Incentive Structure: Should We Factor in Loss Target Ratio?
We’d love to hear about your experiences with sales incentive structures. Do you think the target loss ratio (LTR) should be part of the equation to ensure that only high-quality sales are pursued? Or do you believe that this responsibility lies solely with underwriters in terms of pricing and policy acceptance? Share your thoughts with us!
When it comes to sales incentive structures, the decision to include or exclude a target loss ratio (LTR) can significantly impact the behavior of the sales team and the quality of the policies being sold.
Inclusion of LTR in Sales Incentives:
1. Quality Over Quantity: By incorporating LTR into the incentive structure, you encourage your sales team to pursue higher-quality leads and clients. This can lead to a healthier overall portfolio, as agents will be more cautious about the risks associated with the policies they sell.
2. Alignment of Goals: Including LTR aligns the interests of the sales team with those of the company, particularly in industries where underwriting plays a pivotal role in pricing. When sales incentives are tied to loss performance, it encourages a collaborative approach between sales and underwriting.
3. Long-Term Focus: A focus on LTR can help instill a long-term vision within the sales team, prioritizing sustainable growth over short-term sales achievements that might lead to higher loss ratios.
Exclusion of LTR from Sales Incentives:
1. Underwriting Responsibility: Some argue that assessing risk and setting pricing should primarily be the responsibility of underwriters. Salespeople can be motivated by closing deals, which may not always reflect the long-term viability of those policies. If underwriting is effective, they should manage risk without sales needing to filter out poor quality leads.
2. Simplicity in Sales Goals: Excluding LTR from incentives can simplify the goals for sales teams, allowing them to focus solely on sales volume and revenue targets. This can be advantageous in competitive environments where quick sales wins are necessary.
3. Potential for Overreach: If sales teams have a direct incentive tied to loss ratios, there might be a tendency for them to overly restrict selling certain products or clients, which could limit business opportunities.
In my experience, striking a balance is key. While underwriting should bear the primary responsibility for pricing and risk management, incorporating a modified version of LTR into the incentive structure can definitely promote a culture of quality sales. Perhaps a hybrid model that rewards sales based on both volume and LTR, within reasonable thresholds, could effectively motivate the team while maintaining quality standards. Ultimately, the best approach will depend on the specific context of the organization and its overall goals.