How to Quantity Your Internal Cost of Renewals
Understanding and quantifying the internal costs associated with policy renewals is crucial for insurance agencies aiming to enhance operational efficiency and profitability. While renewals are a vital component of an agency's revenue stream, they also incur expenses that, if not properly managed, can erode profit margins. This article provides a detailed framework for assessing these costs, supported by verifiable data and industry insights.
1. Identifying Direct Labor Costs
The primary expense in the renewal process is the labor cost of the staff involved. To calculate this:
- Determine Staff Involved: Identify all personnel engaged in the renewal process, such as account managers, underwriters, and administrative staff.
- Calculate Hourly Rates: Ascertain the hourly wage of each staff member. For instance, property and casualty insurance agents earn an average salary of approximately $89,000 per year, equating to about $43 per hour .
- Estimate Time Spent: Evaluate the average time each staff member dedicates to a single renewal.
- Compute Total Labor Cost: Multiply the hourly rate by the time spent per renewal for each staff member, then sum these amounts to obtain the total direct labor cost per renewal.
2. Assessing Overhead Expenses
Beyond direct labor, renewals contribute to overhead costs, including utilities, office supplies, technology infrastructure, and compliance-related expenses. Allocate a portion of these costs to the renewal process based on the percentage of overall agency activities they represent.
3. Evaluating Technology and Licensing Fees
Agencies often utilize management systems and rating software in the renewal process, incurring licensing and maintenance fees. Additionally, certain jurisdictions impose licensing fees for agents. For example:
- Illinois: Resident producer license renewal fee is $215 every two years.
- Wisconsin: The Resident biennial renewal fee for an individual intermediary license is $35.
Allocate these costs and others proportionally to the renewal process based on usage.
4. Considering Marketing and Client Retention Efforts
Investments in client retention, such as personalized communications, loyalty programs, and promotional materials, contribute to renewal costs. While these initiatives aim to enhance retention rates, they represent additional expenses that should be factored into the overall cost analysis.
5. Calculating Opportunity Costs
Time and resources allocated to renewals may detract from pursuing new business opportunities. Assess the potential revenue lost by focusing on renewals instead of client acquisition and incorporate this into the cost evaluation.
6. Analyzing Commission Structures
Understanding commission rates is essential, as they impact the profitability of renewals. For auto and home insurance renewals, agents typically earn commissions ranging from 2% to 15% of the policy premium, with most falling between 2% and 5%. Compare these earnings against the costs incurred to process renewals to assess net profitability.
7. Implementing Process Improvements
After quantifying renewal costs, identify areas for improvement:
- Automation: Implementing automation technologies can streamline routine tasks, reducing labor costs and minimizing errors.
- Training: Investing in staff training enhances efficiency and effectiveness in handling renewals.
- Policy Reviews: Regularly reviewing and updating internal policies can eliminate redundant steps and optimize workflows.
Conclusion
Quantifying the internal costs of policy renewals enables insurance agencies to make informed decisions aimed at enhancing efficiency and profitability. By systematically evaluating direct labor, overhead, technology expenses, marketing efforts, opportunity costs, and commission structures, agencies can identify cost-saving opportunities and implement strategic improvements. This comprehensive approach not only streamlines operations but also strengthens the agency's competitive position in the market.