Relationships are a tricky thing. Both sides have needs, but unless communication is clear, one or both parties could end up unhappy.
Most of our personal relationships are more qualitative than quantitative, but in the agency-carrier relationship, it's all about the numbers--at least according to "Selecting Agencies for the Future," a recent study by the Ward Group.
The study looks at how property-casualty insurers can improve their combined ratios by as much as five percentage points by using a true statistical approach to measuring their agency force.
Using metrics and a tiering process, Ward contends that if the process is performed correctly, an insurer can lower its combined ratio three to five points and “drive sustainable long-term value.”
All well and good. But given the wide variance of agency size, specialization and, last but not least, the uncertain economy and competitiveness of the marketplace, how realistic is it to hold agencies accountable to tough metrics and very little in the area of qualitative measurement?
We talked to Frank Pennachio, co-founder of the Work Comp Advisory Group, about the feasibility of this approach.
Toops: The Ward Group recommends that for optimum profitability and contingent commissions for agents, insurers focus on a metrics-driven approach to measuring agency performance. However, the study maintains that most insurers still use a more subjective approach, and that agency tenure, relationship with principal or purely premium volume drive the relationship--that "the bigger the agency, the better it is treated." What do you hear from members on this?
Pennachio: Our members perceive that the "bigger" agencies get preferred pricing, policy terms and special treatment. As a result, some have engaged with agency aggregators such as Keystone Insurers Group and ISU Agency Network. However, profitability is an issue as larger agencies may just be creating greater losses for the insurance company. It is becoming increasingly clear that the insurance companies are paying more attention to profitability of the relationship, not just the size.
Toops: According to the study, the starting loss ratio for earning contingent commissions increased about 1% since 2005 and minimum premium volume was $313,000 in 2011. How realistic is it for insurers to expect this sort of performance with difficult market conditions and high cat activity?
Pennachio: It appears that insurance companies are suggesting that their agency partners should share the downside of a challenging insurance market and economic conditions. Agencies benefit when insurance rates rise through higher commissions on higher premiums, so it appears the insurance companies are saying, "You need to participate in the downside as well," regardless of whether the bonuses are realistic.
Toops: Insurers that use tiering systems to manage agency performance typically categorize them into 4 tiers, with Tier 4 representing underperformers. Most agencies from 2005 to 2011 fall into the "tier 4 or lower" category. Is there a better way than pure numbers for insurers to determine the value of individual agencies?
Pennachio: Yes, and some insurance companies are looking at additional metrics such as:
- Does the agency only place business with the insurance company when they are the lowest price?
- Does the agency consider the insurance company to be their "first choice"?
- Does the agency understand the value of the insurance company regarding improving employer outcomes?
- Does the agency leverage the insurance company's resources or just commoditize them?
Our members prefer a true partnership where both parties are moving away from just providing the lowest premium and joining in an endeavor to improve employer outcomes in measurable ways.
Toops: More insurers are using the "guarantee option" so agencies can lock in their contingency commission payment after 9 or 10 months' results. How is this beneficial for both the insurer and the agency?
Pennachio: The agency can capture the contingency commission which may be their only profit for the year. It assists the agency to address their budget issues with greater certainty. For example, let's assume an agency from New Jersey or New York took the guarantee at the end of September 2012. They would likely get a bonus, but not if they waited to the end of the year due to Hurricane Sandy.
Insurance companies are in the business of risk, so they can reduce their bonus distributions by offering the guarantee and take the risk that the agency would have earned it at the end of the year, anyway. They can spread the risk across the country, so they may take a hit in New Jersey or New York but make it up in the other states.
Toops: Probably the most telling chart in the study shows that "the number of insurance companies that inform the agency of their ranking or tier continues to decline"--from 70% in 2005 to 50% in 2011. Does this trend bode ill for agency-carrier relationships?
Pennachio: We don't believe this trend necessarily suggests a critical change in agency-insurance company relationships, but more of a cycle due to cutbacks of personnel at the insurance company. We believe there will be a turnaround and an upward trend with communication between insurance companies on key performance indicators and how they can improve their "tier ranking."
So what do you think? How do your insurers measure your performance--and are you happy with the results?