Sharon Cunningham's consulting visits with agencies have allowed her to see how the successful ones remain competitive in this changing environment. In this article, Cunningham shares some of what she has seen: What the trends are, what works, what doesn't, and what concerns agencies have as they strive for success on an ever-changing playing field.
Since I started consulting with insurance agencies more than 20 years ago, change has been a constant in the industry. Mergers and acquisitions have left roughly the same number of agents working for fewer, often larger, agencies. The small and mid-size agencies that have survived have done so by using technology to become more efficient and by finding new ways — often through affiliating with other agencies — to access a shrinking number of national carriers. They've also met the same challenges of managing employees and remaining profitable that any business faces.
The insurance industry has changed significantly in the past two decades. Twenty years ago, there were 70,000 independent agencies nationwide. Every year since 1996, published reports have put the number at 40,000 (37,000 might be the best estimate today). Not too far in the future, we could see as few as 20,000 independent agencies.
With a decline in the number of agencies comes an increase in the amount of business that agencies of all sizes are writing. Ten years ago, about 46% of agencies were generating less than $150,000 a year in revenue, and only about 3% were larger than $2.5 million. Today, those small agencies account for only 20% of all independent agencies, and the proportion of those generating more than $2.5 million in revenue has risen to 11%. Seven years ago, an agency had to have $10 million in revenue to make the Business Insurance annual “top 100” list. To make that list today, an agency would have to bring in nearly $20 million.
If anything, the pace of change might be accelerating. In 2003, 174 agency consolidations were publicly announced (and certainly many more took place that weren't announced). Through just the end of March 2004, 53 such deals had already been reported. As you might imagine, banks and larger brokers were the buyers in many of these transactions — a significant change in our industry's distribution system.
Agencies of different sizes appear to respond to these trends in different ways. Approximately 29% of all agencies were involved in a merger or acquisition last year. The owners of many $3 million to $5 million (revenue) agencies I've talked with who haven't made an acquisition have considered this option seriously for two reasons: They might not have worked out a perpetuation plan and/or they wonder if their agencies will ever have a higher value than they do now. However, many of them are hesitating. Some worry about how to pick the right target for an acquisition, while others are concerned that the resources they devote to an acquisition come at the expense of sales.
More and more agencies are responding to industry trends by banding together: 11% of independent agencies have joined clusters, and another 9% are involved in networks. It's not just the smallest agencies taking this route. I've talked with plenty of agencies with $1.5 million and $3 million that are considering some type of affiliation.
With consolidation leading to an ever-smaller number of national carriers, even agencies of this size worry that they won't have enough volume in the future to gain access to markets. Across the board, agencies have increased the amount of revenue generated per employee. Ten years ago, agencies usually averaged nearly $85,000 in revenue per employee. More and more today, I see agencies closer to $130,000. Reaching this level requires changes in an agency's employee compensation system, management style, and use of technology.
COMPENSATION: PAY FOR PLAY
The busy pace of mergers and acquisitions is just one result of the pressure on agencies to grow their books. I've seen several agencies with annual growth rates as high as 15%, for whom “organic” growth is responsible for only about 5% of their total; the rest is due to acquisitions. This can take an agency only so far. Sooner or later, it must grow organically or shrink.
In agencies with revenues between $500,000 and $1.25 million, the average growth rate is 7.7%. Larger agencies have had an advantage recently, because they write the larger accounts that have seen the more significant rate increases. For small to mid-size agencies, the pressure to grow has resulted in a greater emphasis on new-business production, which in turn has led many agencies to take a new look at their compensation plans for both producers and service staff.
In almost every agency, compensation is the largest expense, ranging from 60% to 70% of total expenses. Many agencies today are lowering renewal commissions in order to prompt producers to focus more on new business. Some agencies have also stopped paying any commission on new small-business accounts to producers whose job is to land mid-size or larger accounts.
Some plans provide incentives for producers to reach certain goals. One such plan I've seen gives producers 40% commission on new business policies. If the producer reaches a certain new-business goal, the new-business commission increases to 45%, back to dollar No. 1.
Another example of a simple plan is a bonus system tied to how much a book of business grows. Producers who grow their books to a certain size receive additional bonuses. The typical minimum goal for new business is $50,000 per producer, but $100,000 is a desirable target.
Agencies often hire new producers with proven sales success in other industries. The sales talent that makes these employees attractive in the first place also means that they're already making a relatively high income. Because their lack of insurance experience makes it difficult for them to immediately match their former income on straight commission, many agencies are giving these new producers longer — sometimes as long as three years — to validate their income with new business. Of course, this doesn't mean that an agency has to keep such a producer for the full three years if they're not working out.
Account executives and service staff can help an agency to get more new business out of producers. If you want your producers spending time with prospects, you can't expect them to handle too much work in the office. Where agencies had “processors” 20 and even 10 years ago, they now require a service staff to work on renewals, market, and even to support new-business efforts. Employees are also expected to use a variety of complex software applications. Many CSRs, account executives, and other service employees must obtain a license and participate in continuing education.
These new responsibilities and the need for high-quality service employees have driven up their salaries, too. During the past 10 years, service-staff compensation has increased as a share of overall compensation. More agencies are offering service employees the option of basing their raises on new business, increasing their financial risk, but also their potential reward.
Compensation plans can also be used to support the long-term health of an agency. I visited one agency in the 1990s that had just started out. To keep quality people, they decided that anyone who stayed with the agency for 15 years would receive a one-month sabbatical, in addition to regular accumulated vacation time, and would get some extra spending money to use during that sabbatical. I didn't believe that the agency would be able to keep this up as it grew. Now they're on the top 100 list, with the same policy in place. Rather than creating a problem with their profitability, the policy is probably part of the reason for their retention of employees, good growth, and profitability.
MANAGEMENT: 'NOTHING BUT THE BEST'
The most ingenious compensation plan is useless without agency management support. Managing employees means confronting poor performance. Agency owners are salespeople by nature, and salespeople naturally want to be liked and to please others. Successful management requires overcoming this desire when needed for the good of the agency.
I often see a reluctance to deal with subpar performance when I visit agencies. One service employee is organized, efficient, and up-to-speed on everything. Next to that person is an employee who's behind constantly and refuses to try new procedures that might increase efficiency. Yet both employees receive the same salary and the same raise. This just can't go on in a successful agency.
Top-performing agencies have a full range of professional management practices in place: Thorough training, comprehensive performance reviews, accurate job descriptions, and solid communications efforts that include regular meetings.
Strong management is important for sales personnel as well as service employees. For too long, many agencies seem to have assumed that salespeople don't need as much management because commissions provide all the incentive they need. However, this approach doesn't work. Some producers are happy to float along on renewals, and might have done so for so long that their prospecting skills are dulled. Others might bring in business that provides them with a decent commission, but costs the agency too much to support agency growth.
The most successful agencies have a growth plan that they communicate to their producers. These agencies know how much new business each producer brings in and with what type of accounts the agency has been most successful. They then decide what type of accounts producers should target and determine the criteria for qualifying prospects.
One agency I visited takes a fresh approach to supporting their producers in the weekly sales meeting. They meet on Friday mornings instead of on Mondays, and rather than reporting on what they've done in the past week, they must give detailed plans for the week ahead. This forces the producers to have their next week's plan ready by Friday morning. Each producer must also enter at least one prospect into the agency's central database at the weekly meeting and explain why they should be allowed to pursue it. If another producer has a better chance at a particular prospect (more of an “in”) that producer gets the prospect instead.
Another agency had producers bringing in $300,000 a year in new business. They can do this because the agency hired someone for its new-business department who had a background as both an account manager and underwriter. When producers bring in prospects, this person can determine what more was needed to make a successful presentation to carriers. This made it far easier for producers to work on winning new clients, rather than spending time on the details of submissions.
AUTOMATION: TECH YOUR TIME
In successful agencies, the service staff can operate more efficiently and handle more business because they're using up-to-date technology. Agencies that refuse to change or that don't fully capitalize on the technology they already have don't do as well.
I recently talked with an agency that generated $5 million in revenues and had just one accounting person. She told me that the agency had fully implemented a document imaging system, adding, “If we didn't have this system in place, we'd need another me. The only reason I can do what I do is that I don't need a paper file, ever. Everything is in front of me.” On the other end of the spectrum are agencies that have paid for sophisticated agency management systems but aren't using them fully, particularly their reporting features.
When I begin consulting for an agency, I often ask them to run reports on their new business, lost business, books of business by producer, and new business by producer. Even though these reports are all important indications of how well an agency is doing, many owners don't know how to create them.
I've seen other agencies drag their feet on automated functions that aren't even that high-tech. Direct-bill follow-up is one of these. Too many agencies spend time generating late-payment notices for direct-bill customers; some even make multiple phone calls to these clients, in the belief that this is necessary for retention. Why would an agency want to expend such effort to retain clients who don't pay their bills on time? Time is often also wasted with claims reporting. Agencies that take advantage of carrier service centers often accept claims calls from clients when they should just transfer these calls to the carrier. If your agency provides a true claims-management or loss-control service, that's different. If not, you aren't really bringing any extra value to the client by taking down information and passing it on.
The goal of every agency should be to take advantage of every opportunity to become more efficient and, in particular, to get every piece of information possible into the agency management system database. Agencies should generate reports and use the system for marketing — not just marketing an account to a carrier, but real marketing to clients and prospects. A system can help an agency learn where its most successful niches are, and what business it should be targeting.
PLAN FOR SUCCESS
Successful agencies of all sizes create a sales-driven, growth-oriented culture by using technology to learn their own strengths and weaknesses. They require growth from their producers, create compensation plans that motivate all their staff to meet those demands, and support this demand with their technology and service staff. If you make these practices part of your agency's detailed, long-term plans, you should also be able to plan on greater success.