Printer Friendly

Measure twice, cut once: cutting salespeople may save money today, but cost insurers much more tomorrow.

In good times, insurers, as good competitors, strive to maximize sales and often increase the size of the sales force. By increasing the points of sale, insurers hope to increase their market share, margins and profits. Unfortunately, in tough times, sales volumes sometimes drop and man), companies seek to reduce their costs by cutting their sales forces. While understandable, this approach can prove very costly on a long-term basis in terms of lost opportunities and lost capabilities. Ironically, it also may produce the unintended result of actually increasing long-term costs and losses.

Insurers should evaluate their portfolio of business and sales channels based on measures of efficiency and effectiveness to assure they retain the right business and sales capabilities, even in tough times.

When insurer profits are squeezed by falling prices or reduced investment returns, insurers typically respond by trying to reduce costs. In insurer sales organizations, this usually includes reductions in the sales force. The measures most frequently used in selecting where to cut typically are based on sales volumes of producers. The biggest producers are retained and the smallest are cut. Sales volume measures are readily available and easy to evaluate, but they do not necessarily tell the whole story.

Instead of simply retaining the largest producers, insurers should consider retaining those sales points that generate the best margins, as well as those that hold the best potential to produce attractive future margins in hard times. Identifying those who produce the best margins is relatively simple, although it requires more data and analysis than merely examining sales volumes. Sorting out those who hold the best potential to be successful, even in hard times, is more difficult but well worth the effort.

To identify those producers with the best potential to 2produce attractive future margins in hard times an insurer must consider several factors about each producer:

* Business mix;

* Support, commission and loss/benefit cost;

* Retention and hit rates; and

* Premium volume and growth.

The business mix should be examined with an eye toward the margin and investment return associated with the portfolio of business generated by each producer-including the timing of the returns. It is usually best to employ a net present value approach to easily incorporate all the relevant factors of return and timing with respect to each producer's mix of business.

Support, commission and loss/benefits costs should be considered separate from their role as a component of net present value to provide a measure reflective of minimum revenue requirements and cash flow needs for each producer.

Retention rates and sales hit ratios--how much business a producer retains, and how many sales a producer makes per calls--must be examined to provide a projection of the sustainability of the volume and the mix of each producer's business.

Sorting out those who hold the best potential to be successful, even in hard times, is more difficult but well worth the effort.

Similarly, the premium history of a producer must be examined to project its future business stream, as well as the sheer volume of its production.

Insurers must compare their producers on these factors to identify those with the greatest potential to produce and retain attractive business for the insurer, not necessarily those producing the greatest volume of business. Even small producers can be attractive for an insurer to retain in tough times if they are particularly low-maintenance production sources of revenue and have an existing book of business that produces relatively high investment returns. New producers with small books that recover costs quickly and have historically high retention rates also may prove to be valuable to retain in hard times.

Conversely, the relationships with larger volume producers should be reconsidered, especially those that have high-commission business; business that does not contribute to attractive investment returns; or business that includes other factors that do not indicate attractive profitability to the insurer.

Because it takes about three years on a company's books for new business to be profitable, insurers should reconsider a sales channel that tends to produce business with claims that outweigh premiums. In fact, simply by terminating such a producer, a company can improve its bottom line.

The problem in tough times is that many insurers do not look at the right indicators for selecting which production sources to retain when reducing their sales force. Examining profitability and the potential for profitability under difficult market situations should be the factors that drive such decisions. Those companies that consider these factors will be better positioned for the good times to follow.

Gregory J. Hoeg, a Best's Review columnist, is managing director, Hoeg & Co. He can be reached at
COPYRIGHT 2004 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Selling Insight
Comment:Measure twice, cut once: cutting salespeople may save money today, but cost insurers much more tomorrow.(Selling Insight)
Author:Hoeg, Gregory J.
Publication:Best's Review
Geographic Code:1USA
Date:Aug 1, 2004
Previous Article:Ready to roll: in the next 10 years, baby boomers will accumulate huge retirement nest eggs and their draw on Social Security may spur the...
Next Article:Jump start for sales: insurers can use these six steps to boost sales and promote profitability and growth.

Related Articles
Working Behind the Scenes: Some insurers are benefitting from advanced information technology that focuses on operations without shutting down new...
Busy Signals: Insurers are scrutinizing their call centers for potential improvements in cost savings and efficiency. (Technology).
Cutting IT can be costly: reducing the budgets for information technology programs will not save companies money in the long run. (Technology).
Doing the splits: health insurers can improve profitability by dividing marketing, sales and service dollars among the most productive relationships....
A welcome reprieve: auto rates are leveling out as claims volume shrinks.
Undercover agents: life insurance companies have finally heard the consumer and are bringing understandable, less costly and appealing products to...
Jump start for sales: insurers can use these six steps to boost sales and promote profitability and growth.
Courting TRIA after Hurricane Katrina.
E Fusion 2006: technology leveraging business value: October 23-24: Fairmont Copley Plaza Hotel, Boston.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters