an agency’s success or failure.
High organic growth, low retention. Many independent agency owners were taught that you can sell your way out of any kind of trouble. Unfortunately, that’s not usually the case. While, as we stated earlier, growth is the lifeblood of every agency, growth can also be problematic. Few agencies heed our call to run “one fat,” in terms of service staffing. In fact, with today’s talent crunch, many agencies are actually “one (or more) lean,” meaning they do not employ enough qualified people to handle the current workload. New business is great news to the producer and agency owner, but often it is not received as enthusiastically among account managers.
It’s not that they don’t understand the importance of the agency growing, but when they’re already overwhelmed, the new client is just that much more to fit into their already busy day. That’s when service starts to slip and existing customers entertain offers from competing agencies. Renewal retention rates go down, but if they aren’t being carefully monitored, they can approach a sub-optimum level before the owner knows what hit them. Every agency needs to evaluate its capacity to assimilate organic growth and have a clear strategy, baked into its processes, for maintaining the existing book of business while managing that growth.
Low organic growth, high retention. Agencies that pride themselves on year-over-year account retention, and that’s the majority, often accomplish that by sacrificing new business growth. Producers tend to become de facto account managers and, while the agency is lavishing attention on existing clients, there’s no clear focus on developing new relationships. Retention that is “too high” may mean the agency is not looking at account profitability. It’s amazing how the account you are about to lose becomes the best one you’ve ever written when it might be walking out the door.
Herculean efforts result in the agency “saving” the account, but to what end? There is probably a healthy attrition rate for clients just as there is for agency staff. Relationships should be evaluated periodically and those that are unhealthy for either party should be terminated. But just as we struggle with terminating a failing employee, we are often reluctant to end a client relationship even when it might not be working for either of the parties.
The current hard market has led to a remarketing crisis when it comes to workload. We have addressed this in past columns; it is very related to this scenario. We’ve heard some producers say out loud, “I’ve stopped selling—I’m just focusing on maintaining my current book of business.” Yikes! This is a traditional reaction to times of market stress and agencies need to resist this tendency. It is the antithesis of what it takes to weather—and leverage—a hard market. Additionally, it is not what carrier partners want to hear.
Our experience is that excessive remarketing is an exercise in futility, for the most part, often resulting in lower retention despite these sincere yet misplaced efforts. The result is that it becomes acceptable for producers to stop selling and demand that accounts be “shopped,” while getting sucked into the swirling vortex of “price over value.” Producing new business and retaining accounts should not be mutually exclusive.
Another trend that has concerned us over the last few years is the rate at which agencies are deciding to outsource certain aspects of the account manager job to firms, both foreign and domestic, who claim they can provide better, more efficient back-office support while freeing up the account managers’ time for “more important tasks.” The allure of getting “clerical” work done at a cheaper labor rate is obvious, although we would argue there are few clerical tasks left in automated agencies.
For those agencies that are highly leveraged, which is to say another organization may have invested in them with an expectation of a certain return on that investment, this approach could potentially have a significant impact on agency cash flow and profitability—two of the overarching goals of the investor. Also, these agencies should be able to focus on organic growth since, theoretically, the outsourcing would free up time to take on new business.
What we have failed to understand, however, is the exact nature of these “more important tasks” and how they are being implemented. One of the most common tasks being outsourced is that of checking policies and endorsements. If you read our column on a regular basis, you know we believe that these are two of the most important tasks in any agency, and it’s hard for us to imagine what an account manager could be doing with all that free time that would be more important.
If this is happening, certainly these agencies should be enjoying both higher retention and higher growth, yet we have not observed that outcome. Even agency profitability seems to be unaffected by using outsourcing solutions. Perhaps that’s because service people loathe to trust others to do their jobs and tend to “check the checker” when the work is handled by another firm. Any productivity or profitability gains are just illusory. And that’s not to mention the real possibility of higher frequency and severity of errors and omissions claims for those agencies.
So, is there such a thing as a high organic growth, high retention agency? We believe there is; however, it will require owners and managers to put aside some of today’s “conventional wisdom” and go back to basics.
- Producers sell and account managers service. We are encouraged by agencies that have chosen to “take back the night” and return service to the hands of the people best qualified to provide it, and those are the agency’s qualified account managers. Without having to be involved in service issues, and with lofty but achievable sales goals, producers can help the agency meet its growth objectives, whether internally or externally imposed.
- Professional operations management. Workflows and procedures that are truly efficient and completely client-focused will win the day. Account managers will be able to touch each client proactively multiple times each year, including the completion of true risk management reviews that will contribute to organic growth and improved renewal retention.
- Getting the most out of technology. There are still so many agencies that have computers but aren’t truly automated. Finding a way to harness the technology that already exists and getting a return on that investment still eludes many agency owners. Working with insurance companies to reduce the amount of time and information that currently flows between the two will also be a key for agencies to optimize both producer and account manager time.
- Train them, train them, and then train them some more. Perhaps the only benefit of getting old in this business is that you’ve had the opportunity to learn so much. But we can’t expect the current generations at work to wait four or five years—or decades—to learn what they need to know to excel at their jobs. Neither they, nor you, will have the patience for that. So we have to compress and accelerate the learning process without sacrificing the quality of what is delivered. This is a tall order, for sure, but necessary for sustained growth and client retention.
- It is important to define acceptable levels of growth and retention, and how each contributes to profitability for your agency. Metrics matter; be sure to define your goals, and how each staff member will contribute.
There really is no magic number for either growth or retention and you will notice that we avoided defining “high” and “low.” We’ve seen agencies that consistently add 10% to 12% in new business revenue each year and maintain retention in the range of 92% to 95%, or higher.
Somehow, they have found the way to manage both of the agency’s core functions without sacrificing one for the sake of the other.
The authors
Cheryl Koch is the owner of Agency Management Resource Group, a California firm providing training, education and consulting to producers, account managers and owners of independent agencies. She has a BA in Economics from UCLA and an MBA from Sacramento State University. She has also earned several insurance professional designations: CPCU, CIC, ARM, AAI, AAI-M, API, AIS, AAM, AIM, ARP, AINS, ACSR, AFIS, and MLIS.
Mary M. Belka is owner and CEO of Eisenhart Consulting Group, Inc., providing management and operations consulting to the insurance industry. She also is an endorsed agency E&O auditor for Swiss Re/Westport. A graduate of the University of Nebraska, Mary holds the CPCU, ARM, ARe, RPLU, CIC, and CPIW designations.
