Many agencies' small-business departments consist of one or two account managers handling overflow accounts that commercial-lines producers don't want. Our agency, however, built a small-business unit with four producers and two account managers who specialize in this class of business and actively pursue small commercial accounts. We currently write 1,300 of them, generating a total annual premium volume of nearly $6 million. We can do anything our large-lines unit can do; our customers just happen to be smaller.
Typically, we define small-business accounts as those with less than $25,000 in total account premium from all lines and up to 50 employees. Until a few years ago, that meant mostly mom-and-pop operations such as video stores, music stores and florists. Recently, however, we expanded our definition of "small business" to better match our carriers' definition of the risk. It now includes a wide variety of Main Street retail, wholesale, light manufacturing and service operations with up to $15 million in property values and annual sales, and premiums ranging from $500 to $300,000.
Target marketing is the most effective way for us to prospect in the small-business niche. Several times each year, we ask our carriers what type of clients they prefer and what sort of accounts they've written recently. Their input helps us decide on which niches to focus. For example, suppose a couple of our carriers indicate that they like insuring small, independent florists and that they close 80% of such accounts. We then develop a direct-marketing plan to identify and target the prospects. We send them mailers, and our in-house telemarketer follows up with them. Once we talk with a prospect and close the sale, we already know which two carriers are best suited to write that class of business, so we don't waste time sending the app to other markets.
We assign an account manager to each new account, which helps us close sales and maintain the level of service our clients expect. Clients may contact me or their agent at any time, but their account managers typically address all of their service needs. They create electronic files for new accounts and enter related data into our agency management system, adding loss runs and supplemental documents. They also handle accounting, endorsements, audits and any other customer-service issues that arise. If a client has a package policy and also needs workers compensation coverage, the account manager notifies the producer to follow up and address that exposure.
Account managers also handle renewals. When an expiration date approaches, the account manager sends the client a one-page application that asks for current information on buildings and business personal property, a description of operations, and any changes made to the business in the past year, then updates the file accordingly. If nothing has changed, however, the policy is automatically renewed and direct-billed. In most cases, the account manager receives the renewed policy from the carrier, reviews it for accuracy and forwards it to the insured. Of course, producers are kept up-to-date on their clients' accounts and may opt to handle more complex renewals themselves. When an account manager refers a prospect who becomes a client or writes a new account himself or herself, we give him or her a $25 American Express gift certificate.
Efficiency is the key to profitably writing small-business accounts, and automation allows us to maximize efficiency. Our entire agency moved from paper files to an electronic system, which has helped us tremendously, and the small-business and personal-lines departments get first priority on acquiring new software and hardware.
Last year, we hired a consultant to analyze our procedures and recommend ways to improve them. As a result, we established uniform procedures that everyone must follow. We use an alphabetical split to assign accounts to account managers. One serves all the accounts whose names begin with A through K, and the other handles L through Z. When we get a phone call or piece of mail related to an existing account, we can easily route it to the appropriate account manager. If a producer in my department is out of the office and someone from ABC Co. needs assistance, I can speak to that person knowing which account manager has been working on that account. I can also access the client's file on the agency management system and see all related activity. Implementing the alpha system quickly yielded a noticeable improvement in accuracy and efficiency, and it enabled the account managers to work more productively with one another and with the producers.
Most insureds served by our small-business unit buy businessowners policies, and those with employees obtain workers compensation coverage, too. We also arrange business auto and directors and officers liability coverage for clients with those exposures. Our carriers' BOPs include extended coverage for employee dishonesty, accounts receivable, business income, valuable papers and the like, with some markets offering 25 to 50 additional coverages. When securing a BOP, we use our own application-basically a pared-down version of an ACORD form-that asks for the insured's name, address, description of operations, property limits and building information. The app is suitable for any small-business risk and works with all our carriers' systems. When appropriate, we also require loss runs.
We have access to most domestic markets and some international carriers. If necessary, we can obtain quotes from up to 20 different carriers. Our main markets for BOPs are CNA, Safeco, The Hartford, Fireman's Fund, Golden Eagle and Allied. Our largest workers compensation carrier is Preferred Employers, although we also place a lot of business with Everest, Freemont and Zenith. When it's appropriate, and if the premium is sufficient to warrant it, we can also place an account with a surplus-lines broker.
All of our carriers offer online or automated rating systems, which allow us to qualify a risk, obtain a quote and bind coverage quickly and efficiently. We typically can rate and bind coverage for a small-business account in as little as 10 minutes. For an insured with multiple locations or several automobiles, the process might take 15 to 20 minutes. If a client or prospect contacts us, looking for coverage, and needs to have it the next day, we can almost always oblige, and we write a significant volume of business as a result.
In terms of commission and revenue, small-commercial accounts hold their own against the larger ones. Commission for small-business insurance typically ranges from 15% to 20%. For workers compensation, it's 7% to 10%. Our business model requires about $120,000 in annual revenue per employee in the small-business unit, which is only slightly less than for larger lines and comparable to that of the personal-lines department. It's also the benchmark we use when determining whether hiring another account manager or producer is justified. Our department's loss ratio is 5 or 10 points better than that of the large commercial department. We're in the 50% to 60% range with all our business, whereas small commercial accounts usually are only 40% to 50%.
Most of our small-business carriers have service centers, and we use them whenever possible. They handle claims, process endorsements and renewals, and even do some cross-selling for us. In return, we pay them 1% to 2% of our commission for both new and renewal business. Such service centers help us effectively and economically serve clients who pay small premiums. The fewer times we have to handle a document or make a phone call, the more efficiently-and therefore profitably-we operate.
The combination of uniform procedures, streamlined operations and effective use of automation allows our small-business unit to write a significant portion of our agency's total volume. Our insureds and our department may be small, but together we play a large and important role in the agency's success and growth.
Eric P. Magee is a UCLA graduate who has earned an associate's degree in underwriting and the AU designation. Mr. Magee entered the insurance industry in 1987, serving as an underwriter for NAICC and CNA before becoming a broker. He is now vice president at Wood Gutmann Insurance Brokers, where he has worked for the past five years.
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