October 21, 2020
The Future of Commercial Insurance is Based on Hard Data
4 min read
As business models turn more and more towards technology, there is a tendency to commoditize personal insurance, with personal lines now being sold online in minutes. These operating models are coming very soon for commercial insurance - companies like Tamika already have comparative rating systems out in the marketplace, raising the bar in the commercial insurance market by automatically finding the lowest rates in commercial lines such as commercial property insurance.
How to make data-driven decisions
We're hearing a lot in the insurance industry about the importance of gathering data, performing data analytics, and using data to make data-informed decisions. It's just a new buzzword in the industry.
It’s like we've never been concerned with data before, which is kinda crazy.
We are looking at data constantly: we review loss ratios all the time, we look at all kinds of data, our business is driven by data. That said, the status quo is being challenged, and the importance of really doing a good job in agencies is being informed by data-driven decision making.
We're inevitably going to see commission cuts and other revenue reductions in our business in the short and long term, and we will be facing increased competition, not only from automated online insurance portals but also from many people trying to get into our business.
It's going to be very important to manage business very effectively. You know, in a Fortune 500 company they rely on data for risk management, and if the data isn't well analyzed, they don't make any decisions. In small businesses like insurance agencies, typically owners make decisions based on hunches and gut instincts.
We have written several pieces explaining the main KPIs for insurance agencies, how to calculate them, and what they mean. I recommend you go read them as soon as you can - they will change the way you look at your agency.
The real cost of making mistakes
Increasingly, though, successful operators of insurance agencies are going to have to do more data analysis in order to make better decisions, because the consequences of those decisions are going to become more important.
We’re insurance agents, and we don't want to become like middle-market or Fortune 500 technocrats. But we do want to use data to inform and modify those hunches upon which we make business decisions. Better use of data and KPIs, and more rigorous management decision processes will improve the chances that your insurance agency gets above one million dollars of revenue. And if you’re already there, having a thorough analysis of its operations using KPIs becomes much more important. The reason is the cost of making mistakes goes way up.
It's harder and harder to sustain a growth rate of any size, the bigger the revenue in the agency gets.
How much does a policy actually cost?
As you grow your business, you're going to have to become more rigorous in your analytical skills - either you personally or someone on your team. What we need to focus on now is how much it actually costs us to write a policy and how much it costs us to service a policy.
Those numbers will help us make decisions about who we're going to insure and what markets we're going to go after, and whether or not we're writing appropriate business in our agency.
Did you know that the average insurance agency only sells 1.6 policies per customer? That's crazy! Providing a good customer experience and adequate services to clients is expensive. When you think about the number of policies that any client, whether it's a commercial client or a personal client actually buys, we can't afford to have that low level of production, with the high service costs that agencies are being asked to bear today and going into the future.
Everything I read tells me that over the next five years, commission rates will continue to decline, and the lack of proper profitability that some agencies now have is going to become very serious. So data, its analysis, and its understanding become increasingly important to you in your agency, and knowing your cost of producing small commercial insurance is going to become increasingly important. You need to decide whether you can make enough money on that business. Can you make it up on volume? Or should you focus on something else?
As technology continues to be used increasingly in our industry, not only to sell insurance, but also to service it, you're going to need to make important decisions about the kinds of policies and the kinds of clients that you want to work with. Data is your friend, and its analysis will give you the answers.
There's so much more to talk about on this topic! I've written about many of these subjects in more detail in my new book: The Future of Insurance is Data-Driven & People-Led. I hope you'll download it and take a look.
Tony Caldwell is a modern “renaissance man,” who is not only immensely successful in the field of insurance, but is also a writer, children’s advocate, mentor and even a licensed pilot.
Always keen on helping others make their dreams come true, Tony and his team have helped independent agents grow into more than 250 independent agencies. This has made OAA the number one ranked Strategic Master Agency of SIAA for the last 5 years, and one of Oklahoma's 25 Best Companies to Work for.
Tony loves to share his knowledge, insight and wisdom through his bestselling books as well as in free mediums including podcasts and blogs.
Tony and his family are members of Crossings Community Church, and he is very active in community initiatives: he’s chairman of It’s My Community Initiative, Inc., a nonprofit working with disadvantaged people in Oklahoma City; and chairman of the Oklahoma Board of Juvenile Affairs., and he has served through many other organizations including the Salvation Army, Last Frontier Council of the Boy Scouts of America, and the Rotary Club.
In his spare time, Tony enjoys time with his family. He’s also an active outdoorsman and instrument-rated commercial pilot.
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