Growth Expectations and Lead Generation, Part I: Referrals

12thMar. × ’12

Over the next few posts, I’m going to sketch an approach to sales planning for insurance agents.  We would all like to see our agency revenues increase by 5%, 10% or more a year, but without plan that allows you to manage lead sources, and manage leads once they have been captured, it just isn’t reasonable to expect any change in sales performance.  There are a variety of ways to generate leads today; some sources are prohibitively expensive; other lead sources will preserve or improve profit margins and stabilize loss ratios.  Insurance agents really need to take an incremental approach to managing lead sources because each source has different characteristics.  I’m going to start with the number one lead source for most agents – referrals – not only because referrals are the most significant new business source for the majority of insurance agents, but also because close rates, profitability, and loss ratios are usually optimal for business from this source.  Referrals are the lowest of low-hanging fruit, so it makes sense to be sure your agency is capturing as many as possible before spending time or money on other lead sources.


I have talked to a lot of insurance agents in recent months who tell me that agency growth, in terms of client or customer count, has been flat or slightly declining over the last few years.  The economy is to blame and agents are typically casting about for different ways to generate more leads as a way to push agency growth into the positive range.  That isn’t the only way to increase revenues, and it may not even be the right first step for most insurance agencies looking to register some sales growth, but increasing the number of leads and new clients should be part of the mix in any growth plan.

Most insurance agencies, and small to medium sized businesses in general, are stretched for resources and need to employ a triage mentality when choosing where to concentrate marketing time and budgets.  That is, what tactics deliver the most revenue, at the least cost and with the smallest time drain?  Think of a Venn Diagram – I reproduced one below, just in case you forgot your junior high math lessons.  Revenue can come from improved retention, better close ratios, new clients, new policies or additional coverage sold on existing policies.  That’s about it.  I’m not going to draw a Venn Diagram specific to this conversation, at least not yet.  But think of the outcomes of marketing and communication tactics for each of the circles in the diagram (instead of robots or zombies).  The circles might represent new client acquisition, improved retention, and so on.  The intersection of the circles would represent your choice of tactics like local search optimization, lead nurturing, social media marketing, e-newsletters, PPC or traditional SEO.  In fact, you might draw several Venn Diagrams as you consider your marketing triage.  The triage approach would lead you to start with the marketing and communication tactics that impact single revenue source vs. just a few – and one such tactic is referral management.  In the diagram below, referral management would sit in the middle intersection of three circles representing new client acquisition, improved retention, and new policy sales for existing accounts.

Venn Diagram approach to insurance marketing triage

In this post, I’m going to explore the anatomy of leads that come from customer referrals and discuss whether the quantity of  referrals  most agents see is good or bad.  Perhaps more importantly, I’ll explore whether insurance agents should put any effort into capturing more customer referrals and I’ll suggest some tactics for doing that.  I will discuss other lead generation sources in future blog posts.

For our purposes here, I’m going to define a lead as any opportunity to provide a quote.  Another name for what I am defining here as leads is ‘prospects’, consumers from whom (or for whom) you have obtained contact information and have qualified in some way.  Traditionally, leads aren’t considered to be prospects until they have been qualified but  I think we are safe considering the term ‘leads’ to be synonymous with prospects when the source is customer referrals.  Referrals are more likely to resemble the demographic profile of an existing book of business and referrals convert at a much higher rate than leads from other sources.

A large insurance company survey from a few years ago found that, on average, 69% of insurance agency new business clients come from client referrals.  I’m going to round that number up to 70% (to make any calculations easier on me).  And I’m going to make the case, that for most insurance agencies, the acquisition of leads through referrals is largely a passive activity .

More consumers, at 37.5%, start their insurance ‘research’ by asking friends and family for recommendations than start with any other method (32.5% start with the search engines, e.g.); I discussed some of these numbers in an earlier post on social media and insurance referral dynamics.  What this consumer behavior suggests is that insurance agents are going to get a certain level of referrals, not because of what they do, but because seeking references is a pervasive consumer behavior;  a certain level of referral leads is going to be based, in large part, on the number of customers an agency has.   The question is, can the number of referral leads an agency receives be considered a good number and should an agency put some effort into increasing that number?

Let’s suppose that an insurance agency has 2,000 customers.  At a fairly normal customer retention rate, the agency might keep 92%, or 1,840 customers, over the course of a year.  So this agency probably has to replace 160 customers just to maintain a flat customer count.  In a typical agency, 70%, or 112 of these new clients, would come from referrals and just 48 would come from other sources.

Some light research, from a variety of casual resources1, would suggest that consumers switch, or consider switching insurance every three to five years, let’s split the difference and call the number  4.  The number seems to be consistent whether the line is personal auto insurance, homeowner insurance, business or life insurance.

Further, and please indulge me in some conjecture based on anecdotal data, suppose that most of us really have only 5 or 10 people that we are likely to ask for advice or references.  This number is a combination of the of the people in whom you really trust and the subset of that group with whom you are in regular contact and feel comfortable approaching for advice.  It seems reasonable to assume that this number is a two-way street:  if you have five or ten people you are likely to ask for insurance references, there are five or ten people likely to ask you for the same.

Conversion rates, the number of quotes that result in new clients, is unusually high for leads from referrals, often between 40% and 60%.  This isn’t surprising.  Referral leads are sufficiently motivated to seek out advice, and by definition, are well into the sales funnel.  They are also extremely warm leads, having been introduced by a trusted source.

Let’s put these numbers together and see how they compare with the number of new clients this insurance agency actually obtained through referrals.  Collectively, between 10,000 and 20,000 friends and neighbors of this agency’s clients could ask those clients for insurance references (2,000 customers times the number of people that might ask them for advice – 5 to 10).  However, only 25% of this pool of reference seekers would be shopping for insurance in a given year.  That being the case, the number of possible referrals would would start with a range between 2,500 and 5,000.   37.5% of this pool will start their insurance quest by asking for advice; so the range of potential referrals is actually between 938 and 1,876.

If this agency’s conversion rate is 50% when quoting referrals, obtaining the 112 new customers from this source would require 224 leads.  That would mean that this agency received between 12% and 24% of the possible customer referrals.  Is that good or bad?  …I don’t know, but it does seem like there is a lot of untapped referral potential in this agency’s customer book.

Suppose instead that most people only have three to five people to whom they would turn for insurance references.  Then the pool of potential referrals for this agency would fall in a range between 563 and 938.  If those numbers are right, then this agency is receiving 24% to 40% of potential leads from customer referrals.  Better, but still some untapped potential.

It seems that some effort toward increasing the number of referrals should result in some additional new clients.  An insurance agency probably has little influence in the proportion of consumers who are likely to start their insurance shopping by asking for references (the 37.5%) so increased referrals likely would be due to one of the following:

  1. Serving more customers – if 37.5% of consumers ask for references first, then a larger customer base would necessarily mean more referrals, all else being equal.  But this is a little like putting the chicken before the egg.
  2. Make your customers happier so they are more likely to refer you when approached, or even, so that they proactively seek referrals on your behalf.
  3. Make sure your agency is top of mind with your customers, so if they are asked for insurance recommendations, your name naturally pops up.  Putting a renewal reward program in place or simply asking for referrals in email signatures, etc. might accomplish this.  But in both 2 and 3, the agency has to have regular, value-added communications with customers.

Reaching out proactively – and with other than sales messages – whether by e-newsletter, the occasional snail mail note or card, or through social media are tried and true methods for making customers feel more wanted and keeping your agency top of mind.  If this hypthetical agency acquired just 20 additional new clients, a little more than one a month, then instead of being flat, the agency would grow by 1%.  Getting a few more referrals, because the close ration is so high, seems like a good place to start the sales growth journey.

If the hypothetical agency discussed here were to start a client communication program including an e-newsletter, and one or two traditional mailings a month, their new business from referrals would probably increase to more than 70% of all new business.  That’s not the point of this exercise though.  The referral source is just one of several I will analyze as I walk through a sales planning review.

At the outset, it may have struck you as odd, a piece on customer referrals in a forum dedicated to insurance agency internet and digital marketing issues.  But referrals have been taking place in digital mediums like forwarded emails and online social networks.  The digitization of referrals is likely to accelerate with new developments like introduction of a social layer in Google search results (G+) and referrals that happen across your backyard fence are more and more likely to result in branded searches on the web.

The bottom line is this:  traditional sources for new business are still important and often undervalued and are under-optimized.  But now there is a new, internet wrinkle that needs to be considered when managing old school lead sources, even for tired, old referrals.




1.  There are some definitive sources for these numbers that might differ from my numbers.  I would be happy to plug those into my calculations, but the results and conclusions are not likely to be significantly changed.


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