Writing Small Accounts Profitably

Someone once said: “Every agency should write small accounts because one or two will eventually turn into big accounts.”

If I had a dime for every time I’ve heard this, I could make a healthy contribution to the federal deficit. This is the most common reaction to my suggestion that writing small accounts should be restricted. I am not suggesting agencies should not write any small accounts. I just believe small accounts should be written within a strict protocol. The difficulty here is that there are no known characteristics that determine which accounts will grow and which ones will not.

I have surveyed hundreds of agency owners, producers and CSRs about the time that is required to write and service an account. The problem many have pointed out is that while small commercial accounts should be quicker to write and service, the client is less knowledgeable and requires more attention.

Optimistically, let’s assume that a $250 commission commercial account requires at least one hour of the agency’s time annually. Based on the Growth & Performance Standards published by The National Alliance Research Academy, the average agency with more than $3 million in revenue spends $2,196 per hour (based on a 1,928 hour work year). In Silicon Valley terms, this is a burn rate of $2,196 per hour meaning commissions had better be at least $2,197 per hour.

At this rate, the one big account that eventually blooms will have to generate $219,600 for every 100 $250 accounts just to break even. I’ve known a few agency owners that have had one or two small accounts grow really big. An extreme few have had three. I don’t believe I’ve ever met a person that had four or more truly grow into really large accounts.

My experience and research show that most agencies of any size write at least 1,000 small accounts. Over a 10-year span then, at 90 percent retention, an agency will lose and replace 100 accounts annually at 0 percent growth. In 10 years, it will go through 1,000 small accounts all in the maybe realistic expectation of discovering one gusher.

And even if an account does get big, does it get big before you go broke? Is it worth losing a ton of money on all those other accounts while letting just one or two accounts subsidize all others? Even if one of those accounts does get big, how long will you keep it before it is going to get targeted by some hard playing agencies and brokers?

A lot of people don’t like to believe their accounts lose money, so they change the definition of expenses. You’ve seen large corporations play such accounting tricks and the government does this all the time. If you don’t like the result, just change the formula!

Usually this involves excluding overhead costs, excluding CSR costs and concluding the only cost is the producer’s compensation. Besides the fact this concept is disingenuous, the math still does not work because some account has to generate enough money to pay for overhead. If it is not account ABC, then is it account XYZ? If it is not the first 1,000 accounts, is it the second 1,000 accounts?

Additionally, the costs are greater because with very few exceptions, a commercial account cannot be written correctly at less than $500 commission. While the coverages a customer purchases can easily be less than $500, if the account is written with all the coverages a client truly needs, including writing the entire account to minimize the odds of gaps in coverage, rarely will the commission be less than $500. To write accounts that generate less means the agency is creating E&O exposures which further increase its costs.

After surveying hundreds of producers and staff, I have not found anyone that can show any more effort is required to write a $500 commission account rather than a smaller commercial account. The hit ratios seem to be the same. The retention seems to be the same. The time and expense seem to be the same. So for every account written that is less than $500, the agency is giving up pure profit.

Is it really a good business plan to write as many small accounts as possible, throw them all against the wall and see if one big account eventually develops and then sticks? A much smarter strategy is to write small accounts more intelligently. The most important aspect of such a strategy is strict discipline. Small accounts can be written quite profitably if everyone follows strict rules so these accounts do not cost more than the revenue generated.

This means the agency must have extremely standardized and efficient procedures. It means producers can’t do partial apps or provide partial information because that causes people in the agency to touch accounts extra, thereby eroding profits. It means not paying producers on these small accounts. It does not mean prohibiting them from writing such accounts. If they really believe in a small account, tell them you’ll pay them all back years’ commissions if the account ever develops into a significant account. That way they have skin in the game.