Insurance Industry News from ProgramBusiness.comIndustry and Economic Climate Make for the Perfect Storm to Shake Things Up
At this year’s ninth annual Peak Performance Insurance Ski Conference in Beaver Creek, Colorado, John Wepler, President, MarshBerry, opened up the event with a reality check on what those in the industry need to do to succeed and grow in the wake of an economic recession, a prolonged soft market, growing unemployment, consistent exposure retrenchment, limping consumer spending and confidence, and much more. These and other factors have presented a challenge for all of us in the industry, but John also sees this as an opportunity to change the way things have been done and turn things around for a bright, profitable future.
Following John’s session, I met with him to get more of his perspective on the state of the industry and how he sees us changing course during this time.
Annie George (AG): You opened up the session by listing a host of challenges that we’re facing…and then you stated “we may look back on this time as the best thing that ever happened to our industry.” That definitely got everyone’s attention. What did you mean?
John Wepler (JW): “Insurance distributors are facing a great deal of pressure…due to the state of the economy, a continued soft market, a reduction in insurance rates for reinsurance treaties, renewal attrition, and risk compression in one’s book of business because of a fewer number of insurable risks. Furthermore, we are seeing that rates haven’t stabilized and are still softening. Unemployment in parts of the country is still on the rise and there is a risk of health insurance reform. All of these things have had a big impact on the ability of the insurance industry to grow revenue. In a nutshell, if you combine the recession with lower insurable risk and the soft market, you have a very difficult situation for individuals in the insurance business.
“But we see this as an opportunity for those who are committed to turning things around in their agencies, to truly building a sales culture. If you look at the difference between the bottom 80% and top 20% of agencies, you’ll see that the growth rate for the bottom 80% has dropped to a negative 5%, while the top segment is growing by nearly 6%. We contend that while you would never want to be in a difficult situation like the one we have been facing over the last couple of years, we think that in 5, 10, 20 years, we’ll look back at this cycle and consider it one of the best things that ever happened to the insurance industry…because it has forced many to change the way they do business.”
When discussing how all the turmoil, pressure, and negative influences could turn out to be a positive, John reflects on the fact that the insurance business in general has been traditionally reactive and opportunistic, with insurance distributor success being a byproduct of growth from a harder market, a strong economy, and growth in the general commercial market, GDP, and population, as well as legacy producers that have built relationships. “Yet the insurance industry is well behind almost every other industry in terms of having a very well-oiled, very disciplined sales force that is focused on systematic new client acquisition,” says John. “A lot of this has to do with the fact that most agencies rely on renewal income which provides a stable book of business, but fosters complacency and a tendency to not execute a systematic strategy to drive predictable new business.
“Now economic and market factors have forced many CEOs to make decisions that are unpopular and long overdue…decisions to implement new business minimums and to hold producers accountable for attaining minimum standards or else face a reduction in their renewal commission percentage. Peak performers pay producers a fair and reasonable wage on the retention component of their book, but this will be at risk if they don’t write a certain amount of new business. In addition, CEOs have culled staff that have been unproductive for years but were carried due to a growth wave that is no longer sustainable. These are all factors considered best practices for growth, and it’s time for CEOs to take over the reins and steer their firms in the right direction.”
AG: Do you see this happening?
JW: “Yes, because in this particular part of the cycle those entities that otherwise would not have the fortitude to make necessary change know they no longer have a choice. They have to make some difficult choices in order to grow, perpetuate their business, and if they choose to sell, to sell for a premium. True leadership is not a popularity contest and survivors are not allowing their survival or value to be left to chance.
“Owners need to sit down with producers and account executives and clearly outline each position’s responsibilities…they need to define what is expected in terms of new business production and workload relative to the average account size handled. The bottom line is that a producer’s time needs to be spent proactively identifying and closing new opportunities that otherwise wouldn’t exist…that the agency, MGA or program administrator would otherwise not find. Peak-performing firms pay a lower percentage on renewals than on new because producers need to be involved in the take-offs and landings. A lower renewal allows the agency to maintain best-of-breed service staff to manage mid-flight activity such as making sure clients have the right service platform, ensuring that promises made are promises kept via a service timeline, continually improving risk mitigation plans, and executing the right loss control measures. Within peak performers, it is the responsibility of the account executive, not a salesperson, to manage the service experience, thereby liberating the producer to focus on new client acquisition and relationship management on existing accounts.
“The day of the ‘servicing producer’ is no longer applicable in peak performers given that lean producer renewal compensation has been channeled to attract and maintain a best-of-breed service staff. There has been a clear-cut “coming of age” in which producers must produce to get the big bucks and those that cannot need to be culled or paid like what they truly are, servicing personnel. Industry leaders no longer pay a producer wage to those that are not producers, as defined by a new business minimum. Leaders require producers to write new business equivalent to a minimum of 15% of the prior year’s book of business to maintain producer status and the baseline producer renewal percentage. If a producer cannot step up performance to this level in a defined period of time, then the producer is nothing more than an overpaid service person. What an agency does to deal with non-performing producers clearly separates the men from the boys.
“Five or six years ago, when the economy and rate environment was carrying growth, many insurance agencies were writing 10% of new business with a 5% leakage rate and netting 5% organic growth. As a result, innumerable agencies rationalized that it was ‘ok’ to have service people masquerading as producers. We would often hear comments like ‘if it is not broke, don’t fix it’. While it was clear that the system was broke, the agency was simply riding on external forces rather than running the business like a business, complacency in execution prevailed. Most agencies were content and did not want to rock the boat. Non-performing producers were allowed to act as primadonnas, handled by kit gloves by agency owners, when in fact the underlying lack of accountability was sealing the fate of the agency given that growth was not sustainable. When owners were told that new business production and accountability was in the bottom tier of the industry, many owners refused to embrace change given that the gift of a 5% leakage rate made the math work. A classic quote by Warren Buffett is absolutely apropos: ‘It's only when the tide goes out that you learn who's been swimming naked.’
“Getting lucky is not a business model yet countless agencies rationalized their success. Producers were simply not accountable five or six years ago. Producers would decide when and how much they would work. They would not submit activity reports and agency owners were afraid to hold them accountable, perpetuating the problem. For some reason, it took a turn in the market and the rate environment for peak performers to adhere to the oldest sales paradigm known to man: ‘If you don’t submit activity reports you are gone. And if you cannot hit minimum levels of production, you are gone or you will become and will be paid like what you truly are, a customer service representative or an account manager.’
“Today, leading CEOs are acting like CEOs and are running their businesses versus allowing the prisoners to run the asylum. Survivors are holding their producers accountable and do not allow their success to be a result of chance. For the naysayers, rest assured that the result is not a building full of victims. The byproduct is a growing profitable enterprise where the rules of the game are clear, a winning team emerges, personal income of staff is enhanced and the agency can survive versus perish. The tide change in the external world will be looked on by many as a gift albeit with challenges; many owners would not have had the strength and perseverance to execute uncomfortable change.
AG: What do you recommend to establish a sales culture, to shift away from the way things have been done?
JW: “Set a target for new business and enforce negative consequences if this target is not met. Consider a typical agency with 10 producers. In most cases, as many as five are probably not really producers and never were; they were simply the beneficiaries of transitioned books as older producers retired. Most have never been anything more than account managers paid like producers. In this case, the first step is to separate the wheat from the chaff. Those up to the challenge need to improve performance. Those not willing or able but have the technical proficiency and the ego to manage books on behalf of other producers and a willingness to be paid appropriately can be salvaged. Unfortunately, many non-performing producers do not fit that description. Some will step up their game and emerge but others will, by design, leave. Agency owners need to accept this as part of the plan as it is critical to building performance based culture. For a rush bush to bloom, it must be pruned.
“While producer accountability was an endangered species 10 years ago, it is typical in high performers. When you look at high-growth agencies in 2009, 78.9% of them enforced negative consequences and had a minimum standard of new business production. During 2009, only 6% of producers actually hit the minimum, which means that 40% took a pay cut. That’s almost half. What is telling is that the 60% success rate is far better than the 42.6% rate in the year 2006. As more agencies established minimum standards of new business production, a greater percentage of the producer staff attained the minimum. It’s working.
“Owners have been managing around their people, afraid they would quit. As a result, they haven’t made the changes needed. It’s no longer a theoretical discussion. It’s a best practice for those that are succeeding and growing. To determine whether your organization is on track, consider one very important metric. Do the math and find your place on the sustainable organic growth continuum. Divide the new business commission dollars within your organization during 2009 by total commission income during 2008. The best agencies are at 20-23%; the worst are at 10-13%. If you are less than the average of 15.4%), you are in the bottom 50%. The question remains, what are you going to do about it?”
AG: You also discussed pipeline tracking at the conference. Elaborate on this.
JW: “Pipeline tracking is measuring everything. How can you improve what you don’t measure? Of high growth agencies, 67% of our clients have an institutional requirement and the technology to track the number of calls, number of appointments, number of submissions, number of proposals, proposals to close ratio, new business commission to close ratios… very basic sales measurement metrics. If you don’t have your producers submit activity reports, you will not be able to determine when and why performance is not up to par. Those that require activity tracking simply write more new business. Inspect what you expect.
“For decades, agency owners have sat in conference rooms listening to legacy producers explain why ‘they don’t need to track their activity’. Leading agencies today make tracking a non-optional behavior. To enforce compliance, some agencies have simply changed their compensation structure to a renewal rate on new business if the account is not in pipeline.
“If the world hadn’t collapsed in front of us, most owners would not be making these changes…most run in the same social circles as their producers, they are entrepreneurial people that generally don’t like turmoil and avoid conflict. The economic and rate challenges have given owners the fortitude to execute change. This fortitude stems from a practical reality that if sustainable growth does not materialize, the agency will not be able to perpetuate. Many owners are now capable of saying to producers…. …the choice is you either comply with tracking or end up working for the company I sell to which will require tracking.
“To coin a quote by Peter Drucker, ‘Unless a commitment is made, there are only promises and hopes…but no plans.’ To many, the value of their insurance operation is their largest estate asset. To allow survival and value to be left to hopes and dreams is not a strategy. The peak performers of tomorrow today are executing a plan to succeed irrespective of the external environment. What is your plan?”
About MarshBerry & John Wepler
MarshBerry, a privately held company with nearly 50 employees, provides consulting services to the insurance industry, including sales management, perpetuation planning, business planning, mergers and acquisition services, information services, and more. Headquartered in Ohio, MarshBerry also has offices in California, Michigan, Arizona and Tennessee, and services more than 900 clients throughout the country. The chart to your right is an overview of MarshBerry’s SNL ranking for 2009.
John is president of MarshBerry, having joined the firm in 1991. He is a vital resource in the areas of organic growth management, valuation enhancement solutions, mergers and acquisitions, business planning, ownership perpetuation and financial management. John is also nationally recognized as one of the industry’s leaders in merger and acquisition advisory, having personally closed over 150 M&A transactions since joining the firm. He is a frequent keynote speaker at national conferences, agent association meetings, insurance carrier elite meetings and executive leadership forums. John is also a prolific author for leading insurance publications.
You can reach John at 440.292.2572 or via e-mail at John@MarshBerry.com. And for more information about the company, please visit: www.MarshBerry.com. Click for the whole story...