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Paul Darling 
Principal,
ZS

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Peter Manoogian
Principal,
ZS
 
 
 

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What Insurance Agents Do (and Don’t) Have in Common With Taxi Drivers

Posted by Peter Manoogian on Thu, May 25, 2017

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Ever try to hail a cab in New York on a rainy day (especially before ride-sharing apps came along)? It’s nearly impossible because taxi drivers—whose payouts are 100% fare-based—achieved their income target sooner in the day because of high demand. Research demonstrates that drivers will work the least on rainy days and the most on nice days when fares are hard to find.

A similar productivity phenomenon occurs in the insurance industry. Commission-based pay makes up the vast majority of earnings. However, this structure has a flaw. It often leads to stagnant or declining productivity. The agents who are best positioned to drive growth—those with the most tenure who have the most expertise about the insurance carriers’ products—are no longer incented to acquire new customers. Like taxi drivers, their productivity drops once they reach their income target.

If you’re reading this blog, you’re likely familiar with agents’ compensation models, but just to ensure that we’re all on the same page, and to set the stage for the points discussed below, I’ll offer this brief summary: Whether the agent is captive or independent, incentives are the primary lever to direct behavior and spur sales. The motivational “system” tends to include three types of compensation:

  1. A commission payment for sales of new policies (for example, if your family auto insurance policy is $1,000, your agent may earn 15% in first-year commissions, or $150)
  2. A second (and most commonly lower) commission payment (or “trail”) when the policy renews each year (and is paid in perpetuity so long as it renews)
  3. Other forms of pay to encourage specific types of sales or recognize high performance (think annual trips for the top 10% of agents by sales volume)

This structure has a lot going for it: It’s simple, it pays quickly and close to the sale, and it pays more when the greatest level of “selling” occurs (the initial sale). And then there’s the flaw mentioned above.

During their first few years, the most effective agents build up a strong book of business by acquiring new clients. Their pay starts out heavily weighted toward “type 1” earnings. As time goes on, they may continue acquiring new customers, but their existing customers also renew their policies, and the ratio of new clients vs. existing clients typically tilts in favor of the latter.

The commissions from renewed policies become a powerful annuity. In most instances, maintaining clients requires far less effort than acquiring new ones, but agent pay usually increases from the prior year. That’d be like a cabby making more by picking up easy fares on a rainy day.

This situation often comes at the expense of the carrier, as their top agents with large client bases don’t sustain high levels of new customer acquisition over time, or they may not up-sell or cross-sell to their existing customers as much as they could. 

Consider this quote from an insurance agent message board regarding the possible commission rate change from a major auto insurance carrier: “It appears to max at 15% for new policies and then 10% for renewals. The reduction in new commissions is not meaningful because renewals are where we make our money.”

The below chart shows the total pay and mix for a population of agents we studied over the first 10-plus years of their production. There are typically three tenure “ranges.” Growth years usually occur during years three to six before reaching the peak productivity years. Typically, beyond year 10, productivity declines relative to the peak years, but total earnings increase because “type 2” earnings build like the annuity described earlier (shown in the far right column). This concept is representative across many carriers: While the values and length of tenure at each phase may vary, the story remains similar.

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Figure 1: Comparing agent productivity and earnings by tenure. (Figure 1 is a representative sample across multiple firms.) 

This demonstrates the challenge of building a growth model when agent productivity is usually highest within the first five years, but the agents stay around (and keep their clients) for much longer.

Carrier incentives can encourage stasis in production—and income targeting likely is the culprit in many cases. However, carriers can more directly impact how they distribute and motivate their agent channel than how Mother Nature affects taxi demand in New York. Here are a few suggestions to help break out of this productivity gap:

  • Know your independent agents better so that you can motivate them to higher levels of production. Otherwise, they won’t realize their full potential. For instance, not all agents have the same income objectives or disposition to insurance sales: Knowing this may help carriers optimize marketing lead allocation.
  • Motivate your agents to sell additional lines of coverage. We’ve found strong evidence that, all else being equal, agents who sell a broader number of lines are more likely to be retained and grow production than agents who don’t.
  • Adjust how you motivate agents in an attempt to reverse this phenomenon—and at least consider replacing commission payments with more performance-based retention bonuses.
  • Shift accountability for customer retention to other roles or functions. Some carriers have successfully deployed a “white glove” approach, meaning that headquarters steps in and relieves some of the agents’ ongoing servicing tasks for existing clients. As a result, agents are freed up to focus more on acquiring new clients.

Amid all of the talk about the rise of e-commerce in insurance sales, the vast majority of insurers still rely heavily on their agent force as a key distribution channel. However, around 20% of active agents are expected to hit retirement age in the next several years, so carriers need to be focused on efforts to improve agent productivity. Doing so will help your salespeople—and your company—reverse those “rainy day” productivity problems.


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Topics: incentives, sales compensation, sales, insurance, Peter Manoogian, Sales Force, commercial operations, sales commission, insurance agents, sales force motivation, taxi drivers, growth model

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