For your agency to survive, and thrive, you’ll need to implement effective expense control programs. This two-article by Jack Fries and Gary Holgate focuses on proven expense control techniques.
There’s no more effective way to increase your profits than by controlling your agency expenses. Independent insurance agency managers must become “expense,” as well as “income generating” experts. This can be a difficult, painful task. It’s fun to generate income and create new sales — it’s not fun doing without things that you’ve taken for granted in the past.
This example analyzes how much premium and income an agency must write to make a profit of $1,000 at different profit margins, using an average commission of 12.5%.
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PROFIT
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PROFIT MARGIN
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PREMIUM NEEDED
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INCOME NEEDED
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$1,000
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2%
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$4 million
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$500,000
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$1,000
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5%
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$1.6 million
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$200,000
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$1,000
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10%
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$800,000
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$100,000
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$1,000
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15%
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$540,000
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$60,750
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$1,000
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25%
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$320,000
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$40,000
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To earn the same $1,000 in profit, which agency would you rather be: The one writing $4 million in premium, or the one writing $320,000?
Most agency owners would respond, “I’d rather be the agency writing $4 million in premium, at a 25% profit margin so that I could make a profit of $125,000!”
WHAT CAUSES THE DIFFERENCE?
An effective agency expense control program can make the difference between a 2% and a 25% profit margin. When budgeting for and incurring expenses, an agency owner/manager must identify each category of expense to determine its source. What’s causing this expense? Is it the income your agency generates? The number of employees? The number of customers?
Let’s analyze some basic expense categories to determine their source:
- Rent. This depends on the number of employees. The more employees, the more space, and the higher the rent.
- Telephone Equipment. Costs relate directly to the number of employees.
- Telephone Toll Charges. The more employees an agency has, the higher its toll phone bill.
- Automation. Once the software and server are purchased, the number of employees definitely impacts additional expenses. The more employees, the more PCs, terminals, wiring, maintenance, licenses, and installation charges (as well as the cost of automation training).
- Furniture, Fixtures, and Equipment. The more employees, the higher these expenses.
- Maintenance and Repairs. The more employees, the more items will need to be maintained and repaired.
- Insurance (P/C, E&O, and Health) definitely an employee-related expense.
- Salaries. This is self explanatory.
- Payroll Taxes. The more employees, the higher your payroll taxes.
- Education and Training. The more employees, the higher the cost of educating and training them.
- Printing. This expense depends on the number of customers and prospects and the amount spent on advertising (direct mail, etc.).
- Postage. Again, the size of the customer and prospect base, together with advertising costs, impact this expense.
These examples indicate the trend of this analysis: Employees account for more than 75% of all agency expenses!
The second part of this article will focus on techniques for reducing employee-related agency expenses.