What the stock market can teach you about running your insurance agency
I was messaging with one of our AE clients the other night, and he was expressing his concern about the changes in the personal lines space. In particular, carriers cutting back on commissions.
He asked me if I thought it would be a major issue, and my answer was, “well, eventually yes.”
I say that because personal lines is already the most competitive line of business in the world, not just among independents, but there are a lot of companies and disruptors out there who want a piece of the personal lines pie. Eventually, there will be so much churn in that line of business, that carriers will need to decrease commissions even further in my opinion.
Here’s how to remedy this situation though:
Diversification
When you go to invest money into the stock market, do you put every dollar you own into one type of fund or investment vehicle? Well, if you don’t understand investing and/or were sold some bill of goods by a shady investment advisor, then maybe the answer is yes.
But the correct answer is no. When investing, the safest way to protect yourself from financial loss in the stock market, while at the same time growing your investment, is to use a blended strategy. In other words, you can’t put all of your eggs in one basket in the stock market.
You need to diversify your assets to ensure that one fund or account doesn’t tank your entire retirement savings.
When I look at the way a lot of insurance agencies operate, especially predominantly personal lines agencies, I can’t help but worry about a lot of their financial futures.
Personal Lines is a slippery slope
A lot of people like personal lines because they think it’s stable, easy to write, and has a relatively steady ROI. That at one point was 100% true, but given where the industry is going, with companies like Lemonade, Metro-mile, and even some of the existing carriers like Geico and Progressive, it’s becoming increasingly challenging to write and retain personal lines business.
This is especially true if you have no digital presence which is unfortunately the case for a large majority of independent agencies.
Also, with stock market and loss volatility, reinsurance is becoming more and more expensive, so what do insurers do to offset those costs? They raise premiums, while at the same time tightening their underwriting guidelines.
Don’t fool yourself, personal lines isn’t the cake walk that it used to be.
Unfortunately, there are a TON of agencies out there who only sell personal lines insurance, which in this business, is the equivalent of investing a million dollars into an extremely aggressive growth fund, during a very volatile market.
It’s time to switch things up, and you should
Coming from my background in the insurance and financial space, I realized pretty quickly when I started my scratch agency 10 years ago, that I was not going to make the type of money I wanted to make selling strictly home and auto insurance.
It’s a high-volume, low-margin, high-touch, high-grind line of business. You could make the argument that it’s a losing proposition to only sell personal lines.
Now if you’re an agency owner reading this and you’re doing just fine with a 90%+ personal lines book of business, you may not agree, but the truth is, you most likely built your book in a different era.
What’s more, the typical insurance consumer views personal lines as a commodity. You as the agent know it’s not, but they don’t, and it’s hard for IA’s to convince consumers otherwise when directs and captives spend millions in price-based advertising campaigns each year.
You almost have to beg people to let you quote their home and auto insurance anymore, and if you are able to write it, you have carriers like Geico, Progressive, Allstate and State Farm who are getting between 5-8 touches a day on your insureds through their TV ads, social media, and internet marketing strategies.
5-8 touches per day folks. People have to say no to them, and yes to you 5-8 times per day.
Even if your agency is a well oiled machine and is able to consistently write a lot of personal lines premium, with so many competitors and many more hands in the pot, there is going to be a lot more churn in this space in the coming years.
So, even if you can write it, doesn’t mean you’re going to retain it. Yes, you can say that about any type of insurance, but there is so much competition in personal lines, especially auto, that it could actually cost you money to go after it.
I’m not telling you to stop selling Personal Lines
With all that being said, I’m not totally hating on personal lines.
The beauty of personal lines is that its a law in almost every state that you must carry liability insurance if you’re operating a motor vehicle. Selling home and auto insurance should definitely be a part of your overall growth plan in your agency.
However, like investments, it should only represent a portion of your overall portfolio.
There are so many other lines of business that you could be selling, many of which take less effort to write, have a lower acquisition cost, have better retention and pay the same, if not more commission.
A recipe for diversification
If I was sitting in front of someone who knew nothing about insurance and they told me they really wanted to get into the industry but didn’t know where to start or what to sell, I would tell them this:
- Learn 3 or 4 mid-market commercial niches and target them hard. Stuff that pays big commission
- Get your Life & Health license and learn Life, Medicare, & Long Term Care like the back of your hand
- If you’re going to make personal lines a large part of your business, create an avatar client and build your brand and practice around that person so you can multiply that type of business. Be a specialist, not a generalist
A note on the Medicare space that will blow you away
Working closely with retirement planners for as long as I did, we were always looking for ways to strengthen the bond with our investment clients by offering them as many services in-house as possible to solidify our relationship and retention.
One of the ways we did this was by offering guidance with Medicare Supplement, Advantage, and Prescription drug plans.
If you’re not familiar with it, Medicare is the government healthcare system for retirees who are 65 and older. To seniors, it’s extremely confusing because they go their entire life in some kind of group health plan, like and HMO or PPO, and all of a sudden they turn 65 and everything is different.
It’s like trying to learn a new language at the age of 65 when you’ve been speaking English your entire life.
I never once had to beg, borrow or steal to quote someones Medicare plan or get them in my office for an appointment. People were so confused, they sought me out. Talk about referrals folks, if you help one person with Medicare, you’re a real American Hero in their eyes.
They’ll be so relieved that they’ll tell everyone they know about it. You’ll get a minimum 3 referrals back per client. No joke.
What’s more, Medicare is a booming industry:
There will be over 8,000 people per day turning 65 years old for the next 18 years.
It’s the equivalent of a gold rush, and the best part is, for every 1000 P&C agencies, there are like 10 agencies who understand or specialize in Medicare products. There is literally no competition. It’s not like personal lines agents who come out of nowhere to threaten your book of business.
If you’ve never sold a Medicare product before, like anything else there is a little learning curve involved, but once you get going, you can rake in some serious commissions, while also opening the door to other product sales and referral relationships with local financial planners, and that’s where the real money comes in.
The back door to Long Term Care and huge commissions
What’s great about insurance is there is always a back door to another product sale right?!
Same thing goes for Medicare. Medicare specifically excludes coverage for Long Term Custodial Care, and here’s why thats so important:
Long Term Care is the single biggest threat to someones retirement assets, with over 75% of people over the age of 65 needing some form of custodial care during their retirement. The cost of Long Term Care without insurance is on average $60,000/year, and it’s increasing at about 2 times the rate of inflation.
Long Term Care is an absolute back breaker without insurance.
It could bankrupt even a financially wealthy person within just a few short years if they don’t have a game plan in place for their Long Term Care considerations.
If you ever take the time to learn Medicare, make sure you also understand and sell Long Term Care insurance. Huge commissions folks, and huge opportunities for other lucrative referral relationships.
There is traditional LTC and something called asset based, which can be hard to explain if you haven’t heard of it, but it’s essentially a “hybrid” product that is much more flexible than a traditional policy. It’s usually built on top of a life insurance chassis, and some companies offer it as a hybrid annuity.
I sold a ton of Long Term Care, and guess what, was able to cross-sell personal lines as well! All from a Medicare Supplement appointment. Not only that, but I was able to refer many of these folks to our financial planners to help with their retirement planning as well.
When that was the case, based on our payout agreement, I would get a percentage of revenue based on whatever the retirement planner setup for the client.
So instead of making $225/yr commission from a home and auto sale, I was making on average $1800 per “relationship” because of my knowledge of Medicare and Long Term Care. Sometimes I’d pull in over $5,000 per client/household for financial referrals, and thats no exaggeration.
Let that sink in for a second. $5000 vs. $225.
Sell the stuff that pays, to the right people
When I first started out at this investment firm, I was young and didn’t know any better. I remember the very first week I was there, I would look around and see some of the clients who would come in for appointments, and say to myself, “this has got to be the world’s most boring job ever, dealing with all these seniors all day”.
I asked my buddy at the time who was one of the partners, “why in the world are you only managing money for senior citizens? Don’t you have any clients your age?”.
He looked at me with a smirk on his face and said, “people my age don’t have any money for us to manage”. And it hit me like a ton of bricks.
They cater to retirees because they already have savings for them to invest, and thus get paid a commission on. Duh!! I felt so naive.
The lesson I learned in that moment was, sell products that pay higher commissions to the people who can afford them. Financial Advisors treat home and auto like a nuisance. They could care less about it, and half the time don’t even probe their investment clients about their coverage.
It’s an afterthought in their mind, but for a personal lines agent, its their livelihood.
The point is though, would you rather spend 4 hours quoting someones home and auto insurance, only for them to beat you up over a difference of $10/mo, and make $250 in commission, or would you rather sell a $40,000 premium account and make $4500 in commission for the same amount of time and effort?
There’s more to this business than home and auto insurance. Educate yourself and you’ll quadruple your income, I promise you.
Conclusion
The lesson here isn’t just “sell big premiums for big commissions”, it’s to expand your knowledge and skills in this industry and become more flexible with the products you sell.
There will be a day in your lifetime when an insurance company makes it as easy to quote and bind an auto and/or home policy, as Uber has made it to get a ride home, and that will spell big trouble for a lot of insurance agencies.
Do you want to be Uber, or do you want to be the taxi drivers? That day is coming sooner than you think.
It’s time to diversify.
