The 80/20 Rule and the Law of Small Numbers

"Twenty percent of our insurance clients create eighty percent of our work."

Have you heard this line before? I’ve spent a decade in the insurance industry in both the carrier and agency worlds. In my experience, the 80/20 rule seems to be almost universally accepted, and the majority of resources are spent on a small number of needy clients. What’s not universally accepted is this: How much of the resources should be spent on the 20 percent? How can an agency service these clients differently? And, how much stock should an agent put in what these clients say they need?

When pressed, many agencies share that the accounts needing the most service are the type of business they don’t really want anyway. So why do they continue to serve those accounts? For some agencies, it simply comes down to pride in providing excellent service to all clients. For most, it’s a symptom of a larger operational problem - lack of data analytics.

Spending precious time and resources on a small subset of clients isn’t the only potential problem.  

In “Belief in the Law of Small Numbers”, research by psychologists Amos Tversky and Daniel Kahneman concluded that people mistook even a very small part of a thing for the whole. That even statisticians tend to leap to conclusions from inconclusively small amounts of evidence. What does this have to do with the 80/20 rule in an insurance agency?

Practically applied to our industry, I’ve seen many agents and owners currently make gut decisions on how to handle customer service and treat their client base. To make these decisions, they’re relying on the information readily available to them. So the 20 percent of clients that cause 80 percent of the work (and the book agencies don’t want), end up becoming the driving input of decision making for an agent. As a result, the “Law of Small Numbers” distorts decision making, causing agency “best practices” to be unevenly weighted towards satisfying only the 20 percent of an agent’s business. As a result, agents are creating a business that is more attractive to their less-than-ideal client base. And their ideal clients may look to a competitor that will better meet their needs.

As an industry, we have to evolve past this practice. To do this, we must install data and data analytics as a necessary role in an agent's office. All agency-wide practices or decision making should be accurately measured across the entire client base, not just the most vocal one. This approach will allow an agency to make decisions that have the greatest overall benefit for the agency and the book of business as a whole.

Look for more information from State Auto on how to integrate data analytics into your business soon.

About Clinton Houck Clinton Houck has built his career in the insurance and insurance technology space over the last 10 years. Starting his career as an underwriter, he then founded and built two insurance agencies, a traditional brick and mortar captive agency and a digital, online independent agency. Now, Clinton is a Senior Marketing Specialist at State Auto Insurance, with a focus on insurance technology and agency modernization. He is also aspiring to learn how to cook, but with limited success to date...