BROKER FEES AND DEAD WOOD (REREAD)

July 2007

We often hear complaints from individual agents and brokers as well as insurance associations regarding the Department of Insurance's assault on broker fees. With the current environment, it seems more likely that your competition will either lower or eliminate their broker fees before the D.O.I. gets a chance to limit or eliminate them. In a recent advertising campaign, a large auto insurance brokerage, who was recently bought out, is advertising NO BROKER FEES and yet another who was bought out months ago has lowered their fees, according to their radio advertisements. A few years ago, this would never have happened or thought about because the broker fees were much easier to realize. With the softening market and the fact that the "old model" has all but passed by, most of the broker fee dependent insurance agencies find themselves either selling out or redefining their objectives, compensation plans and business plans. When I refer to the "old model" I retrace my days as a nonstandard auto insurance producer and manager of a fairly large multi-office agency in Central-Northern California. Our plan was to advertise in the yellow pages with a double page spread and hit the radio as much as possible. We allocated a percentage of our bottom line each month and when you add up 10 offices contribution, there was a substantial amount of money to be spent for the "old model" advertising campaign. From the mid to late 80's through the lated 90's and into 2001 and 2002, we did very well indeed. The market went into a bit of a shock after 911 but bounced back with numerous insurers jumping into the auto insurance marketplace here in California and the rest is current history.

The broker fee is under attack by the very agencies that were screaming the loudest about the D.O.I. and their wage against broker fees. The general public has many more options when they consider purchasing auto insurance. Do you think their are broker fees involved when you buy a policy from the large TV and radio direct writers? Oh hell no. Their model is to get as many customers as they can on the books and not only will they not charge a broker fee, they will spend money to acquire that customer (which is witnessed by the huge budgets that these companies have for television advertising). Their are still a couple of large bucket shops out there that adhere to the billboard and double page advertising in hopes that the environment will change. In my opinion, that's a wasted thought. In the last couple of years that I worked in nonstandard auto insurance, I noticed that at least 50% of the business was from rewrites and referrals and I suspect the same is true now. As a matter of fact, a representative from one of the larger management system companies stated that one of their largest hispanic nonstandard auto insurance brokers was writing a majority of their business from customers who had been canceled and were returning to write a new policy with a new broker fee. Years ago, the vast majority of our customers were from new business and referrals. It's not our job to educate the competition but when I talk to agency owners who have been around for at least 10 years and have been through numerous cycles of insurance, they all have one thing in common and that is they are chameleons. They change with the cycles to become more efficient. In recent years, I have seen a trend in downsizing and concentrating on eliminating unececessary fixed expenses, such as payroll and advertising. When I look back, do you realize that those two categories accounted for approximately 40% of the bottom line at the end of the month! I have seen saavy agency owners hang on to one or two highly productive producers and a CSR or two (smaller agency models) and have become less dependent on broker fee income. Many of these owners are able to charge lower or no broker fees and still cover all of their expenses AND show a sizeable profit at the end of the month. They are working smarter and not longer. The smaller agency has a great advantage these days when competing with the larger direct writers and "old model" agencies. Go to the back of the yellow pages and look at some of the advertisements. You will find some small "mom and pop" agencies that boast that they have been in business for 20, 30 or even 40 years. So how do they do it? They are lean and most of them do not have more than a few locations. They are models of consistency who have had the same producers and CSRs for years and they offer a number of products to their clients which boosts customer retention by huge proportions. I really enjoyed writing auto insurance applications all day long and thought that run would never end. It hasn't ended and their will always be a need to cater to this client base but with so many retailers spending ridiculous amounts of money to acquire low retention customers, you need to consider your business plan if you have not already. 

Look, if nonstandard auto insurance was as lucrative as it once was, do you think that there would so many buyouts in recent times? The fact that one very large retailer has gone from full broker fees down to NO broker fees in a matter of months should be evidence to you that this is the time to rework your agency plan and structure if you haven't already. For most of you who are reading this, you probably have known this for quite some time but there are still those who want to hang onto what worked in 1999. Your agency CAN prosper in this market with little broker fee income if you know where to cut out the fluff. Do you have producers who barely produce enough revenue to cover their expense (401K plans and benefits). A good producer will cover their overhead and add to your bottom line and that is what you need to surround yourself with. I would say that 1 in 5 producers are that good but they are keepers. In addition to this, use insurance companies who offer quick and expert services to your customers. Your customer should be able to call their own carrier that you wrote them with and get their billing and policy information questions answered as quick as you could get it (this reminds me of our survey that we will be performing soon, "How Long Does It Take For Your Company To Answer the Phone".) I spent many years at the height of broker fee income competing with Sentinel Insurance and other very large agencies and when I compare the view of the nonstandard auto insurance market from then to now, they are almost completely diametrically opposed. The way that we are finding customers has changed (look at the number of companies that no longer purchase expensive yellow page, television and radio ads), the number of large-agency owners that have sold their businesses (there were few sellers back in the 90s), and most importantly, the general public has become much more informed regarding coverage options, insurance company choices and how to barter the price (except for individuals who are new to this state and depend on their brokers to guide them). As the market reshapes and transforms, I often wonder which agencies realize that they too must change and experiment with different ways to convince their customer base that their agency has everything that the will need for the foreseeable future. Because there are so many insurance specialists and not generalists, consumers often feel that they must seek various specialists to take care of their needs but we need to change that. We need to write their auto or home insurance and stay better in touch with them on other products they should consider to better protect their family. As an agency owner, the most difficult task is to find producers who fell the same way and I suppose the best way to encourage this point of view is to offer a graduated compensation package for those producers who have learned to round out and cross sell. All to often, I hear agency principals asking me what to do with the producers in their office who are satisfied at the end of the day when they have written a few auto applications but have made no effort in attempting to place other business with those same customers. I would much rather have a producer write one package policy than 3 auto applications. I know the retention numbers on that business and the loss ratio history as well and everybody benefits.

My opinion of dead wood is one that needs consideration. For those of you who don't know what I am talking about, dead wood is that producer you have in the corner who stares at the phone, writes a little bit of business, collects his check and benefits and is satisfied. The producer should NEVER be satisfied. He/she should always want more just like you and I, the owners of the agency. A hungry producer with kids and bills is the best and they will always strive to write more because they have to. I have spoken to some agency owners who have producers who have a very good compensation plan but with business slowing and fewer broker fees and commissions being realized, this producer becomes a drag on the bottom line. Your dead wood needs to realize that he/she can be replaced with a less expensive hungry producer at a lower cost and additionally I would revise the compensation plan to put more emphasis on new business other-than-auto. The real money making agencies such as Lawson-Hawkes and Tanner Insurance Brokers  who don't allow their employees to be dead wood....they will not last that long. It is far better to have two young CSRs than an unmotivated producer. You can always get the CSRs licensed and they can work themselves up the compensation chain and they will become more and more excited which is good for them and for you. They want to produce and they are not satisfied and they have a vigor and hunger to their approach with eyes and ears wide open. That is the producer you want. If you have dead wood or too much satisfaction, change the horizon so that they can prosper with a new and fresh approach. Sitting around and staring at the phone to write an auto deal is counterproductive at this point. Your producers have a license which allows them to write many products. They should be attending landscaper association meetings, realtor conventions, real estate seminars and any other congregation of individuals that can refer business. Once you start getting referrals, it grows as you prove your expertise and your producers are in a good position to take advantage of this, especially if they are currently satisfied and in this case, being satisfied is not gonna make anybody money.

AN OPEN OPINION ON CSRs AND PRODUCERS

Hiring a producer or CSR can be tough. You have to know how much to pay them and to offer incentives that won't sink the company nor disappoint your employee. I have often found that a CSR and be trained but a true producer is "born". I currently have two women who share the duties of a CSR and they are part time. These women had no experience in the insurance industry and have become excellent assistant. They are not licensed and have do not discuss any policy or quote information with my clients but they do process the paperwork that would bog me down and hinder my ability to write new business. Ruth and Anne have husbands that are employed in the tech industry and they don't need the job....I think that has been the key to their longevity. This job for them is a chance to get out of the house as their kids are getting older and a chance to break the monotony of a routine. I pay them approximately $15/hr and they work about 8 hours/week. Depending on your mail volume and production numbers, I am sure you may need your CSRs to work more hours. In the past, I hired college students as customer service representatives and for the most part, I experienced a great deal of inconsistency. Many of my former CSRs went to work in a different field because the pay was higher. Keep in mind that this was occurring during the height of the "dot-com" boom. I was very flexible with the hours and my only rule was that 10-15 hours/week had to be worked regardless of what days they came in. I did this because I knew that their school schedules varied. Once I changed my choice of criterion for my assistants, life became much easier. Ask friends and relatives if their spouses would like a part-time job and pay them well. The $15-18/hr pay combined with limited hours won't hurt your bottom line and you will be happy with your choice of CSR.

One thing I did want to point out and that is I don't feel that it is a good idea for producers to be used as file clerks or CSRs when it is not busy. If the phones are not ringing, producers should be involved in finding new business either by contacting existing clients or getting involved in local area meetings with individuals that can refer business to the agency. Networking with customers and peers is essential. Going to a realtors dinner meeting in your community can yield great contacts. If nothing comes of a particular group, be persistent but don't beat yourself out trying to make something work that won't. You can always find another meeting to attend, possibly with another set of participants or a different group entirely, such as a mortgage lender group or contractor club. I can recall getting involved with a large national landscapers group and their meetings as I tried to get some referrals for their GL and Commercial Auto business. At the time, they were using Everest National Insurance Company and they had a great program that combined all of the products, similar to a BOP. Although I found it difficult to compete, their was a certain percentage of landscapers that only wanted the GL or only wanted the Commercial Auto policy and I wrote quite a bit of that business. Had I never involved myself with that group, I would have had a difficult time breaking into that line of business. So make sure your producers are rubbing elbows and not necessarily filing paper....they are there to make the agency money.

MANAGEMENT SYSTEMS

Do you have a management system such as Hawksoft or AMS? I don't have one. Shame on me. I really like the feel of a file and logging notes in it as I continue to represent my client. I guess I like the old school way about business and being able to look at all of the documents in chronological order within the file. I have never subscribed to spending time and money to have someone duplicate this information in a software program; however, a management system does so much more. You can create a letter and selectively choose who you want to send it to using the management system. You can calculate commissions and compensation plans with a good system and can monitor your files with automatic reminders that pop-up on your screen each day. In many ways, it is like having a general manager of your client files who reminds you of your duties and responsibilities. I know that most large agencies have a management system for many different reasons but I am a one-man, two women business and still don't see its benefit at this time. Maybe someday I will see the light. The one thing that I do find essential and that is the ability to access client information quickly through websites such as AIG Agency Auto among many others. Most of our member companies have very good websites and I believe it is because of them, I don't have a management system - they ARE my management system. I would like to throw this little diddy out there for consideration. One of my carriers, Travelers Insurance Company has a program where they can access all of my auto policies and send a form letter with my agency name to all of the clients in order to let them know that we also offer other products. I pay about 75 cents for each customer and they do all the mailing and creating of the form letter. It has paid for itself many times over and I do this annually. For you larger companies, this should be an easy program enhancement, and should be considered especially by those who offer other personal and commercial lines products. Wouldn't it be cool to be able to send a letter to all of my Viking Auto Insurance policy holders a note that I can also insure their motorcycles or that I could have a letter sent to all of my Anchor General Insurance homeowners that I can also insure their autos? For those companies who have expanded their horizons to help the auto agent write more products, this is the next level of service besides a full blown Gold Service Center which Safeco Insurance Company offers. The smart agency owners know the value of time and money and are willing to pay someone to make them money. Money is made when we can concentrate on producing business and not paperwork. It is a wonderful feeling when a customer calls to tell you that they received your letter and the did not realize that the agency also offered other products (even though my website and location clearly illustrate that I do). 

Because some companies act as a management system for me, I have yet to purchase one. As insurers get hungrier for business, I expect the better ones try to emulate their competition by enhancing and empowering the agent and continuing to offer the tools that will lead to more business. Throwing a lizard or a caveman on the TV can only go so far when you are attracting a single dimension auto insurance client. Clearly, they have not seen the importance of doing more for the client than just insuring their auto but then again, why educate them. After all, and at least for GEICO, even a caveman (or Barry Gibb) can do it. 

Have you seen Barry speak these days. His dentures make him sound like Gruntcha from GEICO.