This post is part of a series sponsored by ITC (Insurance Technologies Corporation).
Something we often see when measuring insurance agency health is a blanket retention rate. A low retention rate is bad, while a high retention rate is good.
There are agencies who recognize their low retention rate is related to their specific client base, and they’ve adapted their pricing and business plans accordingly.
But, the large majority of insurance agencies will live or die based on their retention rates.
Talking to an agency recently, I asked what their retention rate was. They proudly stated it was “roughly 85 percent.”
At face value, a retention rate of 85 percent is a good number, despite the fact the principal did not know the exact number (a carrier offered his retention of their customers).
Yet, this retention rate is deceiving the agent. He believes everything is going swimmingly with his insurance agency. But, when I looked at a three-year sample of the agency, the following picture unfolded.
A Bird’s Eye View
In the first year of our analysis, the agency had 3,900 existing customers. They added 1,250 new customers. As previously mentioned, they measured an overall retention rate of 85 percent for the year.
Therefore, they lost 773 customers. The agency began the year two of our analysis with 4,376 customers.
In the second year, the agency acquired 2,000 additional customers. With the same retention rate of 85 percent, they lost 956 customers in that year for a total of 5,420 retained customers.
Then, the agency only added 1,000 new customers in year three. While the agency’s retention rate stayed the same at 85 percent, they lost 936 customers. This was almost a net loss for the year.
While the agency’s retention rate stayed the same at 85 percent, they lost almost as many customers as they gained.
On Razor’s Edge
What’s the takeaway? The more customers the agency earned, the more policies they lost.
Despite a retention rate of 85 percent, they were actually at a statistical breakeven by year three. At that point, the agency needed to improve two things in order to grow. First, they needed to increase their retention rate. Second, they needed to get more customers.
The problem with a blanket retention rate is that it does not show which policies cancelled. Was it policies sold in year one or year three? Policies sold and cancelled in year three may show a failure with new customer follow-up initiatives. Policies sold in year one and cancelled in year two or three may show poor long-term customer retention.
To help your agency better understand your customers, try the following metrics instead.
Time as Customer
This metric will allow you to understand the average length of time a customer stays with your insurance agency.
With Excel, input the following data: A current list of all clients, their purchase date, and their cancellation date. Put today’s date if they have not cancelled yet. Then calculate the length of time they have been, or were, a client for. Calculate the average across all clients.
Time as customer will show how your agency is retaining customers over the long term. Hint: Your average time as customer should always increase over time. Something may be wrong if this metric becomes static or decreases.
Retention Rate by Acquisition Period
This metric requires some more effort. It measures your customer retention by the year they were acquired. This lets you see how your agency handles customers based on when they purchased.
In the example below, note the agency’s average customer is 1.5 years. While the retention rate in 2013 is 99.41 percent, the past five year retention rate is closer to 63 percent. This shows the agency must make an additional effort to clients that have been with the agency for more than a year.
Another year to examine is 2009. What caused the increase of new clients? Why do those clients in 2009 also have a poor retention rate? Do the two correlate?
Moving Beyond Retention Rate
By analyzing your customer data, you will be able to see which direction your agency marketing will need to take. Should you improve your follow-up marketing to prospective customers? What about creating an email marketing campaign to your long-term customers?
Dig a little deeper into understanding your customers and retention rather than relying on a blanket retention rate. It will help you determine your road map for future success.
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