The insurance landscape is changing and how agents build their businesses and their books is changing some too. Efficiency is critical to everything we do and the biggest businesses on the plant are built on efficiency. Amazon isn’t one of the world’s largest corporations because they’ll sell you a frying pan. A lot of people can do that. No, Amazon is Amazon because they’ll sell you a frying pan at 2:00 in the morning with 6 different color options- without talking to a person- then ship it to you for free and have it show up at your doorstep 2 days later. Oh, and in the meantime, you can catch up on cooking shows on Prime Video to prepare for the arrival of this new frying pan. Now that’s efficient…
Bringing efficiency like this to the insurance brokerage world may not be as straightforward or obvious today, but what Amazon does wasn’t obvious until Amazon did it. Small Business can- and should- be the foundation of your agency. The big accounts are great, and I am not advocating that you stop pursuing those, but what I am saying is that small business deserves more attention than it gets today. And let’s be honest, it’s not getting much attention right now. Most agencies have a couple of strategies for handling Small Business: Give it to the youngest producer to “learn” on; Push it to a group of CSRs who just quote renewals and print certs all day, or outsource it completely to an offshore company. We, as an industry, can do better- and the small businesses in our communities deserve better.
Streamline Your Small Business Policies Today
Small Business is Scalable
How does efficiency define how you operate? If you’re like me and most agents I know, you’ve been told for years that larger accounts make sense because, for approximately the same amount of work, you can get more revenue from a larger account than you will from a smaller one. It’s a fair point, and it’s a widely accepted “truth” across the industry. As agents, we’ve all had that big account that made an entire quarter, or even an entire year. But how efficient is that really and how scalable? Insurance can learn a few things from Silicon Valley. Silicon Valley could learn a lot too, but that’s another blog post…
What Agents Can Learn from Silicon Valley Start-Ups
Have you ever wondered how a Silicon Valley start-up that is not profitable, and has been around for months can gain a valuation of hundreds of millions of dollars, and carry with it a multiplier of 10, 20, or even 30 times annual revenue, when a profitable insurance agency that has operated successfully for generations can get somewhere around 1.5 to 3 times? The answer is scalability and efficiency.
Scale Means Value
The most valuable start-ups can demonstrate near-infinite scalability, whereas a traditional insurance agency model carries almost none. If you have an agency that does $1.5M a year in revenue, that’s great, and maybe you do it with 3 producers (for easy math), so every producer is responsible for $500k in revenue. Awesome! You’ve built yourself a hell of a business.
Technology is the Key to Scaling
But what if you want to grow that business to $3M? Or $5M? You can probably lean on the producers a bit, but they can only pick up so many new accounts. It’s a simple matter of resources. So instead, you have to hire or acquire more producers. Hopefully, you can keep your margins the same, but if you hire brand new producers, your margins will suffer while they get up to speed.
Where Silicon Valley has the agency beat, if that start-up uses technology to drive down the acquisition cost, and utilizes the tech to make service more scalable, then you deal with a sunk cost, instead of a marginal one. Yeah, it may cost $1M to build out software, but once it’s done, the incremental cost of more users is insignificant. The marginal cost of more producers, on the other hand, can be prohibitive to growth.
Use Technology to Create Recurring Revenue
Small Business can be the counter for Insurance. If done right, small business can lead to exponential growth, where the answer isn’t more people. Small Business books of business can be built in a way, utilizing technology, where you can create real and significant recurring revenue without the incremental cost of producers’ commissions. With the right tools, the right processes, and the right marketing you can fine-tune your Small Business book so that it becomes a highly tuned machine. One where you can count on predictable growth based on the inputs. Spend another $1,000 in digital ads, get another $2,500 in recurring revenue, multiple that growth month over month and year over year, and that is how you end up with the “hockey stick growth” Silicon Valley is always talking about, and that’s how you can drive real value into your business.
Small Business is Resilient
The economy is cyclical. There is nothing we can do about that in the best of times, but every now and then something like 2020 shows up. A global pandemic, civil unrest, market uncertainty, and throw in an election year. It’s like a total economic eclipse, it doesn’t happen often, but when it does, it’s something to see. How do events like this affect your book of business? How are your clients affected?
When things are good, the mid-market accounts will grow like crazy. Bigger customers will get bigger when things are good, but they are also more susceptible to a downturn. When you look at pure premium, let’s say we have an account paying $50,000 a year, and a small account paying $500 a year. If both of those companies take a 50% hit to payroll or to revenue, the bigger account is now paying $25,000, and the smaller account should be paying $250. BUT, it doesn’t work quite that way.
Small Business Keeps Moving
The smaller account will likely still pay $500 because it’s most likely at the minimum premium threshold anyway. So during a downturn, a small business book will be more resilient than a mid-market book. Also, what if things get really bad and businesses start going out of business? Well, if your big $50k account goes away, that’s going to hurt. If a handful of Small Business accounts close their doors, you’ll likely be able to recover.
Whenever a Small Business closes, generally a new one opens in its place. People are entrepreneurial by nature, and they’ll bounce back. One Small Business goes under and the employees who worked there may open 2 in its place. If a big contractor goes away, there may be a dozen employees that start their own small thing- which goes back to my original point- Small Business is everywhere, and its sticks.
The Perks of Small Business Policies
From a business model too, Small Business can be a game-changer. You know those big accounts that you’ve been told are the ones you want? Well, guess what, every other producer has been told the same thing. Those accounts are being called on constantly by other agents. You may have a great relationship, but at some point, somebody will probably get in there. After all, you took that account from someone too, right? Small Business keeps moving along and moving forward. Small business has fewer claims, Small Business has less competition, Small Business is looking for less service than a big account, and it’ll just renew. If you can find ways to decrease the acquisition cost, Small Business will set you free.
Small Business, Big Impact
This country is built by Small Businesses. According to SalesForce, over 90% of the business population represents small and medium-sized businesses. In fact, small businesses generate 1.5 million jobs annually and account for 64% of new jobs created in the United States (Fundera, 2019). The impact Small Business has on local economies cannot be understated either. They volunteer, they give back, they sponsor softball teams. All these little things add up to big impacts on the communities that we all live in.
Relationships Drive the Industry
As agents, we support our communities. Throughout my career and even today, I work with agents all over the country. I’ve seen that insurance agencies are among the most generous in terms of charitable giving, and volunteering, of any business. Insurance agents understand that relationships are what drive this industry forward, and in turn, supports growth in our local community.
Insurance is the Safety Net for Small Business
Commercial insurance mitigates risks and ensures that while an entrepreneur can put other things on the line to pursue their goals and dreams, insurance can make sure they’re backed financially if the worst were to happen. It makes sure that employees make it home to their families at the end of the day, and if something happens, they have the resources to recover and get back to work. Insurance is the invisible safety net that business- and society, need to keep moving forward.
Small is the New Big
When you look at building your book, for today and in the future, don’t overlook Small Business. With the right tools, Small Business can be the foundation of your book, and help ensure you can weather the cyclical tides of the economy and even find structure and consistency in economic eclipses like this.