A high retention rate is good, and a low retention rate is bad, right? Not exactly, according to Insurance Technologies Corporation’s CEO, Laird Rixford. Many insurance agencies live or die based on their retention rates. While some agencies expect lower retention rates as a result of their clientele and will adjust business processes and plans accordingly, others may be fooled into thinking a high retention rate is good news for their agency.
“An agent once proudly told me his retention rate was roughly 85%, which is a decent number. But, this retention rate is misleading the agent into thinking all is well with his agency,” shares Rixford.
“When I asked a few more questions looking at a three-year sample of the agency, the following picture unfolded: In the first year of our analysis, the agency added 1,250 new customers and had an overall retention rate of 85% for the year. Therefore, they lost 773 customers. In the second year, the agency acquired 2,000 more customers, and with the same retention rate, they lost 956 customers in that year. The third year saw limited growth, and the agency gained only 1,000 new customers. While the agency’s retention rate stayed the same at 85%, they lost 936 customers, almost a net loss for the year. While the agency’s retention rate stayed the same at 85%, they lost almost as many customers as they gained. They were at a statistical breakeven.”
To have had reported growth, the agency would have needed to gain more customers or improve its retention rate. And because the blanket retention rate did not indicate which policies were cancelled, it didn’t provide a clear picture as to why these particular policies were cancelled. Instead of using a blanket retention rate, Rixford recommends using two simple metrics instead: “Time as customer,” the average time a customer stays with an agency, and “retention rate by acquisition period.”
The first calculation is quite simple: Calculate how long customers were or have been customers by comparing purchase date to cancel date (if they have yet to cancel, assume today’s date), and determine the average across all customers. To determine retention rate by acquisition period, you calculate your customer retention by the year you acquired them, which provides insight on how customers are handled based on when they purchased, and the duration they have been a customer.
“Time as customer will give you an indicator of how your agency is retaining customers over the long-term. Your average time as customer should always be increasing. If it becomes static or decreases, this is an indicator that something is wrong,” he says. “[Retention rate by acquisition period] should show you your agency’s average length of customer, overall retention rate, and breakdown of retention rate by year, month and customer.
“By taking a few moments to analyze your data, you can determine what direction your marketing will need to take … When you stop relying strictly on a blanket retention rate, you can better understand your agency’s health and performance.”