When MarshBerry consults with brokerages around improving organic growth, the term leakage often comes up. Leakage is the difference between the new business your firm has written in the past 12 months and your organic growth, or the difference between a firm’s organic growth rate and new business rate, think retention. In most cases, high retention means lower leakage. For example, assume the following:
- Your firm has commissions and fees of $10M to start the year.
- Your producers write $2,000,000 of new business.
- Your firm ends the year at $11M of commissions and fees.
This means you have organic growth of $1,000,000, or 10%, and your leakage was also $1,000,000 ($2,000,000 new business written minus $1,000,000 leakage = $1,000,000 organic growth).
Leakage can consist of several factors, but the primary influencers are the growth or decline of both rate and exposure base, lost accounts and lack of organic growth. The challenge with leakage is that you typically have little influence over it. Losing accounts will happen regardless of how good a team or process you have. Agency and brokerage owners often note, “I can’t achieve high organic growth AND have a low leakage number. Something has to give between increasing my sales velocity and servicing accounts.” That’s not entirely true. It is possible to achieve close to 20% organic growth and reduce leakage. MarshBerry sees firms do it all the time. According to MarshBerry’s proprietary financial database, Perspectives for High Performance (PHP), data from Q1 2022, the top performing firms are growing at an 18.8% clip, while leakage is just .76%.
Granted, overall economic conditions that include inflation and rising interest rates are contributing to exposure growth and increases in insurance rates. U.S. inflation rose 8.6% in May from a year ago and represented the highest increase since December 1981. Ongoing price increases and high asset values are leading to exposure growth. Insurance rates would likely remain firm in an inflationary environment as carriers anticipate the increase of future claims costs. Certain insurance lines, such as Cyber, Umbrella and Wind-exposed property are seeing particularly strong rate increases. 1Q2022 premiums for commercial cyber increased 27.5%, while umbrella rose 10.5%, according to The Council of Insurance Agents & Brokers’ (CIAB) Commercial Property/Casualty’s 1Q2022 market report.
Since 2018, commercial insurance rates have been increasing across most market segments and regions. A continued low interest rate environment and larger than expected insurance losses, contributed to this hardening market. However, interest rates are rising. On June 15 the Federal Reserve raised its benchmark federal funds rate ¾ points to a target range of 1.5-1.75% in an effort to combat rising inflation, the first time the Fed upped the target range by ¾ of a percent since 1994. But economic uncertainty, evidenced by several investment banks warning recently about an impending recession, is another factor that could drive the hard market.
Whether the exposure base growth and insurance rate increases continue, there are a number of ways to combat leakage. The easiest method is to simply write more new business, which seems like a basic solution, but as most of you know reading this article, is not easily done. Getting in front of “bad renewals” by educating your clients about what’s to come and what’s happening in the market will help them be prepared for a potential premium increase. Implement a process where your team remarkets accounts if the increase reaches a certain threshold to ensure you can tell clients, with confidence, that the deal you’re presenting in the best deal for them. Don’t get hypnotized by increased rate as growth, that’s a trap.
When prospecting, have producers talk about the marketplace. Ask prospects how their current relationship is helping them prepare for a potential increase. Arm your producers with data that your competitors aren’t talking about. Become an expert in their industry so they know the impact that the state of the market could potentially have on your prospect’s business. Try to engage with carriers more often so you have up to date information, and to gain insight on when the market may soften.
There isn’t just one way to approach the process of reducing leakage. If you’re a member of MarshBerry Connect (executive peer exchange network), this is a great discussion topic for your Strategic Issues Group. If you haven’t joined Connect yet, reach out to me, or your MarshBerry contact to have a deeper discussion about the state of the insurance industry and how peer exchange can help you achieve your growth goals.
If you have questions about Today’s ViewPoint, or would like to learn more about how you can create strategies for growth acceleration, email or call Eric Kuhen, Senior Strategy Consultant, at 440.637.8118.