Advance versus as-earned: the cash flow math for a new agent's first year

Two agents write the same 15 policies a month at the same premium. One takes advances, one is as-earned. Their bank accounts look completely different for eighteen months, and then they converge.

Advanced, 75 percent. Month one: a big deposit, roughly three-quarters of the first-year commission on everything issued. Months two through nine: more big deposits as long as production holds. Month ten onward: chargebacks start landing for the policies that lapsed, and the deposits shrink by the unearned commission being clawed back. The agent who spent month one's deposit has a problem in month ten.

As-earned. Month one: a small deposit, one month of commission on the policies that paid. Month two: two months' worth. It builds like a staircase and by month twelve the agent is receiving a full month of commission on a year of business, with no chargeback shocks because nothing was fronted.

The crossover. For a book with typical persistency, cumulative income is similar by around month 18 to 24. Advanced agents got the money earlier and paid for it in volatility and chargebacks. As-earned agents waited and slept better.

What most experienced agents do. Advance in year one because they need to eat, set aside 20 to 25 percent of every advance in a reserve, and switch carriers to as-earned one at a time once the reserve and renewals cover expenses.

The number to watch. Your chargeback rate as a percentage of advances. Above 20 percent and advances are costing you more than they're giving you.

Where are you on advance versus as-earned, and when did you switch?