WORKING HARDER? MAKING LESS?
by Jon Persky
During the past few years, many agency owners have been saying, “I’m working harder than I ever have, but making less money.” Considering that few agencies have been hiring or giving raises, and that the largest expense in any agency is compensation, why does this quote hold true? It’s a combination of retention, productivity, and profitability.
Retention
The first issue is retention. If you ask the typical agency employee to define retention, he or she will say, “Keeping a client from one year to the next.” Making it simple, let’s assume you only have one client (client A). If you have client A in year 1 and that same client in year 2, you have 100% retention.
If you ask a carrier employee to define retention, you might hear, “Keeping the same premium from one year to the next.” This means that if client A generates $100,000 of premium in year 1 and there are rate increases resulting in client A paying $120,000 of premium in year 2, you have 120% retention.
Sometimes a carrier employee will define retention based on policy count. So, if client A had two policies in year 1, but only one policy in year 2, retention is 50%. However, if the reason for the lost policy is due to the carrier offering a policy that combined the coverage of the two policies in year 1, you have 100% retention based on risk.
Going back to the agency owner, yet another way to calculate retention is based on commission. Client A had $15,000 of commission in year 1 but only $12,000 in year 2. Based on commission, the agency retention rate is 80%.
So what’s the retention rate? 50%? 80%? 100%? 120%? It’s all of the above! However, when it comes to agency profitability the key focus is commission. Is it possible to have 100% client retention, but only 80% to 90% commission retention? Absolutely.
Profitability
The soft market drives premiums (and commissions) down. The economy might be driving client revenues down. Your clients might also be laying off employees, and reducing other business activities – or your companies might be reducing commissions on certain lines of business. These issues will drive agency commission income down. The problem is that even though you have 100% client retention, meaning you still have to service the same number of clients and policies, you might have significantly less commission income.
What can an agency owner do? Write more business? That means you need to do more work. However, the typical rule of thumb is that you lose money on an account in the first year or two that you have it. So writing more business doesn’t necessarily increase profitability.
To increase profitability, the agency needs to focus on two areas:
1) Increasing staff productivity/capacity; and
2) Ensuring that the accounts you are retaining are truly profitable.
Productivity/Capacity
Increasing the staff workload isn’t the answer. You want your staff to “work smarter, not harder.” This should start with a workflow analysis. In many cases, the agency’s systems and procedures are the same as they were five, 10, even 20 years ago. “We’ve always done it that way” is the mantra.
However, automation and client expectations have changed over the years. An analysis of the efficiency of your automation usage is a good place to start. Another valuable investment is to have a knowledgeable, outside insurance professional come in and do a workflow analysis. Frequently a third party can identify low-hanging fruit that will make an immediate impact on the productivity of your staff.
Does the workflow analysis add revenues? No. However, it might increase capacity, which would allow you to write more business with your existing staff. That results in profit that drops to your bottom line. Of course, if you’re not writing new business actively, the adjustments might allow you to write the same amount of business with a smaller staff.
Account Profitability
Do you really want 100% client retention? Probably not. In most agencies, a significant number of accounts generate small commissions and are highly labor intensive.
Start by looking at all Commercial accounts under a certain commission size — say $1,000. Then look at the number of transactions/activities those accounts had during the last year. If accounts had zero, one, or two trans-actions, remove them from the list. Then remove those accounts that are critical (the mayor of the town, a key center of influence, etc.).
What you have left are the accounts that are driving profitability down. You can make these accounts profitable by transferring them to a service center, where agency personnel won’t be handling them. If you can’t transfer the accounts to a service center, try selling this book of business to a competitor. If you can’t sell the book, try to non-renew the clients. Once these accounts are gone, you have increased capacity or the ability to reduce staff.
Conclusion
Think time” has great value – and the times demand that we use every available tool and resource to work smarter.
Jon Persky, CIC, CPA, PHR, is president of Optimum Performance Solutions, LLC , an agency consulting firm that provides valuation, merger and acquisition, agency, perpetuation, strategic planning, and marketing and retention services to insurance agencies nationwide. He is also a member of The National Alliance faculty and a speaker at Ruble Seminars. For more information, contact John at (813) 835-7337; e-mail [email protected]; or visit www.optperform.com. Reproduced from Resources Magazine, with permission from The National Alliance for Insurance Education and Research.