Insurance carriers have a long history of tweaking their field organizations and compensation plans to make the captive agent channel more effective and efficient. But the stakes have become higher and the moves bolder in the last several years. Faced with stagnant agent counts, declining agent productivity and elevated expense ratios relative to direct players, carriers are taking sweeping action to ensure the continued viability of the agent channel. From Allstate to Farmers to numerous regional carriers, timid steps have given way to massive reorganizations and wholesale redesigns of compensation programs.
As we advise executives at national and regional carriers active in the agent channel, the most frequent question they pose to us is: “How do we know if it’s time to go big (or go home)?” Although good agents tend to welcome change that makes a carrier more competitive in the marketplace, others may resist it. For the insurance distribution executive, agency transformation is difficult, time-consuming, risky and potentially controversial.
We’ve laid out a set of diagnostic questions that executives can ask themselves to determine whether the juice is worth the squeeze and whether the time for real transformation has arrived.
To gauge whether a large-scale reorganization is worth pursuing, ask
yourself the following six questions:
1. Do your field leaders have multi-channel or multiproduct responsibility?
If they don’t, you are behind the times. Other carriers are aggressively breaking down channel and product silos in their field leadership. Whereas previously only top agency executives were responsible for decision-making across channels and products, more recently middle management such as directors and AVPs are being deployed across multiple channels (e.g., exclusive agent, independent agent and retail) and products (e.g., auto, home, life, commercial and financial services).
This deployment is not only more efficient but also more effective. It increases channel and product coordination, allows field leaders to optimize across channel and product efforts and eliminates counterproductive competition for agent attention. It also provides an abundance of career path options for leaders on the rise.
2. Are your district or agency managers able to focus on coaching and sales performance management?
The days of “jack-of-all-trades” district and agency managers are numbered. Historically, these managers were expected to recruit agents, train them, provide them with marketing support and coach them on sales. In an optimized field organization, these managers are liberated from lower-value recruiting, training and marketing duties so they can focus on their core competency of sales management and sales coaching. This shift is enabled by centralizing recruiting, training and marketing functions at home office through centers of excellence that support the field.
3. Are your spans of control current relative to best practice?
The rules of thumb are changing. While carriers used to assign one agency manager for every 20 to 30 captive agents, new guidance is 40 or even more. This evolution is based on analytics that reveal a lack of correlation between coverage and productivity: Fewer agents per manager doesn’t necessarily lead to more production.
We are aware of carriers pushing the envelope even further, such that the average manager span of control will grow significantly over the next two years. Increasing familiarity with video-based technology and virtual meetings in the context of COVID-19 will only accelerate this trend as “windshield time” constraints become less relevant.
The move toward larger spans is happening at the director and AVP levels, too. In lockstep with their increasingly cross-channel and multi-product approaches, carriers are rolling up more and more premium and agent count to these field leaders.
See also: 4 Keys to Agency Modernization
4. Is your field leader compensation sufficiently variable and tailored geographically?
The emerging best practice is for nearly half of field leader compensation (for director roles and above) to be variable. Those with a significantly smaller variable portion may fall into maintenance mode rather than gunning for growth.
Ideally, variable compensation is paid through periodic (e.g., quarterly) bonuses based on the performance of the field leader’s geography relative to targets. Avoid making field leader bonuses a function of individual agent outcomes, lest they spend too much time catering to low performers.
Target-setting for bonus purposes should be driven by an analytically savvy team at the home office and should reflect differences between growth markets vs. mature markets in the weighting of various criteria in the bonus formula.
5. Are there more than three or four layers separating your top distribution executive from your agents?
More organizational distance between your top distribution executive and your agents generally means less clarity of field roles, less accountability for outcomes, slower issue escalation and resolution and reduced visibility for top field leaders.
The ideal number of layers in your field organization depends on how many channels you have – you can imagine a carrier with EA, IA, retail and direct requiring more layers compared with a carrier that is agent-only. It depends, too, on the geographic scope and amount of premium overseen by the distribution function, with smaller, regional carriers often requiring one less layer relative to large, national players.
Right-sizing layers is a powerful reorganizational tool that not only reduces unnecessary expense but also streamlines field effectiveness when done right.
6. Are your field management roles consistent across your geographic footprint?
Some carriers have extensive geographic variation in field roles across states or regions. This can result from mergers of carriers with different field structures, or from a well-intentioned effort to empower local leadership to experiment with new or modified roles. In the long run, though, this variability muddies the waters and harms field effectiveness by undercutting role clarity and accountability.
Field reorganizations represent an opportunity to clean up the proliferation and inconsistency of roles by standing up an optimal set of standardized roles in all geographies. Although the allocation of time to various activities within the role description (and, by extension, the relative weighting of criteria for bonus determinations) may rightly vary to reflect geographic nuances, the roles themselves should be uniform in all locations.
If you answered “no” to at least two of the previous questions, you are likely to unlock significant value from a larger-scale transformation of your agency management structure. If you answered “no” to three or more, it’s definitely time for change. Like going to the dentist, the longer you wait, the more painful it will be.
Even if you answered “yes” to every question, your work is not done. Leading carriers regularly revisit these topics and perform at least bi-annual check-ins of field structure effectiveness in the spirit of continuous improvement. They do the organizational equivalent of flossing, brushing and occasionally undergoing a corrective procedure to keep things healthy.
Pivoting to agency compensation, consider the following four questions to find out how much room you have to improve your agent compensation plans:
1. Are your agent retention and agent productivity on par with competitors?
These key performance indicators vary dramatically. Agent retention after 18 months can be as high as 90% and as low as 35%. Average monthly agent policy production ranges from two to 25 for auto and from one to 15 for home. Similar gaps apply to commercial and life production. If you’re trailing the rest of the pack in these key metrics, it’s likely that your agent compensation plan is a big part of the problem.
Modern compensation plans use an aggressive pay-for-performance approach to create significant dispersion between top and bottom performers. Carriers can choose to vary commissions based on growth (and other factors), or to use a large variable bonus to create the spread of agent compensation outcomes. Either way, the idea is to maximize the incentive for agents to grow, while minimizing the amount of enterprise resources directed to agents who aren’t producing (many of whom should probably exit the agency force).
Contemporary compensation plans enable a variety of entry points for different types of recruits and match compensation mechanics to their cash flow realities to boost retention. For example, the proper plan design is quite different for an agent with no experience than for a well-capitalized experienced producer who is switching carriers.
2. Are your agents cross-selling effectively?
Many carriers have a shockingly low rate of cross-sell, even when their business models are based on the premise of increasing account density among acquired customers. Cross-sell must be a foundational element, not just an add-on, in a modern compensation plan. This means building cross-sell requirements into the core of a compensation plan (e.g., a variable commissions grid or bonus schedule).
Importantly, carrier comp plans should be agnostic to how their agents achieve their cross-sell ambitions. Agents should be rewarded for cross-sell whether they do it themselves, enlist specialist sub-producers or engage the assistance of line of business specialists in a team-based selling model.
3. Are tenured agents still growing rather than plateauing?
Some carriers allow tenured agents to “dial it in” regardless of whether their agencies are growing or shrinking. Even if a carrier has rolled out an improved, pay-for-performance compensation plan, it may have grandfathered long-time agents on outdated plans. Growth-oriented carriers avoid these practices.
See also: Crowdsourcing 6 Themes for 2021
4. Have you enabled economic interest for your agents to foster the business owner’s mindset?
Numerous carriers provide a payout to departing agents that is calculated as some multiple of renewal commissions over the prior 12 months. The concept has different names at different carriers (e.g., fallback, termination benefit, contract value) and may be tied to different requirements (e.g., non-compete or non-solicit clauses), but the core function is the same: to make running an agency more like owning a business by growing long-term economic value alongside the growth of the operation.
A handful of carriers have gone even further, enabling agents to sell renewal commission rights to third parties, subject to approval by the carrier. Farmers, Allstate, Auto Club Group and Horace Mann are among those that have enabled this enhanced form of economic interest; several other carriers are considering doing so or are working on their programs.
We consider this enhanced economic interest a win-win for agents and carriers. Agents are likely to find an external buyer willing to pay more than the enterprise’s fallback amount. It is not uncommon to see transactions close at multiples of two to three times prior 12-month renewal commissions. Carriers, for their part, get the benefits of more motivated agents, sophisticated and well-capitalized buyers joining the agency force and lower enterprise payouts due to third-party sales. In addition, carriers may find that enabling enhanced economic interest is a popular “win” for agents that aids change management efforts during a broader revamp of the agency compensation plan.
Some misconceptions have kept more carriers from embracing this concept. As more carriers understand that enhanced economic interest does not cede enterprise ownership of customer relationships or eviscerate any non-competition or non-solicit constraints, we expect a rising tide of adoption.
If you answered “no” to two or more of these on agency compensation, it is probably worth pursuing a significant overhaul of agency compensation.
Agency transformation work is not for the faint-hearted. It can be tempting to defer meaningful change to field organizations and agency compensation plans in the interests of avoiding disruptions and maintaining harmony. However, if the exercise outlined above suggests a significant gap between your current state and best practice, your agent channel is unlikely to remain viable against direct channel competitors. Ultimately, all parties are better off when carriers fearlessly tackle transformation and find ways to enhance both efficiency and efficacy.