Incentive Structure: Should We Factor in Loss Target Ratio?
What’s your experience with sales incentive structures? Should a loss target ratio (LTR) be included to ensure that only high-quality sales are pursued? Or is it the responsibility of underwriters to manage pricing and policy acceptance? We’d love to hear your thoughts!
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When considering an incentive structure for sales, it’s important to weigh the implications of including a loss target ratio (LTR). In my experience, the decision to include or exclude LTR largely depends on the specific objectives of the organization and the dynamic between sales and underwriting teams.
Including LTR in Incentives:
1. Quality Focus: Including LTR in sales incentives can help ensure that sales reps are motivated to pursue quality business rather than just focusing on volume. This can lead to longer-term customer relationships and lower overall claims costs.
Alignment of Interests: It creates a stronger alignment between sales and underwriting, encouraging sales reps to understand the risk profile of the policies they are selling and the likelihood of claims, which can lead to better underwriting decisions.
Accountability: With an LTR component, sales staff may feel more accountable for the long-term performance of the policies they sell, thereby fostering a greater sense of ownership over the quality of risks brought to the company.
Excluding LTR from Incentives:
1. Sales Focus: Excluding LTR might encourage a more aggressive sales approach, without inhibiting the drive to meet sales targets. This could result in higher revenue in the short term, even if it comes at the cost of quality.
Underwriter Role: It’s also important to consider that underwriters are typically the gatekeepers for assessing risk. They have the expertise to evaluate whether the policies being sold can be effectively priced and underwritten. Relying solely on underwriters to manage quality allows sales reps to focus on expanding the customer base without being hindered by performance metrics that might be outside their control.
Potential for Conflict: Incorporating market conditions and underwriting guidelines may lead to potential conflicts between sales and underwriting, creating friction if sales are pushed to sell more than what can be sustainably underwritten.
Conclusion:
Ultimately, the best approach may be a hybrid model that incorporates both sales volume and LTR metrics, promoting a balance between pursuit of business and maintaining the quality of that business. This ensures that sales teams remain motivated while also safeguarding the company’s long-term financial health. Regular communication and collaboration between sales and underwriting are essential to make this model successful.