BEST PRACTICES FOR AGENCY MANAGERS: LOOK BEYOND THE NUMBERS
by Robert C. Smith
Taking the financial and operational performance results of the Best Practices Study and building management strategies around them can help you achieve and exceed your financial benchmarks. Robert Smith reveals some of the management Best Practices that leading agents and brokers have adopted.
The past 10 years have brought huge change to the independent agency system. Agents and brokers endured a prolonged soft market, only to move to a hard market with limited capacity.
Meanwhile, many agencies have had to 're-engineer' their business because of automation. The entrance of banks into insurance distribution has created a new and powerful competitor. Many insurance carriers have faced insolvency or significant realignment of their underwriting practices. And all agencies have had to endure the threat of disintermediation because of the Internet.
Ten years ago, many were predicting the demise of the Independent Agency System. It was also ten years ago that the Independent Insurance Agents and Brokers of America in Alexandria, Va., began its 'Best Practices Study' as a tool to empower agents to address many of the challenges that they faced.
The Best Practices Study has become an industry standard for financial and operational performance data. As the study begins its second decade, we’d like to highlight some of the management best practices that’ve been adopted by the leading agencies in the country.
STRIVE TO MAKE DAILY INCREMENTAL IMPROVEMENTS
Many agencies look at improvement as a one-time event. Whether it’s an investment in automation, employee training, or hiring new producers, the highest performers are constantly trying to improve their overall operation and striving to make incremental improvements daily.
Because of this, new performance measures are emerging. For example, agencies are now measuring such goals as increasing the average account size by producer, or increasing the average new business account size.
Since increasing the average account size is an important part of increasing a producer’s total book of business (and their income), the ability to track these results is a vital part of helping a producer increase account size.
Other important statistics that need to be monitored regularly include revenue per employee by department and by function. Your agency should try to improve your marginal productivity, or revenue per employee, by at least 10% per year in each department.
REWARD YOUR STARS AND SHOOT YOUR DOGS
Agency principals often comment on their agency’s strengths by saying, 'Our people are our most valuable asset.' The truth is, the right people — defined as dedicated, hardworking, and knowledgeable — are your greatest asset. The wrong people represent your greatest liabilities.
The leading agencies continually strive to reward the right performance, which they define as 'doing the right job, the right way, with the right attitude.' One leading agency told this story:
'We categorized each employee in one of four groupings. We evaluated their overall performance by asking two questions: Are they willing or unwilling to do their job to the standards that we expect? Are they able or unable to do their jobs to our standards?
'Employees who were rated as both willing and able received a bonus and a substantial pay raise. Those who were willing but unable received a specific training program to improve their skills. Those who were able but unwilling were given a mandate to get on board with the agency or risk losing their job. Those who were judged unwilling and unable were terminated.'
The agency reported that morale improved immediately as the staff recognized management’s willingness to reward good performance appropriately. Another retiring agency principal made a final observation about his experience in the business, 'Don’t confuse tenure with experience, or else you’ll end up with an organization that is incapable of any change — positive or negative.'
MAKE PRODUCERS PRODUCE, WITH NO EXCEPTIONS (INCLUDING THE OWNERS)
The highest paid people in a sales organization should be the salespeople. Unfortunately, many agencies are built around business models that allow producers to arrive at a certain sized book of business and then stop producing.
Whether by paying a substantially higher new business commission rate, or a lower renewal rate, the best agencies reward new business with a superior compensation plan. One principal at an agency we studied shared this insight:
'My competitors are buying agencies at 1.5 to 2.0 times revenue. I’m paying my producers 60% for all new business over $100,000 annually. I’m getting these results from more than half of my producers, with the top guy consistently doing more than $250,000. I’d rather pay higher producer splits for new business than overpay for acquired business — much of which I don’t really want anyway.'
This same agency pays only 22% for renewal business unless the new business production is greater than $50,000 per year. For total production of more than $50,000 in new commissions per year, the renewal split moves to 30%. According to the principals, the results only kicked in when they decided to hold themselves accountable to the same compensation plan as the other producers.
'This is a business where a sales culture can’t be faked,' the principal said. 'If the guys in charge won’t produce, how can we expect others to produce?'
ONE SERVICING SIZE DOESN’T FIT ALL
There’s a reason that the 80/20 rule has become a part of today’s business vocabulary — it holds true.
Unfortunately, many agency principals don’t know the account names, size of accounts, or other characteristics of the 20% of the accounts that generate 80% of their revenues.
Although we all must respect the 'trust relationship' of any family or business that entrusts your agency with their insurance coverage needs, the ability to say 'no' to the prospects that you can’t serve effectively or profitability is a defining characteristic of the highest performing agencies.
The access to expertise and servicing resources available to a major account shouldn’t be compromised by the endless demands of small, price-sensitive clients. So, although the Best Practices Study preaches the virtues of account retention, the truth is that there are many accounts that you want to leave your agency — if only to become a headache for your competitor. The best agencies allow them to leave — and, in fact, encourage them to go.
KEEP YOUR KEY COMPANIES IN THE LOOP
In the challenging insurance carrier environment of the past two years, the best agencies enjoy a very close working relationship with their key companies. In many Best Practices agencies, the relationships between the branch manager, marketing manager, underwriters, and producers are now stronger than ever.
This doesn’t mean that business is always being written at the price, terms, and conditions that would be desired. However, it does ensure open and clear lines of communication between the companies and their agents.
Specific steps by agencies to ensure that communication remains strong include advance notification by the agency if a significant piece of business is being remarketed, or involvement by the company during the mid-year stewardship meetings or renewal meetings to ensure no surprises at renewal.
These are just a few of the management best practices that leading agents and brokers have adopted. Taking the financial and operational performance results of the Best Practices Study and building management strategies that help achieve and exceed the financial benchmarks should be your goal.
With the support of the IIABA and the insurance carriers that back Best Practices initiatives, we at Reagan Consulting, which puts together the Best Practices study, expect the Independent Agency System to become stronger than ever.
Robert C. Smith is senior vice president and a principal of Reagan Consulting, Inc., 7 Piedmont Center, Suite 417, Atlanta, GA 30305. He can be reached at (404) 233-5545 or by e-mail at [email protected]. This article originally appeared in the National Underwriter and is reproduced by permission.