The Retention Dimension

Over the past fifteen years we have noticed that high performance agencies inevitably maintain customer retention rates of 95% or more regardless of the market conditions, regardless of the insurance economy and regardless of competition. And these high retention levels at these successful, profitable agencies are not accidental.

First, let’s define retention. Retention is the result on the feature being measured – over time – eliminating the impact of new business. The simplest explanation of retention is through the following formula:

((Current Year-to-date)- (New Business))

(Prior Year-to-date Total)

This definition works on Premium, Commission, Customers and Policies and a difference in retention between Premium and Commission or between Customers and Policies raises ‘Red Flags’ that require further study. The application of this formula judges the value of Premium and Commission including the effects of rates, growth or shrinkage in existing clients’ sizes, audits and negotiated renewals. On the Policy level, the retention formula can be colored by conversion from monoline policies to package policies. However, Customer retention is pure (except for the rare instance of a merger of two customers). Using this formula on customer retention identifies your Churn (the average number of customers you must replace each year due to lost business).

The most effective agencies in the U.S. spend a great deal of time, effort (and money) to reduce the Churn to a minimum. They do this for two reasons:

1. In almost every situation, it is easier and less expensive to keep a customer than to get a new one.

2. The value of a customer in pro-forma dollars grows geometrically, rather than mathematically (this means that, actuarially, the longer a customer stays, the longer he is expected to stay into the future).

Most agencies are too busy ‘cutting the trees’ to ‘survey the forest’. They feel that they are so busy servicing, administering and selling that they lack the time to calculate the acquisition cost of a customer. But consider that the average closing rates of proposals to new business is 33%, that it takes an average of three to four sales calls (some dead ends, others requiring follow-up calls) to achieve a proposal and that (excluding referrals) it takes from five to ten prospects to mature a sales call. With these statistics in mind, the average of $1,900 of total agency cost for each medium-to-large commercial account sale may be astonishing, but is not unbelievable. These calculations include lost opportunity costs associated with the wasted activities in the pursuit of the 90 contacts needed to convert one good size account.

If your customer retention rate is already above 95%, your goal is to decrease the sales ratios by selective marketing and sales training. But if you have customer retention levels below 90%, putting your time, effort and money into new business is like pouring wine into a barrel whose bung is missing.

The second reality understood by high performance agencies has to do with the long term value of a customer. A new customer, similar to a single policy customer, is at greater risk of loss to the agency than a long term customer. After all, a customer you just solicited and sold was solicited by other agents, as well (including his old agent). You selling the account doesn’t, in itself, generate loyalty to you. However, an account with you for ten years has found strengths in your relationship that will cause it to stay with you longer (as long as you treat the customer ‘right’).

And high performance agents actually calculate the long term value of a client. If a client is an existing and viable business (as opposed to a start-up), it is not unusual for that business to remain intact for ten or more years. The ‘Ten Year Mark’ becomes the target of high performance agencies for successful account retention. If the account remains less than ten years it has not met expectations and an analysis of the loss is done. Ten years is the desired retention term. Accounts with the agency longer than ten years are providing bonuses to the agency. So the high performance agent multiplies the annual commission income of each account by ten to ascertain its long term value to the agency.

The reason they look at long term value of clients is to rationalize the need and desire to place time, effort and resources in communications programs to assure that existing customers are contacted a sufficient number of times in appropriate ways by whatever level of employee necessary to keep them happy and satisfied with the agency.

The communications programs differs by client but are closely monitored and costed out. By comparing the long term value of the customers against the cost of the communications programs, you will quickly realize what you can afford to do for each customer in question. However, the application of this process always results in substantially intensified retention programs. The short term goals are set in terms of increased percentage retention. The long term goals calculate the value of each fraction of a percent of retention as a proforma dollar amount to the agency. The result of this effort is more satisfied accounts, higher retention and more profit.