The Endowment Effect - Why We (Agents) Keep Bad Business

If you could “divorce” one of your clients who would it be?

...people attach some strange value to what they own, simply because they own it, and are reluctant to let go even when trading makes economic sense.

Every time I ask an agent that question, they immediately have an answer, and it’s usually more than one client. My next question is, “Why?” The answers include they have a ton of losses, they’re always rude to our team, they require constant service, they never pay their bills on time, etc. The list goes on. I then ask, “Why don’t you divorce them? Why not advise you can no longer be their agent?” Usually, the answer is in the form of body language. Looks of surprise, shock, or confusion. The concept of dropping a client is foreign to almost every agent I speak with.

Richard Thaler’s “Endowment Effect” is the concept that people attach some strange value to what they own, simply because they own it, and are reluctant to let go even when trading makes economic sense. Agents know that certain clients are unprofitable, waste significant amounts of resources, damage staff morale but are still unable to let go of these clients. So how can an agent overcome the “Endowment Effect”?

Through properly quantifying the actual cost of bad business compared to the value of the business, agents can remove the emotional aspect of making such a decision. It’s easy enough to determine the value of such a client: annual household premium * commission rate = revenue to agency

Add in any additional value factors (number of referrals per year, position of influence in the community, etc.), and an agent can come to a pretty accurate value for that client.

But how do we determine the cost? We can start by looking at claim history, determining how much of an impact their claims had on the books loss history and the impact on the contingency bonus. Next, we can look at how often the office has to service the client, how much time it takes, the hourly salary of the staff member servicing, and the lost opportunity of that time being invested in pursuing new business. And finally, we can give a rough estimate to the damage in office morale, by measuring the amount of time staff spend discussing the client and the wasted opportunity that time could have been invested in value added pursuits.

...agents can remove the emotional aspect of making such a decision.

If the cost of keeping that client is higher than the value they bring to the business, the decision to drop that client is now much easier. Does this mean that we will always be rational about keeping or divorcing clients moving forward? No. But we now have a framework to help guide our decision making that can be applied across the business.

If you’re looking for help for your agency or have questions, please reach out. Also, stay tuned for upcoming resources to build a modern insurance agency.





About Clinton Houck
Clinton Houck has built his career in the insurance and InsureTech 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...