Insurers to Curb Agency Compensation in 2010, Ward Group Study Finds

Total property/casualty insurance agency compensation is expected to decrease slightly in 2010, largely due to contingent commission changes.

Four out of 10 insurance companies plan to modify their agent compensation plans in 2010 by hiking premium volume requirements, increasing stop loss thresholds, adding growth requirements or eliminating contingent commission plans altogether, reports the insurance consulting firm Ward Group in its findings from a study of agency compensation and management practices for property/casualty insurance companies.

The study focused on commission practices, agent incentives and other agency management practices and includes aggregated results from 2008 and 2009 for 99 companies. Independent agency companies represented 80 percent of the participants. Key findings include:

• 40 percent of companies plan to modify their contingent plan in 2010;
• 10 percent of companies plan to increase premium volume requirements compared to 4 percent that plan to decrease the volume requirement;
• 6 percent of companies plan to increase the stop loss thresholds compared to only 1 percent that plan to decrease the amount;
• 12 percent of companies plan to change their contingent formulas to pay less contingent commission compared to 4 percent that expect to pay more;
• 6 percent of companies plan to add growth requirements to their contingent formulas and 5 percent plan to add retention requirements; and
• 3 percent of companies are considering eliminating their contingent commission plans completely.

Jeff Rieder, president of Ward Group, said that the insurers considered top performing companies in the study have found that practices other than high compensation lead to better business from their agents.

“A common misperception is that companies must pay higher commissions to generate more premium,” said Rieder. “Top performers focus on ease of doing business and assertive agency management practices to drive new business results. These companies target compensation to be fair, but not excessive.”

Ward Group found that the top performing insurance companies — based on Ward’s 50 criteria — achieved 34 percent more premium than average per agent. Key agency management business practices adopted by this group suggest that they:

• Are more likely to modify base commission by line of business;
• Are more likely to modify base commission by new and renewal business;
• Are less likely to have separate plans for personal and commercial lines;
• Have 20 percent fewer agents per manager than average; and
• Require their top tier agents to demonstrate exceptional characteristics and proven commitment to the company. This benchmark had 50 percent fewer agents in their top tier and had implemented more challenging criteria for their top agency selection (in terms of higher production and lower loss ratios requirements).

In addition to predicting that agency compensation will drop in 2010, Rieder said he expects agency trips and conferences to be smaller and less costly than in 2009 and prior years.

He also said that agency recruitment appears to be more aggressive as companies appoint more new agents to expand their sales forces. However, he believes most companies have not made effective changes to their contingent plans over the last three to five years to align with current market conditions.