| When striving to make an agency grow, most agency managers focus on increasing new business. But it's just as important to address improved retention. Growth in net commission income results from two things: New business written and retained business.
DEFINING RETENTION RATES
How do you define retention rates? It's easy. Follow this formula: 1) Decide what to define - for instance, Personal Lines in force (Home, Auto, or both). 2) Choose a time frame - monthly, quarterly, or annually. 3) Count the opening number of policies in force (PIF) at the beginning of the specified time frame, and the number in force at the end of the specified period of time. 4) Divide the remaining balance into the opening balance. That is your retention rate.
To determine how well the agency is doing, ascertain the retention ratio and add new business. This reveals the net increase or decrease in growth.
New business is a function of a prospecting program, which includes these strategies for growth:
- Regular customer contact via newsletters with response mechanisms tied to your Web site
- Target or niche marketing programs
- Disciplined cross-sell programs
- Policy growth and add-on coverages
- Direct response and telemarketing
'DEFECTION' RATIOS
Many agencies consider retention to be a matter of loyalty, but it is far too important to view it from this standpoint alone. Retention rates indicate the quality of customer service your agency provides, pricing fairness, loyalty, and the basis upon which the business was originally sold (price, product, or service). The average Personal Lines agency has a retention rate of about 88%. This means that 12% of customers leave each year.
At this rate, if 100 new customers buy insurance from an agency at the end of year one, only 88% (88 customers) will renew their policies!. It's clear that retention of existing accounts is far more valuable to an agency than an increase in new business.
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