In a hard market, like the one we’re experiencing lately, many of the positive effects of the increased revenue can also carry some consequences that can negatively affect your agency down the road.
A hard market is a sellers market where a soft market belongs to the buyer. When premiums increase, customers are far more likely to check alternative options. I’ve talked to countless agencies that tell me that the biggest challenge in a hard market is to maintain their client retention ratios. Consequently, they spend a majority of their time and resources on keeping their current customers and have little or no time to market for new business.
The effects of halting new business production may produce dire future consequences. Even though revenues are increasing due to the rising premiums, many principals find themselves allocating much of this increased revenue into their infrastructure to support the additional strains brought on by the increasingly difficult retention issues. The additional revenue spent to retain customers in a hard market is no longer available to attract new ones when the market softens. In addition, if the agency is experiencing industry average retention rates of 85 to 90 percent, it means they will be losing 10 to 15 percent of their customers through natural attrition, which compounds the problem.
In simple numbers it looks like this: Suppose you have 40 accounts with an average premium of 25,000. That equates to $1,000,000 in premium. During the next soft market if premiums go down 25 percent, without prospecting for new business you are automatically knocked down to $750,000 but the actual numbers are far worse; if you lose 15 percent of your customers you will now only have 34 accounts at an average premium of $18,750 (adjusted to reflect softer market). This brings your new total premium number down to $637,500. That’s less than two-thirds of the premium you had to work with during the hard market. This example makes it very clear that you need to start prospecting now to increase your market share and customer base for that ‘rainy day’ that’s coming.
Sadly, most agents don’t focus as much on new business until it’s too late to have an immediate impact on their sagging bottom lines. Unfortunately, the time to start laying the groundwork for a new business push has come and gone. Any marketing efforts undertaken at the start of a soft market, whether those are prospecting, email, advertising, or hiring more producers will not yield immediate results. It will be several months before these efforts yield the kind of results that most agencies are looking for once the market softens.
The best time to market for new business that will carry you through a soft market is when the market is hard. If you can put in the hard work, resources and effort to push for new business during a hard market—you will reap rewards both now and through the soft market, and this effort can and should be maintained during the soft market and usually can with less cost and effort if begun now.
As I mentioned earlier, in a hard market customers are more likely to evaluate options. Those agencies that realize this and take advantage of this fact have a much better chance of increasing their market share. If the average agent is not marketing for new business because he is overwhelmed with retaining his current business, the exceptional agent knows that he can retain his current customers and go after new customers, as well and take advantage of all the “average” agents that are solely focused on renewals simply by allocating the proper time, resources and effort.
The key to making this all work is proper planning and a strong commitment to new business. To effectively go after new business you have to have producers with the time to go after the new accounts. That might mean you’ll need to hire additional CSRs, hire a prospecting firm or break in a new producer. In any event, the key is to make sure you have all the necessary resources to attack the market from both fronts.
Figure out how many new accounts you’ll need to accommodate premium decreases of 20-30 percent and customer loss of 10-15 percent. Once you have this number, determine what it’s going to take to get this many new customers using your agency’s historical data.
The time to plan for the imminent soft market is now. Put in the necessary work now to reap the rewards later. You’ll be glad you did.
Darren N. Clevenger is the CEO of DCM Inc., a commercial lines prospecting company specializing in appointment setting. He can be reached via email at firstname.lastname@example.org.