Characteristics of the Most Successful Independent Agencies

Ten years ago it took $5 million in total agency revenues and about $30 million in Property/Casualty premiums to land on the top 100 agency list. Now an agency needs to have in excess of $10 million in revenues and $60 million in premiums to make the cut. Ten years ago the average independent agency in the country had $250,000 in total revenues with six to seven people. Today the average is close to $600,000 in revenues, also with six to seven people. To use a phrase from Bob Dylan, "the times, they are a changing."

Although there are fewer agencies, those that remain are bigger and also (fortunately) more productive, efficient, and profitable. This phenomenon is due to several factors:

• Reduced commission rates for both Personal and Commercial Lines and lower premium levels in Commercial Lines have forced financially strapped agencies to go under or sell out.
• Pressure from insurance companies for more premium volume has driven smaller agencies together into mergers or clusters.
• Automation advances, including better communication with company systems, as well as improved education and training have increased the ability of agency staff personnel to handle substantially more volume per person.

There’s every indication that these factors will continue to have a dramatic effect during the next several years. There could easily be less than 20,000 insurance agencies in 2006 but they’ll probably average close to $1.5 million in revenues with 10-11 people including the owners and producers. To land on the top 100 list five years from now it might require more than $25 million in revenues and more than $115 million in premiums. If agency management teams vow to be one of the survivors they must be willing to accept the changing environment and do whatever it takes to adapt to the new and very different reality of life in the retail insurance business.

As the Commercial market continues to harden, some agency principals seem to be developing a complacent attitude and are starting to forget the disciplines that they learned during the past decade. It’s extremely important to keep the cutting edge sharp and to continue to run your agency as though commissions per account aren’t increasing. This is definitely not the time to rest on your laurels. If you do, your agency will be one of the 20,000 that don’t exist five years from now. Regardless of market conditions the truly successful, profitable, and high-valued agencies seem to have followed the same course year after year. These agency owners know what has to be done. And they seem to have fun while creating a business with significant residual sales value.

Whether your plans are to sell internally or externally, the stronger your firm from a sales, service, and financial capacity, the more value you’ll eventually have.

PLANNING AND THE ABILITY TO ADAPT TO CHANGE

Successful insurance agents recognize the importance of planning. Yes, we know that the vagaries of the market make this more than a little difficult. But it’s primarily because of these unanticipated changes that you need to follow a basic game plan. Every agency should have three different kinds of plans.

One is a Strategic Business Plan that might consist of only a mission statement, some guiding principles, and a few basic goals regarding growth and orientation. A one or two page synopsis is generally all that’s necessary. A longer Action Plan might be attached but we’ve found that these often gather dust on the shelf. Let the agency personnel know what you want to do during the next several years in a simple statement and then let them know what they can do individually to help you accomplish these goals. This communication might be better handled as part of the performance appraisal process rather than as a formal agency-wide planning meeting. The larger the agency, the less people tend to relate to overall goals — unless the objectives are specifically reduced to an individual level.

The second type of plan is the Marketing Plan. In this document you need to outline the goals and orientation of each producer, unit, or department in the agency. Use a monitoring program as part of the goal-setting process to make sure that the individuals and groups stay on track. If they don’t, take prompt action to find out why and to make operational or performance corrections that will support their ability to meet their objectives. You might also need to modify the goals due to changes in market conditions, company representations, or internal personnel support issues.

Perhaps the most critical plan for agency principals, however, is a Perpetuation Plan. When all of the owners are entering their 60s it might be too late to do much about perpetuation. Most will be forced to sell to an outside buyer for a reduced price if they have no young blood to carry the existing book of business or to produce new accounts for the buyer. And "young blood" isn’t always the answer. Don’t assume that the younger people in the agency want to pay you what you think is a good price for your ownership interest. Talk about it with them. Discuss it among yourselves. If one principal wants to get a son or daughter involved in ownership, how are the rest of the principals going to respond? Know where each of you stands personally and plan to come up with the best resolution for all of you. Putting your heads in the sand and ignoring the issue will almost always end in an ugly resolution, both emotionally and financially.

SALES CULTURE

Successful agencies develop a sales culture that rewards sales people for selling the types of business that are profitable for the agency while not breaking the bank. Most high-valued agencies use sales centers to get ex-dates and set appointments for the producers. They’re also involved in program or niche selling that targets profitable accounts.

Expansion into Employee Benefits is often critical to the overall success of agencies. Rounding out or getting rid of smaller accounts is also critical. If you can’t make money selling and/or handling a piece of business, get rid of it. A number of agencies that have come to this realization have then sold the business that they can’t deal with profitably to other agencies that can.

As part of the creation of this new sales culture, use your advertising and promotional dollars wisely. For a niche market program, put ads in magazines to which businesses are likely to subscribe. In Personal Lines, take pictures of homes in areas that you want to write business and send them to the prospects. If you sponsor a sports team, take pictures and send them to family members to try to generate even more goodwill. Forget sending calendars or other promotional items. These don’t seem to work well anymore. Find other more personal ways to reach the audience that your agency wants to impress.

CLIENT ORIENTATION

The new type of agency sales culture focuses on the client rather than the producer. Hire a qualified service person to help the producer sell and service the account and to keep the pulse of the account to know when it might be necessary to send the producer out for a visit. But have an Account Executive, Account Manager, or Senior CSR handle most of the routine servicing and even much of the renewal preparation.

Organize workflow and servicing functions so that people with the most experience and expertise handle the technical functions while trainees tackle clerical functions. This type of stratification allows you to train people internally and to stay fully staffed at the higher, more technical levels. You’ll help to relieve producers from the pressures of constant client contact and free them up to sell new business.

PERSONNEL MANAGEMENT

To break out of traditional way of doing things, you’ll need to hire, motivate, and retain the right kind of service and sales personnel. The people that you hire (or keep) should all have personal/professional career path requirements and pass applicable personality tests.

Rid your agency of any dead wood. Firing staff is one of the hardest things for agents to do. But biting the bullet is one of the most important actions that you can take to be successful. The Old Marys and Old Harrys create such horrible morale problems among the newer employees that it’s not worth keeping them around. If they’re family members, however, the solution isn’t so easy. We were asked at one seminar "What do you do if the Old Mary is your wife?" There’s no easy answer.

Training and education are critical in personnel management. Keeping licensed personnel current with their continuing education requirements isn’t enough. All agency personnel need sales training at some level. Remember, even the receptionist is in a sales role when answering the phone or greeting customers at the door.

Many of your employees also must have a certain amount of ongoing technical education. And most importantly, everyone should have good time management and organizational skills. If these can’t be conveyed through in-house training then we strongly advise that you look to outside sources. It’s especially important for producers (including owners) to have a good sense of time management because their disorganization can seriously disrupt the workflow and morale of other employees.

HIGH PRODUCTIVITY LEVELS

High-valued agencies today tend to have revenues per employee of more than $130,000 and a strong sense of teamwork to support this workload. Develop and motivate group effort by delegating authority and responsibility, including monetary incentives and psychological and emotional sharing of the results of these efforts. The better employee today isn’t content to just take a paycheck. They want to feel as though they’re contributing to the overall effort and that they’re making a difference.

Top employees also want to know that they have room to grow within an organization. Some people might want to go into sales; others might not. What can they do to mesh their personal and professional goals with those of the organization? If you can answer this question, your productivity will skyrocket. Motivated employees will find a way to get things done.

EFFECTIVE USE OF AUTOMATION

It’s not enough to have a state of the art computer system. Your employees need to know how to use it effectively and your companies must help you with upload, download, and Internet capabilities. Communication with companies, with clients, and within your agency must be easy and free from duplication of effort. Consider a company’s ease of doing business when selecting them. Your employee-training program must include ongoing computer education. An initial one-week orientation isn’t enough. Employees must understand how they can make the agency’s software programs work to help them serve clients better.

COMPANY RELATIONSHIPS

Successful agencies carefully manage their company relationships. They’re careful not to do anything to damage their credibility with carriers and maintain high professionalism and ethics. An agency might have no more than five good years in a relationship with a carrier, a far cry from the good old days. Maximize company relationships and resolve redundancies as much as possible. Most companies (even regional carriers) want more volume now than ever. The average agency has more than one-third of its volume with its top company, 18% with the second and 12% with the third. Companies know these statistics and respond accordingly. Your contingent income, as well as your hopes for maintaining the agency contract, could depend on your ability to meet volume and loss ratio criteria.

BUSINESS COMBINATIONS

Successful agencies evaluate opportunities for mergers, acquisitions, and joint ventures with banks, insurance companies, accountants, and other entities. But not all agencies should be involved in such deals. Although the initial price or possible return might seem irresistible, the end result might not be what the principals want to take on. Go back to your original business plan and make sure that this choice fits with what all the owners want, both personally and for the agency.

FINANCIAL STABILITY

Remember that the financial stability of the firm is critical both for external and internal perpetuation options. You must maintain a current ratio (current assets divided by current liabilities) in excess of 1.1:1. The trust ratio that’s usually measured by dividing current assets by insurance company accounts payable (including pre-billed items) should be above 110%. Otherwise the agency could be out of trust and thus have little value to any buyer. If you want to operate as a going concern in the future, having enough working capital is critical.

Another measurement of financial stability is tangible net worth. To obtain this number, subtract intangible assets (expirations, goodwill, and covenants) from stockholders’ or partners’ equity. In a well-managed agency the result should equal at least one month’s expenses.

POSITIVE ATTITUDE

Probably the most important characteristic of successful agencies is that all of the owners are able to maintain a positive attitude despite adversity. Through market turns and employee turmoil it’s easy to lose sight of sales opportunities. It’s absolutely critical that the principals remain calm and focused on the agency’s goals while dealing with minor personnel or company issues before they become major. An ignored spark can easily turn into a big fire that can and will consume every one in the agency.