An Analysis of The Companies Service Centers
Since the customer contact portion of the service center require additional function and staff on the part of the company, service center companies have reduced the average commissions for personal lines to the agents. In some cases such as the Hartford, the eminent reduction is 5% of the current commissions being paid. Other carriers have reduced personal lines commissions to 5%. The carrier's assumption is that it would cost the agents less to simply sell insurance on behalf of the company than to sell on service insurance products permitting the agent to make a profit on the lower commission rate. Meanwhile, the commission reduction provides sufficient revenues for the companies to staff their service center operations.
While the philosophies of service center are sound and are copies to some degree of the large direct writers with similar programs, unanswered questions exist that should alert insurance agents to delve further into the companies service center concept before committing to it.
1) Can the companies service agent, agency clients better than "or even as well as" agency staff? - How well will service center representatives in a mid-western central office knew the issues and conditions facing clients in a small rural south-eastern town? How sensitive will a service center representative be to the particular needs of individual customers for whom local agency service representatives have performed extraordinary efforts to maintain them as customers and provide the highest grade of service possible? For a number of years personal lines service departments have been made aware of the special relationship that attaches some personal lines clients to major commercial lines accounts. These accounts may belong to the agency, but may not even be in the same company as the personal lines accounts. How flexible will service center representatives be to the needs of those clients (or will they even know who they are)?
2)How committed is the insurance company to their own service center concept? - We are reminded of the CIGNA Compar program that performs so successfully for its' participants in the early years only to experience deterioration and disillusion once internal management and company philosophies changed. When Compar crashed it resulted in a fair number of agency fatalities as well. Certainly, that program could have been an apparition.
Perhaps we assume that other carriers are much more stable in their long term goals with respect personal lines. But if an agency's decision to adopt the service center results in a reorganization to convert a personal lines department into a sales department, what would that agency do if a few years later the company decided to abandon the service center concept?
3)Will the adoption of a service center by one company actually result in decreased expense in the agency? Most insurance agencies still have a number of personal lines markets available to it. When one company converts to a service center does the agency propose to roll all of its personal lines business to that company? Would the company even take all of the personal lines business? Is it advisable to put all of the agency's "eggs" in one basket? If the agency continues to maintain multiple markets, how can it eliminate its service force to yield internal savings as a result of the acceptance of the service center for one of its companies? If 20% of an agency's business is now serviced through the service center, do you believe that the agency's clients will simply stop calling the agency in favor of their new "800" number? There appears to be a learning curve (in some cases quite long) in the education of clients to call the carrier directly rather than their local agency with whom they have done business with for many years.
4)Once the customers have dealt with the insurance companies directly for a number of years, whose customers are they, the agents' or the companys'? While customers may be legally owned by the agency, will the agency maintain sufficient contact to influence their future buying decisions should a market turn require replacement of the coverage with a different carrier? If the company decides that the agency no longer fits its producer profile and terminates the contract, how easily will the agency find it possible to contact and re-sell the clients to place them elsewhere? On the other hand, the companies may be kind enough to offer an acquisition price for those clients who choose to stay with the company either on a direct basis or assigned to a different agent.
5)Have the carriers guaranteed market availability, commission rate stabilization, or rate competitiveness to agents participating in the service center concept? If the service center concept is meant to benefit the agents by permitting more emphasis on sales and marketing, shouldn't the carriers be prepared to commit to rates, product availability and a commission rate that would make this attractive as long as the risk selection was adequate to generate a loss ratio profit?
This article is not a "tongue and cheek" criticism of the service center concept. We must remain professionally naive and trusting as consultants because many insurance agencies are choosing to accept or being forced to accept service center concepts by the carriers. That concept, however, ties an insurance agency much closer to a company than a simple policy assignment. The company will now control much of the retention capabilities of the agents client base. Under these circumstances each agent bears a responsibility to ask the right questions and receive the commitments that would make it comfortable for them to take this giant step toward direct writing.
Meet with your carriers at the highest level possible to determine whether this is a unilateral decision on the part of the company to increase its control over its personal lines book of business and reduce its expenses by reducing commission without regard to the results to insurance agency profitability or if they are committed to mutual growth and profitability. If the latter is the case, the company should be willing to commit to certain contractual considerations. First, the guarantee of a long term relationship with the agency under certain circumstance; a predetermined acceptable loss ratio (three year rolling average) and a predetermined desired and acceptable level of growth for the agency's personal lines book of business. If the agency does not meet its commitments with respect to loss ratio (pure loss ratio excluding loss adjustment expenses) or growth commitment the company maintains the right to terminate contracts. The second commitment to request from carrier is that commissions will stabilize at a level that permits the agency to generate a profit under the same circumstances as the above contractual commitment. In this scenario, the company agrees to maintain commission rates without further reduction and the agency agrees to accept a 1% per year reduction in commission rates if pure loss ratios exceed an acceptable level (on a three year rolling average) or if growth does not meet expectations on a three year rolling average. In order for the growth condition to exist, the company must provide competitive rates (consistently in the lowest quartile of rates filed in the area) and provide territorial exclusivity to those agents choosing to utilize the service center.
Finally, since the carriers are utilizing the service center to reduce redundancy and since it is presumably selecting its best agents to participate in the service center concept, let's reduce redundancy further. Permit the agency to underwrite its own risks on behalf of the company. The agency should accept quarterly audits of its risk selection process but as long as the audits are passed and the loss ratios are acceptable the carriers should assume that the agency value lies in both the solicitation and the risk selection of customers on behalf of the company. The efficiencies gained by an agency who no longer has to refer all risks through company underwriting would become an immense advantage over the competition in personal lines. An additional advantage that is now technologically capable for most carriers is local production of policies. Once applications are processed through insurance company automated systems (presumably at the agency level), next take production of insurance policies at the agency will provide a better grade of service to the company and the agencys' customers than anyone else in the industry. Agency input without company intervention might also result in fewer erroneous policies than currently experienced in the industry. If not, the agency knows exactly where the blame lies since they would be the only entity responsible for front end input.
The process of service center can work. But it can only do so if the insurance company and the insurance agency form an allegiance that is extremely difficult for either of them to brake. The "bad actors" must be culled from both the company and the agency ranks. The carriers committed to marketing through insurance agencies and the agencies committed to working with a carrier would find this process quite profitable. Without the commitment on the part of either the agency or of the company the service center is doomed to failure or will be the first step to company direct writing without the use of the independent agent in any capacity.