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Posts Tagged ‘Insurance Sales’

Commission Compensation

Commission Compensation

One of my colleagues recently postulated to me, “Maybe a homeowner’s product should be more like life insurance and pay a higher up front commission with a lower renewal commission. Perhaps that would provide an effective incentive for agents to do a better job of initial placement.” My response, “I do not think that will work. Most agents will just take the higher up front commission and still not do the work properly.”

I still remember one of my early consulting projects. This occurred many years ago. A competitor came to me with a non-profit entity and asked me to do a risk assessment and to recommend changes. I said, “Why don’t you do it yourself?” He said, “There is not enough commission to make it worth the time and effort.” If I remember correctly, the risk assessment cost about $ 7,500.00. In the initial part of the process, the agent asked for my hourly rate and I said $ 100 .00 per hour. He raised his eyebrows and said… “Hmmmmmm a hundred dollars an hour?????… Guess I am in the wrong business!” I did a professional risk assessment and generated a comprehensive report, and the agent restructured the program. If I remember correctly, the agent made about $ 12 ,000 .00 in COMMISSIONS, EVERY YEAR! And HE’S in the wrong business??????

In my mind, simpleton though I may be, commission compensation makes almost as much sense as hourly pay! You and I both know that we have employees that we could pay
$ 3.00 an hour and they would be overpaid, we have other employees that we could pay
$ 100.00 an hour and they would still make money for BOTH OF US!

Likewise, we write policies for $ 5,000.00 in PREMIUM and have to issue 300 certificates of insurance. We write other polices where we get $ 50,000.00 in COMMISSION for just submitting an application. I am not so sure this is an appropriate use of a consumer’s premium dollars, or reflects proper compensation for a distribution entity.

If we go to a fee based structure, commissions and fees would likely shrink as we would only get paid for our true effort. It would also force each of us to add value AND make it apparent to the client we are adding value AND illustrate the types of value we add (not so easy)! In fact the commission incentive is often contrary to the interest of the agent, the client, or the insurer. In one case, over a six year period I took a large marine account, who had considerable resources at their disposal, from a fully insured plan to a reasonable retention program saving the client over $ 300,000.00 in annual premium. The process of reducing the client’s overall cost of risk by this amount, reduced my commission income as an agent from over $ 55,000.00 to less than $ 17,000.00 in annual commission. What kind of perverse incentive is that??? Most of us would not endure a fee based structure. We would fold under the increased fee/commission scrutiny by the client.

The real reason most insurance carriers would like to nuke agents (and they would nuke agents If they could figure out a way to do it) is that in the macroeconomic analysis, insurance is an expensive way to finance risk, and agents commissions are a big slice of that expense. Commission compensation is, however, the only way we can find that is efficient and manageable.

I am a zealous proponent of agents. I feel risk bearing is a commodity. However, risk bearing without the benefit of competent, trustworthy and CARING risk management advice, is nearly useless.

I am of the opinion that insurance is one if the few products you can purchase where it is impossible to evaluate your purchase decision until it is too late to do anything to modify your previous decisions. One of my mantras is, “Buying insurance over the internet is like buying an old fire extinguisher at a yard sale and putting it in your kitchen in case you have a fire. You never know if it is going to work until it is too late to re-evaluate.” Flood insurance is the only line of business I have experienced that allows a post-loss evaluation of any of the pre-loss work done on behalf of the client.

So… I think commission compensation is necessary, but the underlying problem is, commissions are in no way linked to agent performance except as to the volume of premium dollars generated by the agent. Contingent commissions are nearly the only form of incentive influencing performance, and contingent commissions have been attacked as creating unfair bias. The inverse relationship of commission compensation to the goal of reducing the cost of risk to consumers generates a clear conflict of interest among the parties… consumer, agent and insurer.

Am I wrong or am I disillusioned?

Are Dog Bites a Homeowners Problem for Insurers?

Check out the following Insurance Journal article if you wonder if dog bites are a problem for insurers:

http://www.insurancejournal.com/news/east/2012/09/19/263512.htm

Is Insurance a Commodity? (5)

This discussion of Commodities centers on recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!

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So, in conclusion, I do not think insurance is a commodity.   It needs the advice and service from a competent agent to protect both the insurer and the insured.   Insurance without risk management advice is likely not a good investment for an uninformed insured.  Risk without a first hand, on the ground, rational, informed view of what the exposures present to the insurer is not a good investment for an insurer.

An insurance agent brings a lot to the table IF they are properly educated.   Insurance agents need to put forth a more professional and educated front to deal with clients AND to deal with insurers. Knowledge is the key to being a successful agent.   This is not a point of sale, transaction based business.    That is one of the reasons other types of financial service firms have trouble with it.   The value of an agent is about the added value of knowledge in addition to the SERVICE of bearing risk provided by an insurer.

Insurance is not a “Commodity”!

This discussion of Commodities centers around recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!

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We will explore what is a “Commodity”, why I think insurance is NOT a commodity, and what agents can do to more effectively distriblute the risk bearing product more effectively and more to the advantage of their customers!

Are Insurance Agents executing a Long-Term Strategy?

Insurance Agents are defined by the Insurance Company side of our Industry as the “sales and distribution” mechanism of their risk bearing operation. In my opinion this industry created, “point of sale” paradigm has created a mentality that the Insurance Customer relationship is a single “point of sale” event.

In truth, this is an extremely short term focus/strategy for both the Insurer and the agent. The Insurance Agent Customer relationship has to be viewed as a long term series of events rather than a point of sale relationship. This makes the strategic focus of the agent a long term strategy rather than a sort term strategy. This also forces the agent to focus on ALL the events in the life of the insurance customer relationship rather than just the “point of sale”. If view this way, the agent will be involved in all facets in the life of the relationship including at the time of claim. This is the way to add value and retain customers! Take a long term view, agents!