We issue a Client Letter when I have something I want to say to our clients and other close acquaintances before other readers of Burke Ink. That publication goes to a broader audience.
On one level this letter is about contingent commissions and the possible impact on them that stems from the legal action taken recently by the New York Attorney General, Mr. Spitzer. On another level, it is about your value to your customers, and mainly your own view of that root point.
I am taking no space here to review the background of the events and news stories. I think anyone reading this letter knows pretty much what happened and what people are saying about it. My intent here is to give you some helpful input as you sort out your response to the issue.
This is a time to think clearly, to stay positive (with good reason), and to check your gut.
Now, to the first level: contingent commissions and your relationships with your carriers. For most independent agencies, contingents are really important. They may average only 5% to 10% of revenue, but for serious players in standard-market lines, they often account for a third or more, sometimes much more, of profit. The problem here is that in the news stories and political utterings, they have been painted with the same brush as bid rigging. So we will be dealing for a while, possibly a long time, with irrationality and forces you can’t stop. Don’t deal with this by trying to predict who is going to do what. Instead, remember that this is still a competitive business. If Carrier A tries to use what’s happened recently as a way to cut your compensation, there will probably be a Carrier B who will be happy to have the business at equal, nearly equal, or possibly better compensation. In competitive industries the market gets cleared at the right price. And your compensation is the price for what you bring to the relationship. The p/c marketplace is far from the perfect competition we learned about in Econ 101. And there are fewer carrier players than there used to be. But it still works, especially with good-quality business. With a hairy book of business? A pay cut was probably just a matter of time anyhow, or you are already playing in the arena of no contingents.
I know that moving a book of business is not a piece of cake. But your willingness and ability to do so is what often keeps you from having to do so.
Also, remember that the standard-market–carrier community is not providing profit-sharing and contingent-commission arrangements under duress. Most of them want the lever. It makes sense.
Now to the second level of this issue, your relationship with your customers. Sorry to sound like Pollyanna, but this presents you with an opportunity. First, you should take the initiative. Get a communication out soon to at least your most-important customers and possibly to all of them. To my way of thinking, the more the better. But practical considerations are involved too. That’s a judgment call.
The main theme of your communication should be, You get me; or if you want to broaden it a
little, You get us (meaning the whole agency). Orally, it could be that simple and blunt. What
you put in writing, however, should probably be a little more elaborate and maybe a little
humbler. These are what I think should be the main points in your written communication,
edited to your own words and style:
- Our [the agency’s] interest and yours [the insured’s] are aligned. Our mission is to get and keep customers, and the whole basis of the value of my agency is customer relationships that endure. If we don’t provide you with the best combination of price, coverage, and service, we lose you. Sooner or later. The market works.
- We get compensated by our carriers in a variety of ways. Regular commissions, bonuses, and so-called contingent commissions. The various forms of bonus compensation are important to us because they help us pay the bills, but they are a small part of our total income. The main point is that the bonus arrangements do not cause us to harm our customers. Not because we are honorable (which we are), but because we don’t control the market. You have choices. The large broker you read about in the newspapers, the one sued by the NY Attorney General, operates in a different world. In some segments of business, that broker did control the market. And it committed the unforgivable sin. According to the papers, it rigged the market to ________ its own customers. But it got caught, and now it’s going to pay big time. That world has nothing to do with us.
- We do not promise you the lowest price. We see low-price operators all the time whom we would not do business with and would never place your insurance protection with. Our responsibility is to give you the best combination of price, coverage, service, and stability. If we tried to move our clients from company to company every time someone offered a new wrinkle or some supposed bargain, we would lose our insurance-company relationships and then be in no position to help you get the protection and service you want and need. This balancing act is at the heart of our business, and it has our undivided attention.
- Getting claims paid for you is critical. That goes without saying. But helping you avoid losses in the first place is much more valuable. And when we help customers do that, they pay lower premiums, and we position ourselves to get better compensation from our insurance companies. Bonuses for low losses are the biggest form of so-called contingent commissions. This makes total sense. It’s in your interest and ours. The system isn’t perfect. But it works pretty well. Don’t let the unscrupulous actions of a few big-city guys cause you to worry about whether we are acting in your interest. If we are not earning your business by balancing these many needs properly in your judgment, we will lose your business. And we know that.
I don’t know how all this will play out and whether there will be widespread changes in contingent commissions for independent agencies. But I am as bullish as ever about the financial future for well-run agencies. It’s a good business model aimed at a critical need. And I am not worried about the compensation dollars flowing to value delivered. A few bumps in the road, maybe, but what’s new about that?
The challenges are that “well-run” is not a static concept; that the need for people investment is big, growing, and not being met; and that smaller agencies need to embrace new arrangements if they want to keep their independence and localness.
Take care, and keep those cards and e-mails comin.
Brian Burke, November 2004