Insurance Agency Math

Let’s say it costs less than $20 to acquire a customer(it should)  and most times can just be measured as a fraction of fixed operating costs since there is no official advertising expense?  Is this really possible?  Yes,yes and yes!!!

Even if we broke down all your fixed costs, which are hopefully almost ” to the bone” and put some slight variables in you are hopefully at a very, very manageable daily cost.

Is being hired by one new household per day unreasonable?  NO NO NO.  If it is, time to change business.

But what about retention?  I think the industry accepted amount of the high 80’s, maybe topping out at 92% is PATHETIC.  Think about it, in any sales/business article I have ever read on the topic the prevailing wisdom is that it costs more to acquire new customers.  Sure someone could disagree but I don’t.  There is also the overriding human piece of it that does not seem to have a big role in the life of an insurance agent.  So let’s do some math;

The average gross commission is 15% with the average premium, lets be conservative and say $2000 per year.  So the gross revenue per account is $300.

Why can we lower rates? **This could be a post by itself but here is the short answer.   Well because $300  is better than $0.  $285 is way better as well.  Lets say we reduced the rate by $100 annual.  Is that really a marketing expense of $15?  Who cares.  We really have two years with them and lots of unmeasurable potential so why wouldn’t you want to keep them.

I HAVE NO IDEA.  Every other industry seems to be focused on getting and keeping customers.  Not as much in insurance.

Let’s put another way, I had heard and then read about what an agency should expect as far as referrals.  This was from one seemingly reputable place and the other was from an “iffy” consultant.  None could really show where their numbers came from except by saying they did surveys of agencies.  Many of them were talking about the amount of referrals you should be receiving per household.  It was said that the very best of them were receiving 1 referral per 50 households.


How is it possible that everyone you work with does not want to refer you business?  Now wanting to refer other people to you and actually referring them are two different things.  That being said, I am still baffled.  You provide a good service, follow a process, create some rapport, etc and yet you still only see one referral per fifty households?  Some, most actually, were even worse.

**Much bigger issues surrounding advertising, marketing expenses, lean agency, etc.  Save this for some other posts**

Take this as an alternate scenario;  You have 100 households.  Hopefully you are striving to keep 98 of them, not some week effort of 92 or less that the industry seems to think is acceptable.  Now, let’s say you average a 1/2 of a referral per household.  So you get 50 referrals from them which is WONDERFUL.  Now, with the right mix of companies, and being conservative,  7 out of 10 should be what you  are able to “close” as new business.  so net 35 new household.  Minus the two that left for whatever reason and you increased your households by 33.   This is wonderful!!!  Oh and it is also extremely realistic.

**start of what could be a much bigger post

Math and value and flood insurance

Woke up early and was immediately thinking about one of my last conversations yesterday.  Let’s start with some math;

If you spend $1000 and in return I lower the cost of something by about $3000 what could you consider your return on investment(roi)?  $2000 not bad.  Not bad at all.

So in the first year of this new product you saved $2000 by spending $1000.  Now in the second year(assuming current numbers stay the same) you actually save $3000 since you do not spend the $1000 again.  So you have now made $5000 by investing $1000.  500% return.

Now let’s say you need to keep that product for 10 years so $2000 the first year plus $3000 *12 = $36,000 for a total of $38,000 . **Average time in a home is 13 years** All because you invested $1000.

DISCLAIMER; This is math based on the current situation in flood insurance.  Where a provisional rate is approximately $6000 but if  you invest $1000 there is a very good chance you will see that reduced by about $3000.  With this being a brand new situation(roughly 4 months old) it is to early to make these figures more accurate.

**Real Estate version;

Is not spending $1000 worth losing a buyer?

Is not spending $1000 worth delaying a sale…and possibly losing the buyer?

Is not spending $1000 today worth saving maybe $38,000?

This is no different than upgrading your bathroom, lighting, landscape, paint, etc.

So at the present time here is my explanation as to why I will not guarantee the above;

Let’s look at it another way; DEDUCTIBLE math

So you are getting $250,000 in coverage and want the same $1000 deductible as your home.  Your rate is $6370 BUT factor in you think FEMA is nuts (they are) and you firmly believe there will be NO FLOOD at your home.  So you take a $5000 deductible.  New rate of  $4988 savings of $1382.  The math looks weird, you take on $4000 more in risk but this year you save $1382 plus year two $1382 plus year three and what do you know you are now in the clear (assuming you saved this savings)  risk averted.

Remember insurance is an exchange of risk.  Flood rates are nuts because people were not paying enough into the big pool of insurance.  The only act of government that I believe will fix this is when the government GETS OUT OF THE FLOOD INSURANCE BUSINESS.

When deciding on how to spend your insurance budget don’t just settle for what the crowd says is right.  Your willingness to take on more risk is rewarded with a savings which you should value.  Especially if you place no value on the flood insurance you have to buy.

Just some thoughts.  Please open your mind to some new ideas.