During the last generation of insurance agencies when margins (the combination of commission rates and contingencies) reached 18%, 20% and higher, productivity factors were not of importance. Your organization could be inefficient; with one person checking the accuracy of another, and there was still money to pay all the employees and leave a profit margin for the owners. Many of us remember mono-line staff members, handling either auto or home owners -commercial property or commercial casualty- for the same clients. Redundancy is permissible when margins permit the agency owners to do so and remain profitable. Over servicing, while not being efficient or productive, was a great benefit to customers.
Times have certainly changed, haven’t they?
Gross margins (as defined above) have decreased to between 10% & 15% in many insurance agencies throughout the United States. The inefficiencies and over servicing which was permissible when finances permitted, are no longer possible for agencies intending to continue into the next century.
Agency owners who cannot grasp (or accept) the need to change the ways of doing business will be available–soon.
One of the ways of changing your internal systems to permit the correct level of service appropriate to the margins being earned by your clients is “service teams”.
A service team is a profit center comprised of one or more staff members maintaining a book of business with a size sufficient to pay for that staff. The overhead associated with them and to devote a profit margin to the agency.
In small agencies where a single customer service representative handles all service, marketing and administration for his/her clients, the team is established by default. It is comprised of the producer receiving commissions for a book of business and the customer service representative. In larger agencies the Service Team is comprised of two or more customer representatives and any administrative assistant responsible for processing the work load generated from that book of business. In large agencies it is not unusual for service teams to become departments, including a marketing representative (for placing, quoting and proposing business), two or more customer service representatives and one or more administrative assistants.
Regardless of the size of the agency, the service team is created for two reasons; a) to provide maximum affordable customer service with a minimum number of staff members handling any given transaction, and b) to service, administer and process business to and from customers and companies at a profit to the agency.
Service teams (especially in larger agencies) eliminate processing and service redundancy while permitting sufficient depth in service to avoid the loss of continuity should one staff member become ill, go on vacation or leave the agency. Systems and procedures are rewritten to avoid a staff member taking a call from a customer or writing out instructions for another staff member to process. This is truly unnecessary, paying two people to touch the same transaction at least twice. It promotes repetition and backlogs. In a service team concept, the team transactions are delegated to the lowest level employee capable of processing that transaction. This includes endorsement requests from the clients and the processing of completed policies, endorsements, renewals from the carriers. Abnormalities, transactions requiring unique handling or technical expertise are referred to the higher level employees. Can this be done with sensitivity to the clients? The answer is yes, but training needs to be done at both the higher and lower levels to assure you that the staff members understand what they are to do, how they are to accomplish a transaction, and, especially, how to treat the clients.
How long would you stay in business if you were to manufacture an item for $10.00 a unit that you could sell for a maximum of $8.00 per unit? A service company, like an insurance agency providing an intangible product to its customers must calculate their profit margin the same way a company manufacturing tangible products. You have hard, overhead costs and soft, personnel costs. The combination of your hard costs and soft costs must be less than the revenue generated by your agency in order for you to survive in the long term. This is simplistic and can be defined by reviewing your operating statement. However, once you have reached marginal profitability or you are in a loss situation; few of us can determine what aspects of service or which customers are losing us money.
If you profit center your business into service teams, you will be able to determine which groups of customers require more service and administration than they pay for through the commissions earned on their policies. There was a time when we knew in our hearts that serving every client in the same way cost us money for many of our other clients, but were more than made up for in the revenues of our largest customers. Eroding commissions have targeted our largest accounts even more than our traditional average commercial and personal lines. Our large accounts now pay us barely enough to properly service their needs. This means that our small to medium size accounts must be managed efficiently enough that a book of those accounts can raise a profit on its own accord.
Budget each service team as its own profit center. First, calculate a direct cost of the service team. This includes the cost of the employees, the employment cost for those employees (benefits and payroll taxes), and any commissions that must be paid to producers or any other source for that book of business. Next, budget all other non-direct costs of your agency among the service teams. Many costs (such as occupancy) can be allocated by pure head count. This means that if three of ten employees are in Team A, 30% occupancy expenses will be charged against Team A. Other end direct costs can be designated by the ratio of commission volume in the team to the total commission volume in the agency (i.e. your costs as owners or accounting costs), customer count (telephone expense) or policy count (postage cost). You can make the allocations as general or refined as you desire. The point is that all expenses of the agency must be allocated against profit centers of the agency. If the revenue base of the service team is insufficient to meet its expense quota (direct and indirect), either you must change the systems and procedures to allow the same number of people to service substantially more clients and volume, you must reduce head count, or you must reduce services provided to the client.
Remember, the key is rather simple – each profit centering agency must stand on its own and generate sufficient revenue to pay for itself. Innovation will be the key to success as the service team tests ways of more efficiently handling their client base in order to maximize profits for themselves. The rewards? The most successful businesses who have adopted the service team concept have targeted a profit margin for each service team, above which bonuses are paid. The cheviot is that bonuses are only paid if the agency, as a whole, achieves a minimum profit level. In this way, the members of each service team are interested in all teams succeeding while attempting to maximize their own profit margins.
Service teams are an integral part of the quality initiative that permits the employees to innovate on behalf of the employer, and defines the goals of the agency as common goals, rather than those only of the owners.