Metrics that Matter: KPIs To Manage Carrier Relationships
Prepare for your carrier negotiations with a full set of key metrics.
The lifeblood for all insurance agencies is the variety of products they can offer to meet the needs of their clients. Carriers, MGAs, wholesalers and other solution providers deliver a steady flow of new and innovative products that allow agencies to address an evolving range of risks. As they work to maintain or grow their business, agencies need to be strategic with respect to their carrier relationships.
The stronger an agency’s relationship is with a carrier, the more likely that carrier will be inclined to offer special programs, rates, and underwriting guidelines which can enable the agency to gain competitive advantage and differentiate itself in the marketplace. Additionally, an agency’s top 10 or 20 carriers typically provide it with some form of profit share, increased commissions or a contingency bonus.
Evaluating your carrier relationships is fairly straightforward and typically involves examining a handful of key data points:
Certainly, premium volume is a leading indicator of how significant any individual carrier relationship is to an agency. Essentially, it’s the aggregated dollar amount an agency’s clients pay the carrier.
Yet, relying solely on this metric has some drawbacks. For instance, premium alone doesn’t indicate the size of the clients, or how many client programs the agency has placed with a given carrier. If an agency places $100 million in premium and 15%-30% of it is with one carrier, that concentration of business may be a positive or negative.
For instance, if the carrier is downgraded or its service delivery disintegrates, then you have great deal of business to move to a different carrier. Your clients won’t be pleased and your agency’s reputation may suffer.
On the other hand, if the carrier practices sound underwriting, has strong financials, and solid programs, then there may be no problem. It is highly recommended that every agency keep a close eye on its overall business with each of its carriers and the concentration of their top carriers.
Placement type is another critical element for an agency to monitor. Agencies have two basic options for accessing a carrier’s product. They can access a product directly when they have a contractual arrangement with the carrier to sell it. Alternatively, they can use a third party’s contract with the carrier to write the business. Known as indirect placements, these approaches are sometimes used to control loss ratio, described below.
Loss ratio is another key metric closely monitored by both carriers and agencies. Basically, loss ratio is the measure of the security of any business placed with a carrier. For instance, did the agency bring the carrier a large number of clients that took losses? Or did the carrier only agree to write clients that prioritized safety and consequently had favorable loss experience?
Agencies will quickly realize that premium volume with a high loss ratio will not be maintained with any carrier for long. At the same time, a favorable loss ratio allows carriers to provide incentives to agencies that consistently bring them clients with effective safety programs, quality controls, and strategic risk control measures.
In effect, if any carrier repeatedly pays out more in losses than the premium it takes in, it won’t be able to remain in business for long.
Commission rate, the financial driver behind most insurance agencies, refers to is the percentage of the premium earned by the agency. Agencies earn commissions for distributing the carrier’s product. That service includes advising their clients on what insurance products to purchase based on their needs, budget and individual risk profiles.
The agent also helps the client determine the coverage limits it may need based on location, industry and size, as well as appropriate loss control measures required to operate safely and sustainably.
Agency commission rates generally range from 3% to 40%, depending on the carrier and the type of policy. Often, coverages for specialized needs, programs or businesses will involve higher percentages. Commissions for typical commercial risks generally are in the 10% - 12% range. Meanwhile, employee benefits coverage can see a commission rate of 3% - 8%. These percentages are often lower when an agency must obtain coverage through an intermediary.
The type of business driving premium volume is significant as well. Is growth coming from rate increases, client revenue growth or by generating new placements with the carrier? New placements typically have a higher commission rate. Often, agencies have annual “new business” goals with carriers. If those goals are hit, the agency will qualify for specified bonuses. In some cases, new business brought to one carrier can also be an agency’s renewal business that moves from one carrier to another.
Longevity is another key statistic for both agencies and carriers. It involves the length of time an agency maintains a book of business with a carrier. For instance, is the client a price-shopper that might be inclined to change carriers at each renewal? Not surprisingly, carriers generally prefer long-term client relationships over one-year engagements. Over time, underwriters become more familiar with the client’s business and the carrier also saves costs associated with acquiring a new account.
Having all of these metrics together, or at least a clear view into many of them, is essential for agencies and brokerages to prepare for commissions discussions with carriers. One area that many agencies get tripped up in is the complete view of a business owned by a carrier, through all of the subsidiaries and intermediaries that the agency uses.
Having a system that can report across a agency’s many AMS and CRM systems, as well as normalize and structure the data to give a clear and de-duplicated view is a critical business tool that will quickly pay for itself though higher commissions rates and larger premium growth.