Successfully Going Broke

SUCCESSFULLY GOING BROKE

by Roy Phillips

Various studies conducted by an aggregate of trade groups report that insurance agencies and brokerages suffer from inconsistencies in management and a lack of consistent planning.

Today’s insurance industry is characterized by a decrease in the number of agencies. Small- and medium-sized agencies are merging or being bought by larger ones. As a result, there are fewer larger agencies with different needs: improved management, additional targeted marketing, a better understanding of automation for practical applications, thorough comprehension of the global marketplace, and superior hiring practices that result in greater productivity.

Agencies and brokerages that address these issues will survive and prosper now and in the future. Businesses that do not recognize these factors will go out of business. The factors that unsuccessful agencies have in common are:

1. They don’t have an operating budget.
2. Non-owner producers are overcompensated.
3. Customers take advantage of the agency.
4. The agency doesn’t want to diversify into other coverages, such as Life insurance.
5. The agency is always adding to the staff.
6. The agency contracts with too many companies.
7. There is no office procedure to direct the mechanical work-flow process.
8. The agency doesn’t ask for the money.

If an agency is plagued by one or a combination of the above characteristics, contact outside professional assistance - for example, an accountant, financial planner, attorney, or company representative.

OPERATING BUDGET

It’s essential to project an operating budget at least 90 days prior to the approaching fiscal year. Operating budgets should be based on last year’s budget, the economy, business trends, circumstances unique to the agency, and economic forecasts.

Be aware of the danger in ignoring waste in a budget. Waste cannot be identified by just reviewing spending on a per-line item basis - it requires digging. Many times it’s not possible to conduct such a review thoroughly without the help of an accountant or financial planner. A 3% expense savings in administrative costs in an agency with $2 million in annual premium will put $9,210 back on the books.

NON-OWNER PRODUCERS ARE OVERCOMPENSATED

A business that works on the premise that a producer doesn’t cost the agency anything because the producer is paid commissions only is sorely misinformed. Consider any of the following situations:

1. The producer doesn’t generate sufficient commission revenue.
2. The producer wastes the staff’s time with the little business that is generated.
3. The producer generates business that is hard to place, requires remarketing, or needs to be marketed through Excess and Surplus Lines companies.
4. The producer is constantly getting the agency in errors and omissions trouble.

Most decent producers who have long-term goals also want to own a part of the fruits of their labor. The best producers are those who have the option to eventually become an owner-producer. Meaningful and appropriate salaries and/or commissions must be determined for producers based on what the agency expects.

CUSTOMERS TAKE ADVANTAGE OF THE AGENCY

Every agency has to deal with “colorful” customers: those who don’t pay their premiums on time and always question the amount they’re paying. These types are always presenting claims that stretch the outer boundary of the coverage package.

Culling these clients is hard to do, but necessary. In terms of dollars and cents, these problem clients are probably more trouble than they’re worth. Some agencies will opt to retain these colorful customers and gather their current information and history into a special file. “Special file” customers require more time and energy, but all agency employees are aware of this since they are identified as such. Other agencies will cancel problem clients. Still others will keep them without comment.

AGENCY DOESN’T DIVERSIFY

Like people, agencies that do not expand will stagnate. Most agencies that do not diversify are afraid of learning or afraid that P/C agents shouldn’t deal in coverages such as Life insurance.

Stagnating agencies should learn the product lines and produce the business, use company personnel assistance in the handling of these products, or build a Life/Group/Disability department. Choice three is probably best for agencies that do not want to branch out into an entirely new line of business, such as a travel agency.

ALWAYS ADDING TO STAFF

If an agency finds itself always adding “just one more person,” it will also find itself choking on administrative expenses, salaries, and benefits. It makes more sense to have fewer people who are well- qualified and better-compensated. One of the characteristic ratios of agencies that go broke is a low ratio of expenses and compensation per staff employee.

There are several critical growth plateaus that make or break agencies. During the last 15 years, a large percentage of agencies were sold or merged with other operations because they had stagnated at one of the growth plateaus. There is no particular cause for stagnation, but it frequently arises from reduced productivity due to inefficient allocation of job functions, insufficient communication of organizational relationships, or a failure to adapt to the changing requirements of a growing organization.

A reevaluation process should be conducted at least every two years. The structure that works well at one stage of agency development might be disastrous a year later and, if not changed, can result in a leveling off or reduction in sales and a deterioration of service.

Inability to grow beyond subsequent plateaus results almost exclusively from organizational inefficiencies and lack of management direction. Agencies that grow successfully learn procedures for evaluating and changing the structure and can apply this knowledge as it becomes necessary in the future.

AGENCY CONTRACTS WITH TOO MANY COMPANIES

Statistics derived from studies conducted by trade groups show that the typical agency on its way to going broke:

1. Represents seven to nine standard companies.
2. Has a gross annual premium of $2 million.
3. Allows the lead company to receive 34.7% of all business.
4. Allows the secondary and tertiary companies to share 37.4% of the remaining premium.
5. Allows the other companies to share 27.9% of the remainder.

NO OFFICE PROCEDURE TO DIRECT THE MECHANICAL WORK-FLOW PROCESS

According to the agency personnel King-Smith interviewed throughout the ‘80s, the two most frequent complaints about independent agency operations are: 1) a void in leadership, and 2) a lack of written procedures. When asked for suggestions about implementing procedures, staffers said standard letters that communicate the important aspects of an agency’s products and services are necessary, requested specific standards for developing and maintaining files, and asked for direction from top management.

There are always employees who “take shortcuts” because they cannot understand the usefulness of certain procedures. It is imperative that all employees adhere strictly to procedures so when a problem arises and others are attempting to identify the area of conflict, the information is readily available. Procedures ensure that everything will run smoothly and in the event of a problem provide backup and documentation for comparison.

THE AGENCY DOESN’T ASK FOR THE MONEY

Part of the image the insurance industry has conveyed to P/C customers is that the product is basically worthless, unless something disastrous happens. The industry has created the impression that the product doesn’t do anything for the customer.
The above are eight major factors that cause agencies and brokerages to go broke. There are many more, but these are the ones that surface most frequently during an autopsy.

Roy Phillips, CPIA, CIC and Dan R. King, CPIA, CIC can be reached at Dan R. King & Associates, 4888 Loop Central Drive, Ste. 100A, Houston, TX 77081, (713) 667-0333, fax (713) 667-1560.