Hit Ratios Drive Costs (2024)

by Chris Burand

Hit ratios are an integral cost driver in insurance agencies. To illustrate, consider how an insurance agency is similar to a factory with many quality problems. Let's say a widget factory has a production success rate of 20%. To make and sell two widgets, then, the factory must make 10 of them because eight don't work. The factory employs extra people, uses extra materials, buys additional equipment, and uses extra real estate to make the eight widgets that don't work. If it costs $1,500 to build one widget, then it costs $15,000 to build the two widgets that will actually sell.

In an insurance agency, hit ratios on new business average 20% to 30%. Assuming that an agency is quoting a material number of new accounts (which many agencies aren't doing), the agency will spend a lot of money on accounts it will never write. For example, studies of more than 100 agencies show that the average time required to quote a new commercial middle-market account generating a commission of $1,000 to $2,000 is eight hours for CSRs and 10 hours for producers. If an agency quotes 50 such accounts per year (one per week), 400 CSR hours are spent in quoting them. At a 25% hit ratio, the agency will write 12 accounts-and spend 300 CSR hours, or 37 CSR workdays, generating zero revenue. This comes to 15% of all working days. If an agency has six CSRs, one of them is, in effect, spending all his or her time doing futile work.

Just as the widget factory needs extra space, materials, tools, and people to manufacture defective widgets, the agency expends extra resources on all these misses. For example, a CSR who spends the whole time quoting business never written requires a salary of $20,000 to $35,000, benefits of 10% to 15% of wages, a work station, a computer, office supplies, and furniture. These extra resources increase insurance costs and eat up management time, which in turn decreases the owners' time for selling.

By improving their hit ratios, most agencies can lower costs and management hassles and even forego hiring new CSRs and producers. This is an important advantage, given the shortage of good CSRs and producers throughout the country.

Low hit ratios are an incredible drain on an agency's resources. The benefits of increasing hit ratios directly affect the bottom line, and agencies have many opportunities to make improvements. Here are some recommendations:

• Prequalify accounts!
• Don't pay producers for sales-pay them for profits. Include a bonus or penalty for good or bad hit ratios.
• Train your people. Many agencies don't offer anything other than on-the-job training. Good training for a good producer will make a difference.
• Focus your producers' efforts-on the customers and types of business-where they're most likely to succeed. Discourage them from soliciting other types of accounts.

Don't be a widget factory with poor quality. Increasing your hit ratios is well worth the effort: It will decrease costs and increase productivity, and lessen headaches related to hiring and managing people. Best of all, it will increase your profits!