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  • Writer's pictureChris Burand

What happens when carriers cut commissions?

From A.M. Best (December 11, 20), "Allstate agent sales dropped 8% this year after the carrier changed how it distributes its products, according to Chairman, President and Chief Executive Officer Tom Wilson." "Saying he didn't know if 'we need 10,500 offices in the future,' Wilson said doing away with such expenses could help lower rates and invest in helping agents to gain more business."

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"The company increased commissions on new business and lowered it for renewals and is also improving lead generation for agents, Wilson said."

Most people are going to jump at the correlation between cutting commissions and sales decreasing. What they will miss is Allstate's calculation that the expense savings is worth the decrease in sales.

Agencies are buying into software and consultants advertising their offerings that enable agencies to place business with the carriers who pay the most. Period. Most people in this industry honestly can't see much past the hand in front of their face. First, this practice may be ethically challenged. The customer must come first. From an E&O perspective, if you move a client for any reason, you must provide the client with a list of coverages lost. Once you complete that exercise, how much more are you really making? Failure to inform the client is an easy win in an E&O case.

Second, moving business to a carrier paying more commissions is putting more of one's eggs in a fraying wicker basket. Why are carriers so focused on decreasing their expenses? Because if they don't, the carriers who have lower expenses will put them out of business. The evidence is already crystal clear. If an agency puts business with a carrier paying more or causes a carrier to pay more with no offset, that carrier's expenses will increase. As the Allstate statement indicates, losing business is not bad if it results in a lower expense ratio. The expense ratio is probably more important than organic growth for a wide swath of carriers today. A carrier to whom agents move too much business at too high a commission without any offset will be at a huge competitive disadvantage. Yet agents will have concentrated books of business with the wrong carriers.

Historically agents have spread their business among far too many carriers. I am not suggesting dilution is the answer. The key is consolidating with the smart carriers, not the ones that pay the most. Concentrated books with strong carriers makes sense. Concentrated books with weak carriers makes no strategic sense at all.

What is happening is short term thinking that is damaging long term success. Make more now with weak carriers but give up the opportunity to develop relationships with stronger carriers and be better positioned when the weak carriers falter. I have studied this aspect for my clients and a correlation exists between weak carriers often paying more than strong carriers. Why is this? Because weak carriers don’t have as much to offer and strong carriers don’t need to bend a knee.

If you want to build relationships with strong carriers in a manner that is good for all parties, using my Alpha approach and deep analytical insights, let me know. This way, you win, your carriers win, and most importantly, your clients win.


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.

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