The vast majority of insurance agencies will live or die based on their retention rate.But, relying too much on the blanket retention rate can be misleading. ITC CEO Laird Rixford explains how insurance agents can avoid being fooled by your agency’s retention rate.
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One of the things I see all the time when it comes to agency management is reliance on the blanket retention rate. In other words, a high retention rate is good while a low retention rate is bad.
Some agencies understand they’ll have a naturally low retention rate due to their clientele, and modify their business plans and pricing accordingly. However, the vast majority of agencies will live or die based on their rates.
Here’s how you can avoid being fooled by your agency’s retention rate.
An agent once proudly told me his retention rate was roughly 85 percent, which is a decent number. But, this retention rate is misleading the agent into thinking all is well with his agency.
When I asked a few more questions looking at a three-year sample of the agency, the following picture unfolded.
In the first year of our analysis, the agency added one thousand two hundred and fifty new customers and had an overall retention rate of 85 percent for the year. Therefore, they lost seven hundred seventy-three customers.
In the second year, the agency acquired two thousand more customers, and with the same retention rate, they lost nine hundred fifty-six customers in that year.
The third year saw limited growth, and the agency gained only one thousand new customers. While the agency's retention rate stayed the same at 85 percent, they lost nine hundred and thirty-six customers, almost a net loss for the year.
While the agency's retention rate stayed the same at 85 percent, they lost almost as many customers as they gained. They were at a statistical breakeven.
For the agency to grow, they needed to get more customers or improve their retention rate.
To complicate their situation, a blanket retention rate does not tell the story of which policies cancelled. Was it the policies sold in the first year or the third year? First year policies might indicate a failure with new customer follow-up initiatives. Third year policies might indicate poor long-term customer retention.
I recommend you use the following metrics instead of a blanket retention rate.
First, “Time as Customer.” This one is simple. What is the average time that a customer stays with your agency? Using Excel, input a list of your customers, their purchase date, and their cancellation date. If they have yet to cancel, assume today's date. Then calculate how long they were or have been a customer. Then determine the average across all of your customers.
Time as customer will give you an indicator of how your agency is retaining customers over the long term. Your average time as customer should always be increasing. If it becomes static or decreases, this is an indicator that something is wrong.
Next, “Retention Rate by Acquisition Period.” This will require a bit more work. You will need to calculate your customer retention by the year you acquired them. This allows you to determine how you handle customers based on when they purchased and the duration they have been with you.
This should show you your agency's average length of customer, overall retention rate, and breakdown of retention rate by year, month, and customer.
By taking a few moments to analyze your data, you can determine what direction your marketing will need to take. Should you create an email marketing campaign to your long-term customers? What about improving your follow-up marketing to prospective customers?
When you stop relying strictly on a blanket retention rate, you can better understand your agency’s health and performance.