Don’t Trust the Black Box

Don’t Trust the Black box!

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You know what I mean.  The secret sauce insurance companies cook up to rate and price their products.  The secret tiers, the magic variables, the rating alchemy.  No one but the initiated traveling the path of Ivy League MBAs and Actuarial Secret Societies have gazed upon these models.
In the early 2000s, these pricing models, especially in auto, came into vogue.  No one was more successful at developing these sophisticated systems than Progressive.  And they worked.  Profits rolled in, and the rest of the industry was quick to follow.
Multivariate pricing was the name of the game.  Identify as many variables that could reliably be used to identify a customer, and price on each of these factors.  None of these would have been possible before the advent of sophisticated desktop computer power.  It could never have happened in the days of manual rating.  I remember back in my Progressive days when these models were first being launched, one particular DOI (I think VA) questioned the accuracy of the rating.  They actually asked someone from the company to come to the DOI and demonstrate the ability to manually rate several policies.  Because the rating was done through computer algorithms, and not real people, the company had to find someone with a math degree to demonstrate the problem to the DOI.  In my mind’s eye, I imagine a disheveled college professor spending hours calculating on a giant blackboard, filling it with numbers, square roots, squiggles, and Greek letters.
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Credit was the backbone of this type of rating.  This upset and confused many agents and regulators.  Customers were mystified.  But as time went on, it proved itself a predictor of loss and behavior.
 It’s probably been 15+ years since the industry has been unprofitable in auto. Several years ago, I caught myself saying, “Auto profitability is reliable.  The only thing we really have to worry about anymore is property, and that is only because of weather.”  Then 2016 hit.  No one made money.  The big dog of insurance, State Farm, lost $30 Million in auto.
What happened?
Industry experts tell us it is multiple things: cost of repair, increased cars on the roads, distracted driving.
I’d put my money on distracted driving. Credit underwriting and multivariate pricing models struggle to identify this risk.
Unfortunately, this is not only impacting company profitable and increasing pricing for your customers, it is impacting your ability to generate profit-sharing and contingency dollars.  If it continues, it could even jeopardize contracts inside your agency.
What to do?
1.  Trust but Verify.  You remember Ronald Reagan, and his relationship with the Soviets.  In his negotations, he often said he trusted them, but verified their statements on the back end, just to be sure.  This has to be an agent’s attitude toward the pricing black box.  Trust it but verify it.  Carriers claim they can price for everything and have a price for every risk. Use it but don’t rely on it.  Don’t rely on them to DNR customers that become serial claimants.  You need to step in and ask for that non-renewal.  Resources are thinner at companies than they used to be, and humans aren’t monitoring individual accounts.  I’ve done this exercise with agents and have found examples of a customer with multiple claims (11) continuing to renew year after year, and continuing to cost everyone money.  Review your books of business with your carriers and take action.

2.  Oldschool Underwrite.  You know how to do this, but if you have staff that has come into your agency since 2005, they may not.  Even if a company advertises, “Price for every risk” or “Let the system do the underwriting”, don’t!  Have everyone ask 2 questions for every new customer:

“Will this customer make our agency and companies money long-term?” and “Will this customer attract good or bad business?”  

You might have to sit down and actually explain what good business looks like to some staff.  We’ve all become so reliant on the rating system to determine profitable customers. The mantra has become “If it takes it, we write it.”

Unprofitable books don’t help anyone, and the industry loses in the process.
It’s time to go back to basics.  Trust the tools, but don’t rely on the black box to make you money.

Insurance Customer Retention: A Tale of Two Agencies

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness….sorry, wrong story.


Here are two real stories with similar insurance customer retention issues but very different results (names have been changed to protect the innocent).

Story #1: Jones Insurance resides in a medium size Midwestern town. Due to market conditions, their companies contracted leaving them with only a couple of companies. Their largest company has had major internal changes as well increased loss pressure because of bad weather.

The result is that prices have increased dramatically over the last year, causing customers to shop and move. This has led to a 3 year decline in customer count.

What would you do?

Here’s what Jones did. They contacted the carrier to discuss rate activity. The company said there was no room to lower rates because of loss activity. The company did provide the agency with a list of upcoming renewals and the potential price increases. They also increased the deductible credits, because a lot of the agency’s customers were at a 250 home deductible.

Nothing happened….customers still left, and the agency was frustrated.

The next time I ran into this agency, I asked how things were going. He mentioned that his main company was killing him, because all their customers were leaving due to price increases. I asked a lot of questions, and discovered the information above.

My next questions was whether he was proactive in calling customers ahead of time.

He responded, “We don’t have time.”

I asked about sending out postcards since the phone was so time-consuming. He was afraid of the cost.

“What about email?”, I asked. “I don’t have a list”, he said.

I walked away from the conversation as frustrated as he was, but for very different reasons.

How would you have responded?

Here are my thoughts:

You can only control what you can control. The agent can’t control the company rates. The marketing rep can’t either. Even if their complaints take root, it would probably be 6 months before new rates would hit the street. So continuing the current path would continue to lead to customer run-off.

So what can he control. He can control how he helps his customer respond to the increases. He can’t control their reaction, but making an attempt to contact, sympathize  explain, etc. may not save every account but it is action in the right direction and would save more than doing nothing.

He can control his access to markets, and now may be a good time to look for more. He can’t control whether they appoint him, but he can stack the deck in his agency’s favor. Look professional, demonstrate activity in the agency, and feel modern with an online presence.

Story #2: The Smith Agency is larger than Jones but facing a similar problem. Like Jones, they have had markets contract on them in the last several years. One particular market left the agency, forcing them to roll to a current carrier. Thankfully they had a carrier willing to take on the business, but that is when things get interesting.

The carrier that took the book transfer setup a price match on incoming business. This made the transfer fairly seamless, unfortunately at the first renewal, a storm hit. Pricing jumped from the matched price to the “natural” rate which was dramatic.

Customers were jumping ship, and when they called, they were angry. The agency immediately called the carrier frustrated and disillusioned at what could look like a “bait and switch”. The company listened, but wasn’t able to make any pricing concessions.

The agency was short-staffed and did not have the manpower to requote every renewal, so they had to get creative.

What advice would you give?

They assigned one person to reach out to the customer and walk them through the renewal increase. They did everything to avoid shopping the renewal, no matter the increase. They looked at deductibles, discounts, replacement values, and potential cross-sells.

Yes, they lost customers, but more amazingly their policy count went up, because they found cross-sell opportunities. Premiums went up because the majority of the customers kept the rate. They just wanted an agency that cared.

The process changed the agency as a whole, and they implemented the same strategy throughout the PL department, and had similar results.

Knowing both these agencies, I learned valuable lessons: Action trumps inaction, don’t let fear ruin your retention efforts, and control what you can control.

What are your thoughts?

Getting A Handle On Customer Retention in Your Insurance Agency

Agency consultant John Fear talks about the three Rs of Insurance: Referrals, Rounding, and Retention.  These are like the three-legged stool, remove one leg and it collapses.

If you are a newsletter subscriber, you know that April’s focus is on retention, and Retention is crucial to success in the Insurance Industry.

Insurance Customers Leaving Your Agency

Before we move forward, we need to get a handle on agency retention.  Agents that perform well at this metric, track it on a regular basis looking for ways to improve their score.  I have worked with several agents that assign a person to retention improvement, and tie a portion of their compensation to retention improvement.

So, the first step to improvement is to figure out where you are.  If you are a direct writer, this is easy, because you represent one carrier, and your company can run the figures for you.  For Independent Agents, this can be a bit trickier.  Company reports will be deceptive, because your agencies numbers are always better than the individual companies.  The reason is that because you lost business with one carrier does not mean it left the agency, there is a good chance that it found a home somewhere else in-house, but you need to verify it.

Most management systems can handle this type of reporting, but don’t make it too complicated.

There are three ways you can track retention:  written premium retention, customer retention, or policy retention.  Tracking premium retention is dangerous because rate increases can mask customer run-off.  Customer retention is good, but I like policy retention, because it can alert you to problems quicker, and allow you to salvage customers in the danger zone who have moved a policy or two out of the agency.

Pick a benchmark date (month-end is easy) and determine how many policies (or customers) you have (subtracting any new policies you’ve written over the previous 12 months).  Find how many customers you had a the previous year’s month end, and compare the two.

Here’s an example:  At the end of March 2013, you have 1000 policies.  If you look at March 2012, you might find 1000 polices as well.  Retention looks good.  Don’t forget new business.  Between March 2012 – March 2013, you wrote 500 new policies.  You need to subtract that from your 2013 to get an accurate picture of how many policies you kept.  In this example, you really only had 500 policies at the end of March 2013.  You only have 50% retention.

This is an extreme example.  Very few agencies will have such a low retention, but even in this case, you can see how many policies you had to write to stay even.  Acquisition costs for new customers are really high, and retaining more would have allowed you to write less and stay even or possibly see growth.

Insurance Customers Exit This Way
Don’t Put This Sign On Your Door

Let’s talk about some simple retention strategies that you are able to implement into your agency.

1.  Agency Newsletter.

2.  Selected Pay Plans.  EFT / Recurring Credit Card / Paid-in-Full.

3.  Pre-Renewal Calls.

4.  Customer Reviews.

5.  Account Rounding & Cross-Selling.

6.  Social Media.

7.  Value Creation.

8.  Service Center.

Theron Mathis

Next Steps:  Over the next several weeks, we are going to dig into some of the above strategies, and detail out how agents are using them effectively.

Here’s what I need you to do, let me know what is working in your agency, and what strategies you would like to know more about.

Here’s how you can give us your feedback.

Comment below,  email us at, or message us on Twitter @productiveagenc.

Insurance Carriers Scrap Credit Scoring for New Rating Variables

In a move that will be seen as radical by many in the insurance industry, several companies are scrapping Insurance Scoring (Credit) for newer non-traditional rating variables.

The two most controversial variables being rolled out by carriers are:

1.  Vehicle Appearance.

2.  Buying Habits.

CarsIn the past, many agents would inspect vehicles for pre-existing damage before adding comprehensive or collision insurance in order to prevent fraud or improve their auto profitability.  This new “vehicle appearance” variable goes beyond mere damage inspections.  

Car color has been determined to greatly impact the risk profile of the customer.  Most consumers intuitively understand this, and will not be surprised that red and yellow vehicles attract greater theft and driving violations.  The decision to buy such certain colors tells a company a great deal about the profile of the customer.

Stripes and two-tone vehicles perform poorly as compared with mono-color vehicles.  Other features such as neon plate covers, added spoilers, and spinning hub-caps, also will create a negative risk score for the customer.

Interiors of cars are important to rating as well—leather vs. cloth has been found to greatly increase risk profile, and beaded car seats tend to relax drivers beyond the ability to react quickly in changing traffic circumstances.

Agents are worried because of the workload issues this will create, because initially they will have to inspect every car until companies discover databases matching car appearance with VINs.

dollarBuying Habits appears to bring even greater pricing accuracy than any previous variable.  Carriers have partnered with Amazon and Google to understand the buying purchases of their customers.  The fuzzy logic that Amazon uses to determine the likes and dislikes of customers also creates a risk profile that companies are beginning to use.  This will necessitate the use of correct customer email address within the family they can pull the Amazon data.  In order to gather data from Amazon, many companies are considering entering an arrangement to sell their own data, so Amazon can more accurately market to their customers. 

Buyer-discount cards, such as those distributed by grocery chains and gas stations, are also ripe for data mining that will allow companies to price their insurance products based on buying purchases.

Companies are extremely excited about the potential that these new variables will create more accurate risk profiles of customer leading to greater underwriting profits, and are considering such things as height and weight of driver along with political affiliation.

Bob Johnson, President of Risk Managers Insurance Co, proudly stated, “Vehicle Appearance and Buying Habit data will lead into deeper market segments and more accurate pricing.  While the initial logistics will be onerous to our agency force, we believe the long-term benefits will outweigh any extra workload.”

Welcome to the new era of Insurance Pricing,

Mark Eugene

P.S. April Fool’s Day!

3 Reasons for Your Insurance Agency to Do A Book Transfer


Have you ever done a book transfer inside your insurance agency?  If yes, then you will agree with the following:

Book Transfers are a pain in the butt and should be avoided at all cost !


Your company has become unstable.  What do I mean by unstable?  The company is unable to remain profitable and is pulling out of the market.  Warning signs for this are downgrades by the rating agencies.  Massive agency cancellations.  Tightening of claim payouts.  Dramatic increase in rates.  None of these alone are red flags, but multiple ones can be indicators that something is going on.  Like your car’s “check engine” light, it may be no big deal, but it couldn’t hurt to ask questions.

Check Engine

 You have been cancelled.  This is not the death knell it may seem.  I have seen many companies cancel good profitable agencies.  There could be something on their balance sheet that necessitates shedding premium in a market, and you just hit their metrics.  Perhaps you got unlucky with storms or shock losses.  Just because they are CATs doesn’t mean they don’t count, someone still had to spend real money to adjust the claim. Whatever the reason, you felt the axe blow, and have to do something.

 The AxeYou have too many companies.  Over the years, I have seen many agencies become company collectors, believing the more markets you possess the greater your success.  This may be true for commercial lines, but not in personal lines.  At most, 3 to 5 companies are the most you really need.  If you have more, look at where your premium stacks up and I guarantee that most of it is spread among 3 companies and never evenly distributed among 5 or more.  One of the dangers of too many companies is that you dilute your ability to make profit sharing.  If this is the case, then consolidating some of the smaller carriers can help earn more profit sharing. 

Wall of Awards

 So, have you found yourself in the scenarios above?  What did you do?  Comment below.

P.S.  Next post:  How to Survive A Book Transfer


Theron Mathis

Why I Hate Non-Standard Auto


If you are new agency, new producer, or have new agents in your office, then this post is for you.

I hate non-standard auto and so should you.

Non-standard auto is a dangerous siren calling out to agents with dreams of easy sales and fast money.

Her call is a half-truth, for as soon as you hook your boat to her rock and enter her lair, the sexy veneer wears off as you see the dangers you’ve entered.

As a new agent, you are hungry and need to produce, and the quickest way to find customers is to reach out to those desperate with the greatest need.  They are the customers with bad credit, no prior insurance, chronic cancel-ers, and dreadful driving records, but they are easy.

You can hang up a shingle advertising to the minimum limit customer, and they will find you, then eagerly tell their friends, but the goldmine you’ve found is a mirage.

Within months, you can write hundreds of policies and the cash flow seems miraculous, until the cancellations ensue, and this is but one reason I hate non-standard auto.

In case you are tempted, here a list of reasons to keep you from building your agency on this shifting sand:

1.  Cash.  Rarely do these customers have checking accounts, and they will load you down with cash.  Soon you will find that 30-50% of your time is spent taking payments preventing you from new sales.  You are making change, and multiple trips to the bank.  The amount of cash you have to keep on hand begins to create a fear of theft.

2.  Endorsements.  The non-standard customer, while seeming to have little risk with low limits and fewer cars than the household account, is endorsement heavy.  They change cars and drivers more than the preferred customer.  People are moving in and out of their house, and cars are breaking so new ones need added.

3.  Billing.  These customers are always on the verge of cancellation, and you may find yourself chasing payments.  If you don’t chase payments, then you will be answering call after call explaining billing nuances and payment amounts.  You may spend minutes on the phone explaining billing, and then never see the customer again.

4.  Referrals.  Like attracts like.  Birds of a feather flock together.  This is where this type of business can become really dangerous.  If you have an established preferred agency, then attracting these customers will begin turning you agency into a non-standard shop.  They will send their friends and slowly your preferred customers will leave as these high maintenance clients eat your time causing you to neglect your best customers.

5.  Profitability.  There is a theory that because the non-standard customer carries lower limits, the potential claim payouts are lower.  This may be true on individual risks, but the frequency of claims and potential for fraud becomes the bigger reality.  Over time, agencies focusing on non-standard auto slowly become unprofitable, and create greater risks to company contracts.

6. Value.  One day you will want to sell your agency or book of business, but there will be nothing to sell.  Non-standard auto creates no equity.  The value of a book of business is based on it’s long-term revenue potential.  Another agent will never pay 1-2 times revenue on a non-standard book, because retention is so low that the revenue will not exist in a year.  At most, you could garner 50% of your revenue.  That is a lot of blood, sweat, and tears without any value to sell at the end of your career.

Take this a warning.  Protect your book.  Protect your customers.  Protect your future.

Do you agree?  Share with your new insurance friends and comment below.



Checklists Are Not Only For E&O Protection

As insurance people, we think of checklists as way to review coverage with a customer, and avoid an E & O claim.  But they can be more useful than that.

Checklists download the success part of your brain.

insurance success checklist

Skilled pilots rely on checklists every time they take a plane into the air.  Even though an experienced pilot could go through steps where he checks instruments and readings and flight plans, the checklists protect him from mental slips.  It frees his mind to focus on the task of flight rather than using mental effort to remember each step of take-off.

Medical professionals use checklists to protect the lives of their patients when diagnosing or performing procedures.  The use of checklists have been so successful that hospitals who adopt their use see a dramatic decrease in medical accidents, thereby protecting the lives entrusted to their care.

It is work to think through complex tasks, but following a checklists removes mental strain and allows you to do what you do best: sale, market, manage, create a legacy.

I set aside every Monday to do administrative work, yet I found I got to lunch and often never got to the true tasks that needed done.  Out of frustration, I scribbled out a list of my most important admin tasks that had to get done each week.

Monday morning arrived, I pulled out the checklist, and begin working my way through it step by step.  Surprisingly lunch arrived and the bulk of my admin worked had been done, which gave me time to brainstorm around prospecting and marketing. Rather than being bogged down in the daily grind, I could begin to manage my future.

I took the same concept and applied to new customers.  How should I onboard people properly to create loyalty?  I wrote down the steps, and on my next new appointment, walked through the list without forgetting something important or racking my brain looking unsure in front of the client.

I am beginning to do the same for marketing, the sales process, and writing this article.

You can do the same.  There is so much we do that is repeatable, yet we frustrate ourselves by struggling to remember all the moving parts each time the task arrives.

Think through all your tasks that you do repeatedly.

Think through each small step you do, and write it out.

Next time, you encounter that task whether it be cold-calling, quoting, selling, crafting a presentation, etc; pull out the checklist, and see if you don’t find that you just put success on paper.

How have you used checklists in your insurance agency?


Why Insurance is a Noble Profession

Used Car Salesman
Is this how you see yourself?

Of all the professions in our world, insurance never ranks very high.  You often find it in the company of attorneys and used-car salesman in a list of despised or suspect professions.  Unfortunately, we often believe the surveys.

Deep inside at the neighborhood party, introducing ourselves as an insurance professional feels slightly uncomfortable.  As soon as the words leave your mouth, you feel the need to enter defense mode.  Granted, we will always get one-upped by the policeman, fireman, or athlete at career day in your child’s kindergarten class, but there’s no need for shame.

Insurance is a noble profession, and I will prove it for you. 

  • We protect people.  We offer advice and products that have immense value.  They protect people from financial ruin.  Our neighbors and society are able to take greater monetary risks, and thereby create value and comfort, because our safety net exists.
  • We uphold the modern economy.  In a world of fiscal cliffs and crazy governmental monetary policy, we forget the fundamentals that underlie our economy.  Consider the housing market.  Would a bank loan 100K, 200K, 500K to individuals to buy property if they were not convinced their loan was not protected against risk?  There would be no housing market without insurance.  The risk to lenders would be too high.  The same premise can be applied to loans for business, exploration, and research.  Insurance allows capital to flow much more freely than it would in a world without it.
  • We force people to consider risk and safety.  Many modern safety advances came out research from insurance companies.  Fire protection took leaps forward due to insurance.  Those ubiquitous “crash-test dummies” were created in the lab of an insurance organization. Crash Test Dummies
  • We create jobs for hundreds of thousands of people.  I am not talking about indirect job creation.  There are approximately 40,000 Independent Insurance Agencies in the US, and with direct writers like Allstate, State Farm, and Nationwide, there are easily over 100,000 insurance agencies in America.  Most of those offices employ at least 1 person and many employ upwards of 50+.  Conservatively, 1 Million Americans have jobs because someone in their community decided to get an insurance license and begin selling.
  • We create goodwill in our community.  The above points are reasons enough to support the nobility of this profession.  This bullet is nothing more than icing on the cake.  Rarely do I meet an insurance office who does not participate in local charity and community sponsorship.  I know many agents who have begun their own non-profits to support charities they create.  Insurance people are involved in their churches, civic organization, and local charities giving back in gratitude to people they protect.

Don’t let the perception of the slimy, polyester decked sales person get stuck on you.  Proudly wear the badge of insurance professional, and hammer these positive and noble images into every employee and neighbor you have.

P.S.  Add your thoughts to this list in the comments below, and share this post with your insurance friends.