From a profitability perspective, service centers are neutral. Whether profitability increases or decreases depends mostly on the quality of the service provided by the service center and how effectively the agency executes handing off service to the service center.

Many agencies now use service centers, usually insurance company service centers, to at least a minimal extent. Let's consider several critical issues agencies face when using them. Profit
What is the effect of service centers on profit? Some service centers charge 1 percent or 2 percent of premiums, while a very small number charge 0 percent, usually for preferred agencies. For simplicity's sake, let's assume the charge is 1 percent and the book of business is 100 percent personal lines. The National Alliance Research Academy reports the average personal lines commission rate is 13 percent, so the charge equals 7.7 percent of revenue. If the profit margin without a service center is 20 percent, which is very reasonable for a well-managed personal lines or small commercial book (this usually means producers are paid limited or no renewal commissions), then to make the service center profitable at a cost of 7.7 percent of revenue, the agency must be able to greatly increase productivity to make up the cost.
Using $135,000 commission per personal lines customer service representative (which is industry average for agencies of all sizes, locations and metropolitan sizes, according to the Alliance's GPS study) without a service center and a 20 percent profit margin, the agency makes $27,000 per rep per year. If 7.7 percent of revenue is taken away, or $10,400 profit drops to $16,600, this is a profit margin of 12.3 percent and a decrease of 38.5 percent. If the service center charges 2 percent, profit drops to $6,200, a decrease of 77 percent.
The only way to make up this loss is through increased productivity. To make $27,000 at a profit margin of 12.3 percent, customer service rep productivity has to increase to $220,000. If the charge is 2 percent, customer service rep productivity has to increase to $588,000. To increase profitability, an agency's personal lines customer service reps must achieve incredibly high commissions per rep. If you are using a service center, how does your rep productivity measure against these numbers?
I have yet to see an agency heavily using company service centers achieve such incredibly high results. Often their customer service rep productivities do not budge. This is not an indictment that company service centers are bad. From a profitability perspective, service centers are neutral. Whether profitability increases or decreases depends mostly on the quality of the service provided by the service center and how effectively the agency executes handing off service to the service center.
Usually, the agency continues to service a large proportion of these accounts. I have seen situations where agencies continue to service 100 percent of the accounts. An agency that continues to service the accounts placed in a service center is just shooting itself in the foot. To achieve the necessary productivity improvements to offset less commission, agencies need to amend their procedures and then enforce those procedures so the agency no longer services its own customers. If this is not possible, then the agency probably should not participate in company service centers.
E&O
Each company service center addresses E&O exposures differently. Therefore, agencies must carefully review their service center contracts. For example, when the agency services an account that is in the service center, does the contract stipulate the agency is now responsible for all E&O errors? Does the company take responsibility for its own errors? If the agency is going to be responsible for servicing customers that are in the service center, then what good is it to place customers in the service center from this perspective?
Book Rolls
What happens when an agency is ready to move a book of business that is in a service center? First, does it endanger the overall company contract/relationship? Second, does the agency have the customer service rep capacity to roll a book of business?
I don't know of any agency that wants to roll a book of business, but it is sometimes necessary. The company's rates may become noncompetitive, its service deteriorates, its solvency is questionable, it is purchased or merges, or another company begins offering a much better product, making a roll necessary. If an agency has eliminated customer service reps to increase profitability to pay for the cost of the service center, the agency likely will not have enough staff to roll the book. If an agency cannot roll a book without hiring more people, then profitability will erode. If the agency decides to stick with the company, what happens to the agency's value if a business segment is hostage to a company service center? What happens to the agency's value if the book is deteriorating due to the company's lack of competitiveness? The agency has lost control of its own book.
I am seeing this occur as service centers have existed long enough for book rolls to begin occurring, so agencies are wise to address these contingencies.
Quality
What happens to retention? What happens to the quality of customer service? I have heard and seen insurance carrier-generated data showing some company service centers achieving the same retention and customer service quality. One service center claims it supersedes its agents' retention and quality. If this is true, I suspect it is more of a sad testimony on the quality of their agencies rather than the quality of their services. If an agency's retention and service is so poor that a company's service center achieves materially better results, that agency should turn over every account possible to service centers and fire most of its staff.
Control
The last issue to consider is the loss of control. Agencies fully using a service center also lose the ability to provide the services for which they are paid by the customers to provide if they are professional agents.
For example, when are the service center accounts reviewed for better coverages and prices with other carriers? Study after study has shown this review is critical to customers. Progressive has made it clear that customers want comparisons and someone watching out for them. Who is watching out for the customers in a service center? If the agency is not offering professional services for its customers, if the agency is just peddling insurance, this is not such a big deal. Service centers are much better for peddlers, but for those providing professional services, service centers can hinder the ability to provide a professional level of service.
Agencies also are jeopardizing their futures with service centers. The million-dollar question agents want to ask, but are afraid to say out loud, is that if company service centers can service accounts for 1 percent or 2 percent, why should companies pay agents 13 percent? If the agency is a peddler, I am not sure 13 percent is necessary; if an agency is a professional, I am not sure 13 percent is enough.
Service centers are neither good nor bad. If an agency is going to use a service center, success depends upon a full understanding of the issues and proper implementation of procedures that enhance the relationship.

Special Reports /

For the Manager: Service Centers-Are They Worth It?

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