Broking Business Summer 2021: How should you calculate renewal rates?
Focusing on client retention and renewal
Building strong relationships with existing clients and making sure you retain them, not only makes perfect sense, but can also boost your profits and grow your business.
As a Key Performance Indicator, client renewal and retention rates can be seen as critical in assessing the health and quality of a firm. However, the way in which they’re calculated can often lead to uncertainty or doubt over the results achieved. This in itself can slow down the process, or at worst, affect the price realised in a sale. In these days of increasing premiums the underlying renewal rate can be distorted by these rate increases. This can make renewal rates look better than they really are.
Why are they so important?
Renewal rates indicate the ‘stickiness’ of your clients and therefore whether or not your firm enjoys ‘recurring’ revenue. Not only does this inform you on the underlying performance of your business, but it’s also key to the value of your company should you wish to undertake any M&A or fundraising. Recurring income is also one of the underlying features of brokers that both potential investors and acquirers can find attractive.
Choosing a calculation method
There are several ways you can calculate your renewal rates:
Client or policy? Do you aggregate all the client policies or not? By going to a client level it may be the most accurate measure to look at whether clients renew all policies. However, when a client returns but decides not to renew all their policies, then you may have artificially increased your rate.
Value or count? Do you base your calculation on the total value of Gross Written Premiums (GWP)/commission income, or the number of clients/policies? The count tells you how many clients/policies are renewing, but not if important clients have been lost. If you’re using total value, the renewal rate can be depressed or increased depending on whether premium rates are softening or hardening.
Inclusion of mid-term adjustments (MTAs), refunds, etc? If you decide to use your policy administration system (PAS) to identify renewals: ‘new business’ and ‘renewals’ tags can be used as well as many others, such as ‘cancellations’ and ‘MTAs’. You need to decide what to include to ensure that the figures are as accurate as possible.
The key lies in the data
As with all calculations, using high quality data is crucial in ensuring an accurate outcome. We suggest that you use data from your PAS, taking the following into account while doing so:
Client names are the same every year, e.g. capitalisation and the use of ‘Limited’ against ‘Ltd’.
Include a ‘Group’ name where client names need to be different but are linked.
Your data’s free from obvious errors such as dates that aren’t correct.
That your internal tags are appropriate, e.g. some systems tag clients that have moved carriers as ‘new business’, when it should be tagged as a ‘renewal’.
It’s critical that information is entered ‘correctly’ into your PAS so that your company’s processes and controls are maintained. However, we recommend reviewing and ‘cleaning’ data before you use it. PKF always review the information supplied to us for accuracy both before and after completing any such calculation.
How does PKF handle it?
In order to avoid inaccuracies, we often use a combination of different calculations to validate the rates provided. What’s more, to decide on the best approach, we rebuild the calculations from scratch to give us a detailed understanding of the data.
The process for our main recalculation is as follows:
We identify all the clients available in the chosen period, while also comparing clients from the previous year, to make an accurate calculation of the rate of renewal
After creating a single unique client list, we’ll add the commission and GWP for every client for each year that we need.
Each client will then be assigned one of the following tags: ‘new business’, ‘renewal’, ‘lost client’, or ‘not a policy’, for the periods involved.
Using these tags gives us the number and the total value of each type of client per year. This allows us to calculate the renewal rates on both a ‘value’ and ‘count’ basis.
These are then cross-referenced to the PAS’s renewal rates.
This gives us the renewal rate by client. However, you can also achieve the same via business line, date or any other metric you choose.
What do I have to do next?
After ascertaining the renewal rate using your chosen method, you should compare the results to your expectations. If they don’t make sense you should investigate further to understand why there’s a difference and use them to inform your strategy and identify areas where improvements are needed.
Get in touch
If you wish to discuss how you can implement, improve or use renewal rates within your business, get in touch.