Agency transformation: When to revamp compensation plans

Insurance carriers should consider these questions to find out if it is time to improve agent compensation structures.

Insurers that answer “no” to two or more of these questions on agency compensation should consider pursuing a significant overhaul of agency compensation. (Photo: VectorKnight/Shutterstock)

Editor’s Note: Read part one of this two-part agency transformation article series here

Our previous installment explored when carriers with captive agents should pursue transformation of their field and agency organizations, given the complexity and sensitivity of doing so. This second installment tackles an even trickier topic: When carriers should entertain an overhaul of their agency compensation plans.

Of course, carriers are constantly tinkering with their agency compensation plans, adjusting a commission rate here or a bonus threshold there. The extensive reinvention of these plans — in particular, the replacement of legacy plans for existing agents who may otherwise be grandfathered — is substantially rarer.

Consider the following four questions to find out how much room you have to improve your agent compensation plans, and whether it may be time for a bold move to realign incentives:”

1. Are your agent retention and agent productivity on par with competitors?

These key performance indicators vary dramatically. Agent retention after 18 months can be as high as 90% and as low as 35%. Average monthly agent policy production ranges from two to 25 for auto and from one to 15 for home. Similar gaps apply to commercial and life production, as well. If you’re trailing the rest of the pack in these key metrics, it’s likely that your agent compensation plan is a big part of the problem.

Modern compensation plans use an aggressive pay-for-performance approach to create significant dispersion between the top and bottom performers. Carriers can choose to vary commissions based on growth (and other factors), or alternatively, use a large variable bonus to create the spread of agent compensation outcomes. Either way, the idea is to maximize the incentive for agents to grow, while minimizing the amount of enterprise resources directed to agents who aren’t producing (many of whom should probably exit the agency force).

Contemporary compensation plans enable a variety of entry points for different types of recruits and match compensation mechanics to their cash flow realities to boost retention. For example, the proper plan design is quite different for a scratch agent with no experience than for a well-capitalized experienced producer who is switching carriers.

2. Are your agents cross-selling effectively?

Many carriers have a shockingly low rate of cross-selling, even when their business models are based on the premise of increasing account density among acquired customers. Cross-sell must be a foundational element, not just an add-on, in a modern compensation plan. This means building cross-sell requirements into the core of a compensation plan (e.g., a variable commissions grid or bonus schedule).

Importantly, carrier comp plans should be agnostic to how their agents achieve their cross-sell ambitions. Agents should be rewarded for cross-selling whether they do it themselves, enlist specialist sub-producers, or engage the assistance of line of business specialists in a team-based selling model.

3. Are tenured agents still growling rather than plateauing?

Some carriers allow tenured agents to “dial it in” regardless of whether their agencies are growing or shrinking. Even if a carrier has rolled out an improved, pay-for-performance compensation plan, it may have grandfathered long-time agents on outdated plans. Growth-oriented carriers avoid these practices.

4. Have you enabled economic interest for your agents to foster the business owner’s mindset?

Numerous carriers provide a payout to departing agents that is calculated as some multiple of renewal commissions over the prior twelve months. The concept has different names at different carriers (e.g., fallback, termination benefit, contract value) and may be tied to different requirements (e.g., non-compete or non-solicit clauses), but the core function is the same: to make running an agency more like owning a business by growing long-term economic value alongside the growth of the operation.

A handful of carriers have gone even further, enabling agents to sell renewal commission rights to third parties, subject to approval by the carrier. Farmers, Allstate, Auto Club Group, and Horace Mann are among those that have enabled this enhanced form of economic interest; several other carriers are considering doing so or are actively working on their programs.

We consider this enhanced economic interest a win-win for agents and carriers. Agents are likely to find an external buyer willing to pay more than the enterprise’s fallback amount. It is not uncommon to see transactions close at multiples of two to three times prior to twelve-month renewal commissions. Carriers, for their part, get the benefits of more motivated agents, sophisticated and well-capitalized buyers joining the agency force and lower enterprise payouts due to third-party sales. In addition, carriers may find that enabling enhanced economic interest is a popular “win” for agents that aids change management efforts during a broader revamp of the agency compensation plan.

Some misconceptions have kept more carriers from embracing this concept. As more carriers understand that enhanced economic interest does not cede enterprise ownership of customer relationships or eviscerate any non-competition or non-solicit constraints, we expect a rising tide of adoption.

Conclusion

If you answered “no” to two or more of these questions on agency compensation, it is probably worth pursuing a significant overhaul of agency compensation. Agency transformation work is not for the faint-hearted. It can be tempting to defer meaningful change to field organizations and agency compensation plans in the interests of avoiding disruptions and maintaining harmony.

However, if the exercise outlined above suggests a significant gap between your current state and best practice, your agent channel is unlikely to remain viable against direct channel competitors. Ultimately, all parties are better off when carriers fearlessly tackle transformation and find ways to enhance both efficiency and efficacy.

David Ascher is the founder and managing partner of Transom Consulting and oversees the firm’s Financial Services practice. In the insurance sector, David has served global, national, and regional carriers across every function and line of business on strategic, transactional, and operational initiatives. 

Troy Korsgaden (troy@korsgaden.com) is a highly sought-after insurance and financial services consultant. He is the principal of Korsgaden International, which specializes in global marketing, distribution, agency building and technology strategies for many of the world’s largest insurance carriers and financial services companies. 

Related: