Tag Archives: chris burand

Insurance Is Not a Magazine Subscription

Magazines and insurance seem to have three commonalities:

  1. Each depends heavily on renewals for profit.
  2. Each originally, in part, used the term “subscription,” though only magazines commonly use this term today.
  3. Each wants to charge more, often far more, at renewal.

This is where the commonalities end and the last commonality should not exist. Magazines are priced at a market rate. Insurance is supposed to be priced at actuarially supported rates with only so much consideration to the market and profit because insurance is considered a public good. Insurance is heavily regulated because of its importance to citizens and commerce. Magazines just don’t have the same relevance.

A real need exists to balance company/agency profitability and public affordability so that public policy is best served. In other words, insurance is supposed to be priced so that the most people possible can afford it because more people possessing insurance is the greatest spread of risk possible, resulting in the lowest overall cost and the best societal results. It works for everyone: society, consumers, agents and insurance carriers. This combination really goes to the heart of the insurance industry. It is somewhat egalitarian in nature, though almost no consumer will ever see it that way, and maybe that is because the industry is not working the way it should.

See also: If Insurance Invaded Magazine Covers  

Pricing has changed significantly and is set to change even more, and in ways completely novel to the industry. Magazine renewal pricing is an example. Insurance companies probably (actually they almost certainly) bought a study from one or more large consulting firms that concluded that companies could charge x% more on renewal without any actuarial justification. After all, why would an account become riskier at renewal, unless the company is constantly developing more information in the first year? Because increased renewal rates is widespread behavior, this suggests if data is developed the first year that indicates more rate, carriers are not asking the correct questions on the initial application and are not in a hurry to fix their applications. Otherwise, they know they can just charge more. While true that they will lose some accounts at renewal when they raise rates, the net gain on the accounts that stay will outweigh the loss, resulting in a net gain. Different economic terms exist for the different varieties of price sensitivity, but most fall under the term “price elasticity.” Price elasticity has absolutely nothing to do with actuarially sound pricing.

Moreover, companies have identified that they can keep more of these accounts if the agent gets out of the way. The agency variable is an important reason companies are pushing service centers. (A question: Why do companies need agents or, at least, pay agents renewal commissions if the company does all the work while achieving a higher retention rate? Just asking a question more agents need to ask themselves.)

The net result is a magazine renewal pricing program. I completely understand and appreciate the opportunity that carriers have identified and partially realized. Any executive running a company would have to choose this strategy once the data was presented. This strategy is a contributing reason why insurance companies have been so profitable the last 12 years. From a public policy perspective, I am not confident that pricing insurance like magazines is in the public’s or even the industry’s best interest.

A newer pricing factor is the supposed ability to bypass the law of large numbers and price accounts with extreme individual precision (the statistical argument as to whether this strategy works must await another day, but it is not a foregone conclusion that such precision works). Assuming for now that this hypothesis is correct, insurance will be made available to more consumers and businesses, though maybe not at affordable rates, is a given. The reason is that, within the law of large numbers, a certain unpredictability exists as to which account will have material losses. Pricing therefore charges those who do not have claims a huge premium while greatly undercharging those who will have a claim. Actuarially, on average, the premiums and discounts will average out, i.e., the beauty of the law of large numbers.

However, if pricing is precise, the best accounts’ premiums will decrease significantly, maybe by 50% or more. The worst accounts’ premiums will increase by thousands or tens of thousands of percent. If too many people are priced out of the market, the market likely will not work well, which is just one reason the theory of such precise pricing may not work. Additionally, I cannot imagine how it is in the public’s best interest. Just consider this: Quite a few uninsured drivers are already uninsured because they are bad drivers. This is why UM insurance is so important. What happens if uninsured drivers increase by 20% or 30%?

Another factor is how some insurance distribution disrupters have flouted insurance regulations, regulations designed to protect the public and pricing integrity. The press has widely reported the shenanigans of an online independent agency/broker funded by private equity. Besides the normal ethical mores a company should observe, for its own good and the public’s, this one reportedly created a software program to hide from insurance commissioners its employees’ lack of insurance licenses. Insurance pricing and regulation are co-dependent. Insurance costs more when employees need licenses, and licenses are another protection for the public because insurance is, again, considered a public good. Cheating by not purchasing licenses changes pricing.

The same firm has been questioned by some relative to conforming to rebating laws. Rebating is prohibited because rate filings list x% for agent commissions. Rebating arguably demonstrates that x% commission should be x% minus y% commission. An actuarial factor is not applicable, and, therefore, all customers should really pay x% minus y%, not just some consumers.

Anti-rebating rules are levelers. An agency can more easily afford rebates when one does not have to pay for licenses. Foregoing licenses, regardless of how easy they are to obtain, is not in the public’s best interest.

See also: Is Talent the Best Defense?  

The insurance commissioners have heavy workloads and plenty on their plate of more immediacy. I know they are considering each of these factors, and I am not naïve enough to suggest the industry police itself on these matters. The distribution of education and knowledge helps. Keeping what is happening quiet does not benefit anyone except the most aggressive parties. My recommendation is for all associations and regulators to consider a loud public discussion and then make the rules enforcement consistent, extremely consistent, for all.

I recommend agents keep their clients’ best interests in mind by actually working the renewals. If you want a service center, build your own. Companies do not need to pay agents a renewal commission for doing nothing on a renewal. For now, they are just being benevolent. These scenarios remind me so much of the proverb involving the frog bathing in the warm water thinking it has a free warm bath until the water is boiling and it’sdead.

Insurtech and the Law of Large Numbers

I read a comment from a consumer who purchased a renter’s policy from a well-known, low-price, direct carrier for $25 a month and got a quote for $5 a month from a well-known, though brand new startup. The consumer asked online of the startup, “Are you real?” One of its executives replied, “Yes, and we can charge so little because of our technology!” (I’m paraphrasing slightly for confidentiality.)

That is some kind of technology to legitimately charge 80% less. If the technology is that great, everyone else should just pack up and quit now.

But, first, I will go through some simple math. I’ll use the incumbent carrier’s results using publicly available data. The limitation is that I do not have line-item expense data down to the renter’s policy level. This might make a difference, but, because the price difference is 80%, the difference is not material for this explanation.

See also: Chasing the Right Numbers on Claims  

The incumbent’s overall expense ratio excluding loss adjustment is about 14% of written premium. The overall industry average over the last 10 years is 27.1%, and in 2016 it was 27.7%. Expense ratios tend to be stable, stubbornly so when companies need to decrease them. The incumbent’s profit margin excluding investment revenue was approximately 5%. Therefore, it pays out approximately 70% of premiums in claims (total industry average for all lines is approximately 59%). This means that, if this carrier had no expenses and no need for profit, it would have to charge $.70 per dollar of premium just to  break even.

The new competitor (let’s call it “NewCo”) is charging approximately 80% less. NewCo is too new to use its actual expenses as comparisons (the profit margin was hugely negative last year, which is normal for a startup, even one with great technology). 80% less, though, is less than the incumbent’s expense ratio when loss adjustment expense is included (LAE is approximately 10%). In other words, the incumbent’s expense ratio including LAE is approximately 30%, one of the lowest in the industry, and yet NewCo can justify a rate of $.20? To the best of my knowledge, no developed personal lines company has a sub-20% expense ratio including LAE. I suppose that, if everyone worked for free, if reinsurance were free and if the great technology was free, it might be possible.

For NewCo’s executive to be accurate, its technology must be so good that the great technology, his salary, others’ salaries, auditing fees, license fees, all other expenses and all losses must be less than $.20 on the dollar. Is the executive correct? We’ll have to wait and see.

Giving the startup the benefit of the doubt, the only way a company can make money at 20% is if the technology identifies prospects that will not have claims, except in a highly unlikely scenario, such as maybe Black Swan events. The policy would have to be really a de facto catastrophe policy, even though the insured does not see it as such. Another possibility is that the forms are not comparable, which means NewCo’s form is disingenuous or a de facto cat policy from a different angle. Based on the executive’s response, though, no indication was made coverage was less, so I’m going to assume the forms are comparable. If I am wrong, a serious disclosure should have been made.

I am going to extend the benefit of the doubt further. If NewCo’s technology really is that good, to select people highly unlikely to have a claim, then those people do not really need insurance. They are just wasting much less at $60 per year than $300 per year.

Going further into the implications for the industry: There have to be clients so unlikely to incur a claim that rates can legitimately be 80% less. The law of large numbers is based on the concept that a company cannot, within reason, predetermine which of 100,000 renters will have a theft or fire. The company can only identify the probable number of claims and the claim dollars it’ll incur from these 100,000 renters collectively. If the carrier charges enough for all 100,000 policyholders (law of large numbers) but does not identify specifically who will have a claim because historically (and maybe still today) that is not predictable, then the company can make a small profit. The profit on some clients will be 70%, and on others it will be -1,000%, but, collectively, the underwriting profit will be 5%.

If NewCo’s executive is correct, what he was really saying is that its technology knows exactly who will have a claim–true predictive modeling down to the individual level. This means the consumers likely to have claims will pay much, much, much more. The carriers and agents stuck with these unfortunate clients will have serious problems, too, because the rates they have to charge may be so high as to be unaffordable. As much as people hate paying premiums that are always too high, historically insurance was egalitarian in many ways because all clients in a pool were treated somewhat equally.

See also: How to Make Your Numbers Jump  

Of course, NewCo could just be seriously underpricing its product like hundreds of new carriers that have gone before and often failed. Insurance history is littered with the tombstones of carriers that have “figured out something smarter” but were really just underpricing. It would not be the first time, and it will not be the last, where an executive thought the key advantage was technology when, in reality, the carrier did not even possess a competitive advantage. I recently heard another insurance C-suite executive advise that its advantage was technology when a review of its financials suggests it is not even investing in technology beyond some interesting reserving models.

There was one other aspect of the web-based conversation between the consumer shopping renters’ insurance and NewCo’s executive. When asked if the company was real, the executive also advised that NewCo was real because regulators have licensed it. Please understand that, just because regulators have licensed a company, does not always mean much in the real world. I believe that almost all insurance companies that have failed were licensed. For an executive to use this as proof of “being real” causes just a smidgen of skepticism, especially when combined with a need to write to a combined ratio of 20%. The logic doesn’t add up.

A Bizarre but Common Strategy: Hiring Incompetent Producers

Hiring incompetent producers is apparently the strategy of a group of agency owners who told me that my advice that no producer is better than a bad producer was:

  1. Just wrong
  2. Too harsh
  3. Short-sighted

I have seen some consultants make the same case, so I thought I should have an open mind and reconsider my position.

The consultants’ point was that every commission dollar sold is worth (pick a multiple) 1.3 or 1.5 or 2.0 times. That makes every commission dollar a commodity. From the agency owners’ perspective, one way to build value is to put as many commission dollars on the books as possible because the value is same regardless of whether the sales are profitable or unprofitable. The value is not affected by whether the sales are personal lines or commercial, whether the accounts carry more or less E&O risk. All sales carry the same value, in this perspective.

Some people will argue I have taken the consultants’ and agency owners’ point too far, but that is impossible. Remember, their point was that poor producers, meaning unprofitable producers, still have enough value to justify keeping them. This means that even if the producers’ sales have a negative 20% profit margin, which is common, the consultants and agency owners believe these sales have the same effective value as books of business with a 20% profit margin.

The strategy of adding sales without regard to profitability is quite relevant if the agency can grow fast enough and sell itself quickly enough. More than one such flip has made an agency owner wealthy. The key is how long the producer is with the agency before the sale. Let’s say that at the end of five years a producer has generated $150,000 of commissions. The profit on this book is (using industry standards for agencies with $1 million to $2 million in revenue):



This excludes all administrative wages such as the bookkeeper, receptionist, claims and so forth. It excludes ANY owner compensation. It understates the CSR compensation, too, because the average commercial CSR makes much more than $35,000. If we include these real additional expenses proportionately, this book likely is still losing money in the fifth year, anywhere from $10,000 to $30,000. Losses in the prior years were even greater as the book was built.

Over five years, then, the agency has likely lost between $75,000 and $150,000 net. Using $75,000 and a one-times multiple and an agency sale in year five, the agency still nets $75,000 (($150,000 times 1.0) – $75,000) = $75,000.

But if the agency hangs on too long or the five-year loss is too great, this strategy fizzles. So to make this work financially, the agency owner has to have a firm and fast exit plan.

Why not hire quality producers initially? Then the agency gets profit and value simultaneously. Besides, who in their right mind would pay the same multiple for an unprofitable book as for a profitable book? Let’s use an EBITDA example. If the profit is $25,000 and the EBITDA multiple is six, then the value is $150,000. What is the value of a book with a loss of $25,000 and a multiple of six times?

Why would someone pay the same multiple for a low-profit book as for a high-profit book? Maybe the thought is that books all average out. But why do they have to average out?

A poor producer cannot take an entire book, even most of a book, with him if fired. If the producers were so good, they would not have been fired. So agency owners can eliminate unprofitable producers and reassign their books to staff or other producers at lower commission rates, which is common when books are transferred between producers. This is a key secret to the success some serial acquirers have achieved. They completely understand that poor producers are unnecessary so when they buy, they fire and they keep the business but make it profitable. Even if 20% is lost, that is 20% losing money vs. 80% making money.

I truly feel for agency owners struggling to find quality producers. If it was easy, everyone would do it. Is hiring poor producers really the solution, though?

My experience, and I’ve seen the hard data, is that when agency owners properly prepare their agencies for finding quality producers, use the right interviewing tools and tests and create a quality development/management plan, successful hire percentages quadruple. All the work — and it is a lot of work —  is before the hire, and, given all that agency owners already have to do, finding the time and energy for this key element is not so easy, but it is essential if the goal is to truly build profit and value.

Does Knowledge Really Matter for Agents?

What does an agency sell? The answer to this question will make or break many an agency.One might say an agency sells price. Fair enough. But what is it selling for price? An insurance policy? Any policy? Is whether the policy provides the coverages the insured needs secondary, to be discovered in court together?

Is an agency selling insurance I.D. cards and evidences of insurance for a price? That is all some insureds want, and it makes sense to only sell them what they want, right? Do these insureds then even need an agent? What value does an agent selling pure price really provide that software cannot?

Consumers do get two benefits. First, they benefit from the agency’s E&O policy when coverage proves inadequate. Second, they gain false comfort by believing agents know what they are doing.

Computer processing is so fast and powerful today that, when combined with massive advertising, the agent is often obviated. This is a fact. It is not an opinion, no matter how much many readers may protest.

The I.D. card portion of the insurance market is already lost. Agents obviously still write this business, but the future is dire.

The rest of the market can be saved if knowledge, rather than price, is sold. Computers can bring price faster and more cheaply than humans. The human value is knowledge. Fortunately, a great percentage of the market still cares about buying from a resource that offers personal knowledge.

Unfortunately, I see too many producers literally running away from knowledge. Here is the proof: When I ask producers why they do not use coverage checklists, they regularly tell me they’re afraid the customer will ask about a coverage for which they do not have knowledge! Think about this! They think the consumer values knowledge but refuse to gain the knowledge the consumer wants! Those producers should just find another career.

Think about this a different way. Do you want a doctor who, because he does not understand cardiac medicine, refuses to test or discuss cardiac issues?

Consumers want to buy from a professional who understands their needs and can match their needs to the prices and products available. At the moment, only professional independent agencies can do this. These people and businesses are the market. Do not run away! Embrace this market and gain the knowledge required to meet it.

A key difference between the younger generation and older generations in the industry is that knowledge used to be less important, because company underwriters knew much more, and producers could rely on their knowledge. Company underwriters today, as a rule, do not know coverages nearly as well. Deficiencies create opportunity, and this is a great opportunity because a majority of people never will expend enough effort to gain adequate technical knowledge. Those who do will have a competitive advantage that will endure.

Much to the disbelief of some, Google does not offer all the answers. Consumers cannot competently look up coverages and apply them correctly. Truly understanding coverages and forms requires a full context. This is what a large and important consumer segment and a huge proportion of the B2B segment clearly want from their agent, so why not give them what they want just like so many agents are willing to give I.D. card shoppers what they want?

The alternative is that if knowledge is not advertised and emphasized, the rest of the market will eventually turn into commodity seekers, too. Several new research studies suggest the small commercial market is already turning that direction. The small commercial market is the bread and butter of many agencies. Are you ready to lose those clients, too?

Technical insurance knowledge is a great asset. Sometimes, the people possessing the most are not the greatest salespeople, and sometimes the best salespeople are just not geared to possess considerable insurance knowledge. This is no reason to ignore the opportunity. In fact, ignore the opportunity at your peril because, if you do not provide the client knowledge, someone else eventually will.

Perhaps the best solution is to create a team that combines knowledge with sales skills. Creating a team may result in less commission to the producer but will gain the producer more sales, more than making up the difference.

Knowledge makes a difference. Gain and use knowledge, or let the competition take advantage of your ignorance.

NOTE:  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.

5 Rules for Hiring Quality Producers

A simple and obvious solution to many, likely most, agencies’ growth issues is to hire a quality producer. As proven by the 70%-80% failure rate for such hires, the solution is much easier said than done. However, hiring quality producers is not as hard as it often seems, if agencies follow some rules. (By the way, these rules are based on my clients’ actual, repeatable successes. These rules are not based on theory.)

Identify the deadwood.

Quality producers do not want to work with a bunch of retired-in-place producers and owners clipping coupons. Just think about it from their perspective. Can you see a really good producer saying, “I can’t wait to get to work to sell lots of insurance while all my coworkers sit around not making any sales! What an invigorating place! I just love making everyone else rich!”?

Good producers want to work in agencies where everyone is pulling his weight, where other producers are good and generate competition. Good producers want to work in an agency that is growing. Agencies supporting deadwood don’t grow.

Eliminate that deadwood and start creating a real sales culture.

Firing deadwood or invigorating them is even more difficult for most agency owners than hiring quality producers. But the agency owner must.

For what it's worth, I have never seen a producer fired who did not benefit. To the best of my knowledge, they all found a better job that fit their personalities, reducing stress and increasing happiness. I have even seen many return to the agency and thank the owner for firing them because they knew they needed to leave but did not have the inner strength to do so.

If an agency owner cannot fire deadwood, she cannot build a true sales culture. Building a sales culture with deadwood producers is like attempting to build a house with twigs as the foundation.

A real sales culture is based on accountability. The producers not only have to make sales but, more importantly, are held accountable for all the activities that eventually lead to sales. A sales culture is built and managed daily rather than just measured once a month or, more honestly, as usually happens, annually. Try it! You’ll like it!

Once you're completed the first two steps — identifying and eliminating the deadwood and establishing a culture of accountability — you can begin the search. Don't begin the search first.

— Test.

The best test for producers is the SPQ Gold test from Behavioral Sciences. It is good on many levels, but what has been interesting to me is the apprehension that flashes across the face of so many agency owners when I describe the test. They know they would fail. They are then caught in an important emotional bind. They have to hire someone who is better than they are at selling.

One of the secrets to why producers fail 70% to 80% of the time is that a large proportion of agency owners are not good producers, and if someone is not a good producer he typically doesn't like to hire good producers. Good producers are intimidating and ego-busting. Good producers can even be grating.

My clients who climb this emotional mountain successfully always do so using the same technique. They separate their emotions from what is best for the agency. Again, easier said than done and likely impossible to do on one’s own. A support system is likely required. Asking for help is actually key to successfully hiring producers. Asking for help is a sign of strength, not a weakness.

Don't have owners involved in ANY initial interviews.

When agencies advertise for producers, they try to list all the desired qualities. However, I have never seen an advertisement list the most important quality to owners: that the producer is a good guy (whether male or female).

The search for that quality is a huge reason so many owners fail to find a good producer. Do you want a producer who is a good guy and can’t sell or a producer who may or may not be a good guy but can sell?

Owners have a tendency to fall in love with every producer they interview, so they need to stay out of the process at the start. Let just about anyone else do the initial interviews.

Develop and manage.

If you just follow the first four steps, your odds of successfully hiring a quality producer will increase dramatically. But if you really want to maximize your prospects, you must create clear producer-development and -management plans. These are two different plans. Considerable detail is required. If you’ve never done this previously, these plans are nearly impossible to create on your own. Hire specialists.

These are not easy steps. Frankly, most agency owners are not emotionally capable of taking these steps, and many are not emotionally capable of delegating these steps, either.

Having to delegate to people who are better-equipped to hire successfully is often the most painful part of the solution. Delegation feels like abdication of personal responsibilities. Yet delegation is leadership. Being a leader — and a leader is the decision maker who does what is right for the agency rather than making the emotionally easy choice for the owner — is what really makes the difference in finding and hiring quality producers.

NOTE:  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.