First a little background about the insurance agent’s business model and commission structure. It is designed to provide commissions, incentives and bonuses if certain retention objectives are met. In addition to the obvious increase in direct compensation, additional bonus dollars are "triggered" at specified performance levels. For example, the commission would be 6 percent of the premiums paid up through and including 93 percent retention. Once 93 percent retention is exceeded, the commission percentage would go up to possibly 8 percent for the entire retained policy premiums. The payout is further enhanced if the retention of automobile policies meets or exceeds 95 percent. At the 95 percent retention point, an override bonus (lump sum amount) is paid on all policies maintained by the agency. In other words, the office and insurance agent stand to earn significantly more money once these thresholds are reached and exceeded. Seems simple, but we all know that insurance companies do predictive modeling and actuarial tables in the normal course of their business. These thresholds are not arbitrarily set and the insurance firms are pretty confident that achieving these retention rates is no "walk in the park" for the insurance agents.
Using a Six Sigma Process Improvement Approach
Our insurance agent was "hitting the wall" at slightly above 92 percent retention. While it didn’t appear that he had to move the ball far, he had been stuck at the 92.45 percent retention level since 2006. Our insurance agent decided to try a Six Sigma process improvement approach. Working with his office team and a Master Black Belt, they began measuring their current capability. The first step using the Six Sigma process improvement approach was to define the process. The Six Sigma project team got together and after several iterations focused on the key steps of declination. Armed with this information the Six Sigma project team set about measuring the variation. The process focus was condensed to the following steps: (Click on diagram to enlarge.)
The next step of the Six Sigma project was to categorize the reasons for non-renewal. Seventeen different categories were identified and measured. The following table represents the categories identified:
| Code | Reason |
| A | Auto—Vehicle Stored—Single Item Policy |
| B | Auto—Cancel/Rewrite |
| C | Auto—Declination Of Late Payment |
| D | Auto—Driving Record—Insured Or Family |
| E | Auto—Exposures—Including District |
| F | Auto—Insured Dissatisfied With Claim Service |
| G | Auto—Insured Dissatisfied With Coverages Provided |
| H | Auto—Insured Dissatisfied With Premium Amount Charged |
| I | Auto—Purchased Insurance Through Finance Company |
| J | Auto—Rejected Application |
| K | Auto—Sold/Standard Remittance Item In Force Less 60 Days |
| L | Auto—Transfer Out Or New Business Voided To Another Company |
| M | Auto—Vehicle Sold—Single Item Policy |
| N | Cancellation U/W Review Period (CURP) |
| O | Debit Balance To Manual Desk For Collection |
| P | Non-Pay—Issued Not Taken Renewal Premium Due |
| Q | Non-Pay—Renewal Taken By Other Than Cash—No Subsequent Payment |
In addition, during their investigation the Six Sigma project team discovered that some cancellations were not appropriately categorized. Certain cancellation categories are not charged against the insurance agent’s retention targets. Correcting and standardizing the administrative process ensured that cancellations were appropriately categorized.
In the Analyze phase of the Six Sigma project the team found that there was a statistical difference among the categories. Using a Chi Square test the Six Sigma project team determined that there was at least one factor that was statistically different among the categories with a p-value≈0.000. (Click on diagram to enlarge.)
By performing a series of Chi Square tests the Six Sigma project team discovered that four categories/reasons for cancellation were the statistically significant factors creating the variation. Those factors were:
- Dissatisfaction with premium charged
- Vehicle sold—In force less than 60 days
- Vehicle sold—Single item policy
- Non-pay—Policy Issued, not taken—Renewal premium due (This refers to temporary policies that may be requested on a vehicle for the purposes of sale/title transfer of a vehicle. However, in many cases the sale was not completed, title not conveyed and/or the Client chose to insure the newly acquired vehicle in a different manner after the temporary coverage lapsed)
The pilot included some key process changes:
- Training in and understanding of value options that could be offered to a client to address possible concerns in the cost of the program
- Rigorous monitoring system of client class and follow-up
- Changing the work/priority assignments
- Identification and contact of clients who were approaching the renewal term
- Proactively providing service and options for the client to consider
Results from the Six Sigma Process Improvement Initiative
In the end the pay-off from the Six Sigma project was big. The agency was able to exceed a 95 percent retention level for automobile renewals, which resulted in a net gain to the office of over $160,000. All this from identifying the specific factors causing the variation, tailoring/implementing a solution and measuring performance and progress to sustain the process improvement. Nothing implemented was revolutionary but targeted the focused area for dramatic results.
In these tough economic times an increase like that is welcome, especially when no major costs were added—just an adjustment to the process based on the data, measured consistently and carefully controlled using Six Sigma process improvement and statistical tools to make more money. That is one of the more tangible benefits of the work that we do.