DIVIDING CONTINGENCY INCOME AMONG AGENCY COMPONENTS
The simplistic division of contingency income by premium volume alone benefits the growth oriented entities enjoying this profit sharing income but is actually penalizing the strong underwriters whose loss control is generating these revenues. This approach seeks the lowest common denominator instead of rewarding BOTH growth AND loss ratio profitability because it has always been too complicated to identify and formulate the components.
For many years, Agency Consulting Group, Inc. has provided a contingency distribution service for its clients. As the agency industry matures, we have found many more agencies needing this type of service to properly allocated contingencies among the entities within their organizations. For this reason, Agency Consulting Group, Inc. has introduced its FAIR SHARE CONTINGENCY DISTRITUBION PROGRAM for general availability to the insurance agency industry. This program divides contingency income through formulas that includes both growth and loss ratio of each entity as these factors relate to the overall growth and loss ratio of the agency group earning the contingencies.
Whether a traditional cluster group, a Virtual Insurance Agency, a Service Center, a Conglomerators or an agency with several profit centers, offices, departments or owners/producers, if contingency income is to be apportioned among several entities, this program answers your needs.
Cluster Groups traditionally are comprised of several agencies, each of whom retain ownership of their books of business and combine for economies of scale, the primary one of which is shared representation with carriers. When contingency income is achieved from cluster carriers, the cluster group needs to know how to distribute contingency income among its component agencies.
Virtual Insurance Agencies are a generation beyond cluster groups. Once the cluster owners realize that the economies of scale go far beyond simple sharing of markets, it makes financial sense for them to combine the agencies into a single organization, a ‘virtual’ insurance agency with each entity or former cluster member remaining a separate profit center for compensation purposes. These groups enjoy all of the benefits of a larger organization including central automation, accounting, administration and management in addition to the sharing of markets. The carriers appreciates the closer relationship of a merged organization and the owners still enjoy the benefits of their own identities, locations and productivity and profitability related compensation.
Many Service Center organizations arise from effective and efficient agencies with strong service operations and strong carrier relationships that have excess capacity to handle other agents’ service and marketing. The more mature Service Centers have begun offering the agents using their facilities additional benefit of contingency sharing based on the volume and loss ratio benefits derived from these agents.
Conglomerator (acting under many forms of organization) provide agencies markets and support to permit the agents to act as the sales arm without concern over premium commitments to every carrier every year. It is common practice for Conglomerator to provide contingency arrangements for agents based on volume and loss ratio.
Just as interesting as these alternative forms of organization are the many more advanced agencies that have successfully profit-centered. Each department, program, and/or location become sub-coded producers for the agency with a carrier, allowing the agency to determine where their operating growth and profit and underwriting profits and losses were being generated. These advanced agencies are allocating their contingency income by virtue of the profit center’s premium and loss ratio with the carriers who are generating these profit sharing amounts for the agency each year.
Finally, we still encounter many agencies who have compensation agreements with owners and producers that are sensitive to contingency earnings as well as to commission earnings.
Each of these organizations require a CONTINGENCY DISTRIBUTION PROGRAM that is sensitive to more than simple premium volume. The Agency Consulting Group, Inc., FAIR SHARE fulfills all of the needs of any entity desirous of FAIRLY distributing or allocating contingency income among several entities.
The basis of the program is the principal that any distribution or allocation should be made BOTH on volume AND loss ratio considerations.
Each year the carriers providing contingencies provide Year End Production and Loss Documents to each agency (including sub-producer entities) that provides Written Premium, Earned Premium and Incurred Losses (the components of growth and loss ratio). Knowing this data for each entity allows us to construct a set of formulas that consider both volume and loss ratio COMPARED TO THE TOTAL VOLUME AND LOSS RATIO OF THE MASTER AGENCY as the determining factors for distribution or allocation of contingency income.
The allocation of volume is easy. The key issue is to determine the Loss Ratio Relativity of each entity to the Master Agency. Once the loss ratio of calculated for each entity our formulas determine the relativity (how much better than or worse) of each entity’s loss ratio to the total loss ratio of the Master Agency. Then the volume relativity of each entity is adjusted by the loss ratio relativity in order to identify the percentage of contingency actually earned by each entity.
Whether the agency does its own data entry or assigns it to Agency Consulting Group, Inc., the Written Premium, Earned Premium, and Incurred Losses are entered BY LINE OF BUSINESS for each entity being given a Production /Loss Document by the carriers offering contingency bonuses.
THE RESULTS ARE NOTHING SHORT OF AMAZING!!
Of course the Contingency Income is distributed or allocated by each entity accurately. But, for the first time, agencies can also determine:
- Loss ratio by major business divisions (Personal Lines and Commercial Lines) across all participating carriers for as much as five rolling years.
- Loss Ratio by individual line of business for the entire agency across all participating carriers for as much as five rolling years.
- Historical growth and loss ratio performance for the agency and for the component entities for as much as five rolling years by line of business and in total.
- Historical loss ratios and growth for each entity separately by major line of business (Personal Lines and Commercial Lines).
- Historical loss ratios and growth for each entity separately by line of business within the major lines of business
- A single spreadsheet showing loss ratio of each entity for each carrier by line of business for as much as five rolling years.
Some carriers provide Master Production/Loss documents while others provide documents for each entity only. The FAIR SHARE program can derivate the Contingency Distribution in either case.
The FAIR SHARE permits you to adjust loss ratios for Stop-Loss provisions in many carriers’ Contingency Agreements. We have packed the FAIR SHARE with all of the information requested by our clients over the decades that we have been serving the independent agency community and now, all agencies can enjoy the benefits of the FAIR SHARE.
Call us 800-779-2430 to discuss how the FAIR SHARE can act to benefit YOUR agency to incent every entity sharing in the contingency distribution or allocation to BOTH grow and maintain strong loss ratios with every carrier and with the primary agency.