Insurance Carrier Relationships
Insurance carriers are experiencing serious angst today relative to their future with their distributors. Too many distributors have grown too large for the carriers to order around. Too many agencies have been acquired by larger agencies which is forcing many regional carriers that purposely avoided contracting with aggregators and serial acquirers to now contract with them.
These entities pose several material problems for carriers. A couple of key issues are their compensation demands and lack of growth. It is well known that most aggregators and serial acquirers have below normal organic growth rates. Many regional carriers lament the loss of the relationships with their agents that results after they sell or join a network. Carriers feel, rightly, their diminished relationship minimizes their ability to cause agents to sell more of their policies and they have no idea what to do about it.
Look at why the relationship is diminished. It is diminished because the agent no longer needs to rely on any particular carrier as much. As an example, Carrier Marketing Representative John tells an agency they need to grow by Z%. This number is often inflated, but the agency promises and then fails to achieve the promised growth. This deficiency is then followed by everyone ignoring the failure because all of the parties knew it was an inflated percentage anyway. Next year's inflated promise to grow is looming, and the agency pledges that next year everyone will hit their goals, etc. Just the promise to grow caused agents to try to sell more to keep their carriers happy and off their backs if nothing else.
The goals, combined with profit sharing growth requirements, caused agents to work harder toward growth. Now neither is important. As part of a large entity, the individual agent's efforts are lost in the bigger picture. The lack of growth and profitability is someone else’s issue. Given the aggregator's size, or even the network's size, the carrier often cannot threaten to pull the contract. In other words, the carrier has lost the stick and the carrot.
Now the roles have actually somewhat reversed. The large aggregator/network tells the carrier, "Pay more without regard to growth or profitability, or I'll move the book or tell people to focus elsewhere on new business opportunities." This is the stick only approach. Carrots are completely gone, blame it on supply chain shortages.
This loss of influence is a major problem for carriers. They look at their expense ratio and how much extra they are paying and ask, "What are we getting for all the extra expense?" They are regularly concluding their ROI is negative and are in what economists have named, negative economics. The investment must be made because the failure to do so might result in an even worse ROI -- better known as the lesser of two evils.
Carriers are feeling the impact of those evils. Making the situation even worse is that when carriers were able to work with many individual agents, more alignment existed between what was good for the agent and what was good for the carrier. Personal lines is a great example. For large entities, personal lines is a loser if producers are involved. Remove producers, lose the local name, lose the agency's leaders who are heavily involved in the community and by osmosis created personal lines sales, and as a result personal lines growth dies.
Then, add to this entire dismal situation the demands of the aggregators/serial acquirers to be paid more for lesser results and what's a good carrier to do?
I have been building agency compensation plans for carriers and teaching distributors how to negotiate holistically with carriers for 30 years. Not much has really changed for carriers that have good leadership and are willing to listen to someone other than one of the big consulting firms.
The mistake carriers made from the very beginning was agreeing to pay extra for inferior results. Agreeing to pay extra to a bunch of second rate agencies that banded together or a bunch of small but good agencies that banded together was, categorically, a really bad decision. Carriers must acknowledge they made bad decisions so that they can begin moving forward. Blame it on your predecessors if you must.
Compensation should be based on performance. When I consult with carriers and distributors, I insist my clients use a holistic performance-based approach that benefits all three parties, the carrier, the distributor, and the consumer (or is at least is neutral to the consumer) or I will not take the job. Other consultants will take the job, though.
This approach requires a critical change of thought at the carrier level. The metrics most carriers use to measure and reward performance are wrong and always have been wrong. An example is the budget for contingencies. Contingency budgets have always been set as a percentage of premiums, as if contingencies were commissions. This causes carriers to instill stability clauses (one of the most unfair contractual clauses to be found anywhere in this industry) into their contracts. These clauses punish agents by cutting their contingencies if the carrier is TOO PROFITABLE! This is stupid. The reason carriers do it is because they do not want to break their budget. If they set their contingency budget based on the same variables they have in their contract so that the two are aligned, everyone would have a better platform for success. Any time such gross misalignment exists, profit and growth opportunities are lost.
The reason such a misalignment exists originated in the dark ages when carriers’ IT systems were incapable of more sophisticated calculations. Some carriers' IT systems still need to be updated because it is scary how behind the times some carriers' systems still are. However, in today's world, more sophisticated programs exist that can easily align contingencies as a percentage of true profit and as a variable budget expense. The key to achieving this success is leadership.
Leadership is required to convince people to eliminate the old way of thinking. When I work with carriers to help them move forward, and hear, "But that's the way we've always done it." I cringe. I hope the leadership then says, "Yes, and that was good, but this is the 2020's and we have the opportunity and duty to use more sophisticated solutions to create alignment with all our stakeholders. No longer should the budget be set simply because it is easier for the accounting department."
Stability clauses are not the only problem with this budgetary misalignment. Carriers might discover they can pay their top agents a lot more money and their under-performing agents a lot less money if they fix this issue. The power of aggregators and networks is based, to some extent, on carriers not aligning their own budgets with performance. Even though carriers are beginning to examine what they have titled "excess compensation" budgets, their goals are still not in alignment with their distributors' goals.
Carriers are measuring their "excess compensation" as a percentage of their entire compensation budgets and/or as a percentage of premium again. This means they sound really stupid when they go to a big player and say, "We're paying you too much." Paying too much for great results or paying too much for lousy results? Usually the carrier has not thought this question through. On the opposite side, the distributor with lousy results is thinking, "This is great! How much longer can I get away with being paid far in excess of what I'm worth simply because the carriers can't do the correlation effectively?"
Correlate performance with compensation. Start there. Then recognize the value of those aggregators who have quality onboarding programs that result in strong performance. Agencies that sell are selling because they have reached the end of their growth potential. The future is with agents/agencies who want to grow. A small handful of high-quality aggregators are saving carriers a fortune by finding, developing, and building new agencies from scratch. Plus, these aggregators are generating growth and profit. They are worth the extra money. As for your budgets, take money away from those aggregators/serial acquirers that are demanding more for nothing.
It is a longer play, but the ROI is really good if the carrier has quality leadership who can steer them through the initially tough decisions.
Focus more on a micro level too. Items as simple as quality submissions change a carrier's expense ratio a tiny bit at a time, but the savings add up quickly. Other factors like retention and hit ratios are examples where carriers, and even consumers, benefit. Most carrier IT systems inadequately track these variables and/or the agency's internal processing is too inconsistent for the IT systems to do the tasks it was designed to do. In these cases, time is of the essence because paying extra for worse results is a losing proposition. Money can be spent on far more important endeavors with a positive ROI instead of a smaller ROI.
Failure to take this approach has another penalty down the road. My best clients are working on efficiencies. They are tired of subsidizing their lesser competitors while seeing carriers treat their more demanding and less efficient peers with excess compensation. These distributors will find another solution where they are rewarded for the value they bring to their carriers and consumers with you or without you. If carriers continue to measure compensation, and excess compensation in particular, as percentages of premium or even as percentages of compensation, instead of measuring compensation relative to ROI, they will find their futures are dim.
Not many carriers have reached that state of enlightenment yet. Cultures are tough to change. Leadership is the most important ingredient, i.e. a leadership that is willing to challenge the incumbent culture. I know I have much more fun with clients, whether distributors or carriers, when their leadership has already moved toward this alignment because it is always more fun to work with clients who have bright futures.
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.