Calculating Retention in Insurance Agencies

Originally posted on Medium

One of the most discussed topics at any insurance get-together is the calculation of retention. Everyone has a different perspective of what retention is or should be. Here’s how I define and calculate it.

Definition of Retention

Retention: What revenue did our agency have before that it will not have now or in the future. To understand this, you need to grasp a bit about insurance agency operations.

Insurance agencies make the majority of their money off of a percentage of the overall premium (what the client pays) of each insurance policy. That percentage is called the policy revenue.

For example, an insurance agency that sells a policy with a $10,000 premium might get $1,000 in revenue. Typically, a percentage of that revenue is given to a salesperson (known as a Producer) the first year, with a decreased percentage in subsequent years. The amount of recurring revenue that a producer is responsible for renewing is called their book of business. Adding all the producers’ books of business together makes the agency book of business.

Why Retention Matters

Retention is crucial for understanding growth potential. If an agency wants to grow the book of business by 10% and doesn’t know its retention, achieving that goal becomes guesswork. For example:

• If retention is 100% and the book is $1 million, the agency needs $100,000 in new sales to grow 10%.
• If retention is 85%, they need $250,000 in new sales to achieve the same growth.

Methodology for Calculating Retention

I’ve refined my approach to calculating retention over the years, and here’s the methodology I find most effective:

1. Use Active Book of Business

Most agencies use cancel codes to determine if a client has been lost. While effective, it requires extensive accountability and data accuracy. Instead, I focus on the active book of business, which tracks policies marked as active when entered or renewed.

To implement this:

• Take a full copy of the active book daily, with a timestamp.
• use effdate and expiration/cancelation date

2. Analyze Four Key Metrics

• Lost Clients: Clients in the before dataset but not in the after dataset.
• New Clients: Clients in the after dataset but not in the before dataset.
• Revenue Changes: Compare revenue differences for clients in both datasets.
• Movement: Identify clients moved between producers, departments, or account managers to avoid misclassifying them as lost or new.

Bounce these results against the entire active book for accuracy.

3. Generate Retention Reports

With these metrics, you can create a detailed retention report, sliced by producer, account manager, department, carrier, or any other data element.

Limitations

This method identifies what revenue is no longer present but doesn’t assign blame. For deeper insights, producers fill out reasons for lost clients through the producer dashboard. However, this approach works well for understanding retention from a high-level perspective without heavy reliance on manual data entry.

Conclusion

Retention is vital for growth planning in insurance agencies. By leveraging accurate data and robust methodologies, agencies can better understand their revenue dynamics and strategize effectively for the future.

Thanks for reading!