During a recent blog series I took a look at the true cost of hiring a producer. I’d like to take a similar swing at the cost of customer service representatives. Not to criticize anyone but more as a thought experiment.
If you take a look at the benchmarking studies you will see that CSR payroll and related expenses, along with the general overhead associated with the service of business averages around 40-45% of revenue (obviously, this does not include marketing or selling expense, profit or certain administrative expenses which exist independent of the number of employees).
In the Best Practices study of the most recent year the average PL CSR handles $143,323 of commission income. The average CL CSR handles $188,000 of commission.
So, in rough terms that means that the service cost on the $143,000 PL book is about $65,000 and the service cost on the $188,000 CL book is about $85,000. To adequately compare service center costs to agency costs we need to convert these commission dollars to premium dollars.
The studies don’t give us premium figures but it’s reasonable to use 14% for personal lines and 13% for commercial lines as typical commission percentages. That yields a $1,021,000 PL premium book and a $1,446,000 in the CL book.
The typical insurance company service center charges 1.5%-2% of premium for their service center (OAA members usually pay about 1% however). So, the service center charge at 2% for PL service for a typical agency would be $20,420 ($10,210 for an OAA member!) and $28,920 for a typical agency for the CL book (again about half as much at $14,460 for an OAA member).
So, if we’re conservative we can estimate that the cost to service the PL book in the typical agency is about $44,580 dollars higher for the agency to do it (or three times as much) compared to putting the business in a service center! It would cost the typical agency $56,000 more to service the CL book in house than to let the company service center do it!
It goes without saying, but I’m going to anyway, that the increased bottom line from using service centers increases agency value. This is so because agencies are valued based on a multiple of profit. Currently agencies are selling for 5-7 times net revenue. That means that the PL agency using the service center in this scenario is worth over a quarter million dollar more than one servicing the book in house! In the CL example the difference is over $300,000!
We haven’t even considered the productivity issues of the agency with books too small to justify a full time CSR or too large for one CSR and too small for two. Nor have we visited the management requirements of the owner or the PITA factor that employees bring!
So, to me, this thought experiment makes three things clear: insurance service centers dramatically impact the bottom line in a positive way, service centers dramatically increase agency value and OAA members make even more money and develop even more equity than typical agencies in these situations.
What do you think?