The pandemic hit the North American insurance workforce hard, with 67% of insurers reporting furloughs and 68% reporting layoffs. More than half of these companies reduced insurance agent commission rates and other compensation while another third planned to do the same. There were similar effects on raises and bonuses, while most promotions were frozen.
Post-pandemic things are unlikely to change. Rapidly shifting distribution models and other financial pressures suggest that insurers and their finance departments must look to further rationalization to ensure operational and financial stability. In fact, according to a recent Deloitte survey of insurance executives, 39% of respondents believed they would need further rationalization of compensation and headcount.
But rationalization isn’t just about cuts. It’s also about designing creative solutions to drive revenue growth, increase operational efficiency, retain top producers and reduce risk. Many of these solutions are driven by innovative insurance commission rate structures focused on critical KPIs. However, insurance sales compensation is notoriously complex. Here is what you need to know.
Tie Insurance Sales Compensation to Business Goals and KPIs
The days when compensation was determined by annual or semi-annual reviews with managers and dictated by politics and the bottom line are over. New approaches to compensation link it directly to KPIs and the data tracked for each KPI by your finance department. Whether you are planning to scale, looking to retain customers or sales staff or hoping to increase revenue, your KPIs should reflect your intentions. And so too must the sales compensation plan that drives each of these metrics.
Insurance Commission Rates
Commissions are the lynchpin of compensation in the insurance industry and can come in various forms, all of which are tied directly to sales KPIs or metrics. Commission rates will often vary according to product and according to a salesperson’s experience and production. Products with higher profit margins, such as group life insurance, will usually garner higher commission rates as a company passes some of that higher profit to its salesforce. Companies often pay their highest producers 100% commission so production is another important KPI for insurance companies to track.
Upfront or first-year commissions are attached to the initial sale and are generally designed to promote growth and revenue. Trailing or residual commissions are also often linked to policies and these payout for several years as customers renew their policies. These commissions provide salespeople with an incentive to perform periodic reviews of policies and at the same time help ensure insurance companies meet their customer retention goals.
When a policy ages or a salesperson retires or leaves a company, agents may also be assigned a service fee to ensure loyal customers a certain level of service on their policies. While these are not really commissions, they do provide servicing agents with a specific percentage—often just 1 or 2%—of the renewal fee. This servicing can include periodic reviews as well as assistance with claims or the reporting process.
Insurance companies will also include a chargeback or clawback clause in their compensation packages to protect revenue goals. Essentially, this means that if a salesperson earns commission in advance on the sale of a subscription, they must pay a portion of the commission back if a customer cancels the subscription before the end of a specified term.
Chargebacks can be tricky. While they protect the company and its customers from overly aggressive salespeople, they can also provide some unwelcome surprises for good salespeople and that in turn can adversely affect morale. There are also legal considerations regarding clawbacks, particularly in states such as California, so carefully check the rules for your state or province.
Insurance Commission Structures
There are also several forms of commission structures. Each is best suited to a specific product type and designed to help the company focus on a unique set of KPIs.
Heaped commission structures are most commonly used for individual life insurance. In this structure, paid commissions are highest on the sale of a new policy and considerably lower for renewals. This structure helps companies with KPIs or outcomes targeting growth in sales volume or new customers.
A level commission structure provides the same commission rates for both new clients and renewals. This structure addresses KPIs that focus on customer retention efforts. Group life insurance, such as that sold to employee groups or unions, where customer retention translates into significant profits, will often employ level commissions.
In the third type of commission structure, known as levelized, insurance companies pay higher commissions for new clients than renewals. However, the difference between the two is not as significant as with a heaped structure. These keep some focus on retention efforts while still incentivizing new sales.
Other Forms of Sales Compensation for Insurance
While commission is perhaps the most significant form of compensation for insurance salespeople, there are several other forms of compensation to consider. Bonuses can be attached to specific metrics, such as sales targets, long-term employment or even maintaining certain commission levels. These can also come in the form of contingent commissions tied to specific metrics or supplemental commissions tied to things such as profitability, premium retention or premium growth. Bonuses serve as both a retention effort and to incentivize sales efforts.
Salespeople are also likely to receive company benefits, including profit-sharing incentives and access to support staff and equipment. Finally, compensation packages for insurance employees will often include an expense allowance for equipment purchase or even office space.
Challenges of Distribution and the Need To Innovate
The COVID-19 pandemic has accelerated long-brewing changes in the insurance industry, particularly a move to remote or virtual distribution. This, too, is driving a new look at compensation structures as salespeople struggle with lead generation and other issues critical to their revenue.
Many companies are, for example, investing in a team approach by allowing for split commissions and customer information data and tools sharing. This will enable agents to team up with others who may have different product experience and help each extend their customer reach. Others are expanding distribution partnerships by linking with marketing organizations and developing affinity relationships, which help agents, particularly virtual agents, positively impact scale and revenue.
Investing in enablers is also critical to compensation structures. These can include digital tools for the agents and customer tools, both of which can increase upselling and cross-selling opportunities for agents. And, more importantly, enablers can help with critical lead generation. According to a McKinsey study, 60% of agents were willing to pay between 0.5 and 2.0% of their annual income for enablers leading to quality leads.
Data is also crucial to designing the best compensation plan for your workforce. It does little good locked away in a legacy system or a filing cabinet. Quick access to data means insurers can respond quickly to changing customer demands, identify potential churn and candidates for cross-selling or upselling and develop opportunities for agents.
Tying all of this data to KPIs allows insurers to develop the best compensation plan to help them maintain a strong salesforce and meet company goals for growth. Streamline the process with Vena’s Insurance solutions.