I know carriers are struggling with their expense ratios. Many carrier executives are especially concerned regarding the extra compensation being requested, maybe demanded, by networks, large brokers, aggregators, and so forth. Two types of carriers exist relative to this point.
Commodity Carriers
These carriers appoint every Tom, Dick, Harry, Sally, and Molly that possesses a license. When a carrier appoints every agent imaginable the carrier becomes a commodity. No value exists in representing that carrier other than the ability to offer another price. Any agent can access that carrier even if the carrier somehow forgets to appoint them. Some of these carriers have now appointed direct writers to write for them. They are literally available on every street corner. And when carriers appoint every single agency, their predictive modeling had better be excellent or results will deteriorate.
Furthermore, they are treating their agents who often best take care of their books through high quality, upfront underwriting, and/or better organic growth, and/or lower new business acquisition cost the same as those agents who are still learning to spell insurance. If a carrier treats their best agents the same as their incompetent agents, why wouldn't the carrier expect the better agents to ask for more? These carriers are trying to have it both ways. They are taking advantage of their best agents to subsidize their worst agents and then moaning and groaning when the best agents use their righteously developed leverage to get a fairer deal.
When a carrier brings no special value to the best distributors and is available to all distributors, the best ones have a great point in demanding more compensation.
Value-Added Carriers
The other major category of carriers relative to this situation actually do bring unique value to the agents they appoint. Not many of these exist and yet, each of the most successful ones possesses their own unique value proposition. The one element they have in common is each has significant will power and spine.
One such carrier appoints just about every agency, but their underwriting system is so slick and so successful from a profit perspective, that they really do not need to play this game. Agents simply cannot live without them.
Another has a rather paternal style relative to its agents. The agents protect the carrier and the carrier protects the agents, and they pay their agents well. They do not appoint every agent and for the most part, the carrier is not accessible without a direct appointment. The carrier has decent products and rates. This combination of factors means the carrier maintains a traditional amount of leverage relative to the carrier-agency power distribution.
Another carrier has almost direct control over its agents, but also takes care of them similar to the one above, but with more force and is probably even more selective with its appointments.
Another carrier has historically simply had some of the best coverages available and the means by which to manage those products. When you bring higher quality products that competitors really cannot copy, you get to maintain leverage. This is especially true in insurance because agents cannot, without material E&O risk, move clients from a higher quality product to a lower quality product without taking considerable extra steps and expense. (Of course, some agents do it anyway out of ego or ignorance or thinking they're E&O bulletproof.)
None of these carriers are commodity carriers. Each has created their own tangible differentiator and therefore, does not have to play the same games as the commodity carriers. These carriers do not negotiate compensation the way the commodity carriers are forced to accept. A commodity is a commodity so buyers are not going to pay more for something where they can get the same product elsewhere for less. The same goes for insurance distributors. Why take less compensation from a commodity carrier, especially one who has given their products and capacity to every possible agent and then complains when another carrier is offering more money?
Many agencies really do not bring anything special to the table either. At the individual level, not aggregate level, most agencies are too small to bring material value to large insurance companies. $500,000 premium here or there are rounding errors. This is why these small agencies feel the need to aggregate, but their results do not improve in the process. The commodity carriers are then in a position of needing the volume but paying extra for marginal to worse results. Going out and appointing every agency imaginable including direct writer agencies to dilute the power of the aggregators is not a great solution because the commoditization and resentment from the best distributors only grows resulting in more adverse treatment.
A far better solution is to stop treating all agents the same, which is what carriers do with their compensation systems. At this time, a large portion of carriers lack the internal controls and ability to measure agency performance on anything but traditional and rudimentary levels, so they are far behind on many levels and therefore lack the ability to distinguish the best agents from the worst agents with actual data. At the roll-up aggregator level, loss ratios really do not matter because the law of large numbers dominates. The premiums are large too. Newer, better metrics are required and then using those metrics, pay agents differently. No logic exists in paying a lousy agency with a 5% hit ratio, an 80% retention rate, a 5% growth rate, and an average loss ratio the same commission rate as one who has a 25% hit ratio, a 90% retention rate, and an 8% growth rate with the same loss ratio. The latter is far more profitable than the former. The best way to ruin a high-quality person’s motivation is to pay them the same as an incompetent peer.
The best quality agent is going to move to better carriers. Create a value-added carrier, pay the best agents more and the lousy agents less. This is the winning strategy that I have developed for my carrier clients. Contact me to learn more.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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