Agency Productivity Levels Continue To Improve

by Carol Hammes

Despite the ongoing soft market in Commercial lines, the average insurance agency continues to show improvement in productivity levels. This happy phenomenon results from a combination of three factors, the most significant of which is the decrease in duplicative efforts now available with more effective automation. But the benefits afforded by computer systems and communication links wouldn't have anywhere near as much impact if it weren't for two other things: a heightened efficiency awareness on the part of agency principals and staff members, and the related increase in training and education investment at all levels. Computer systems are only as good as the people who use them and they can definitely affect productivity adversely if employees haven't changed both their outlook and their procedures to use the help that automation can provide.

Most of resist change, fully embracing it only after a period of testing has proven that it might be good after all. When a new system is implemented, this built-in reticence, coupled with a lack of knowledge and sketchy training, often forces an agency to add people rather than eliminate them. But once the system has been in place for a year or so and most of the data has been loaded, users' comfort levels increase and the agency can start to reap the benefits of the investment. The full impact of the Windows-based policy file-maintenance systems, improved company communications through interface and the Internet, and the extensive use of internal fax and E-mail capabilities finally started to gel this past year. Fully automated agencies are showing revenue-per-employee figures in excess of $125,000, and some are hitting more than $150,000.

Although some agencies are having fantastic results with automation, a number of firms are still operating with sub-par productivity levels and often 10 or more extra people. A commercially-oriented agency with a large average account size should have revenues per employee of at least $125,000. Total revenues of $5 million, for example, would translate into a head count of 40 people. So an agency of this size with 50 employees is effectively overstaffed by 10. At an average compensation per employee of $60,119, the direct annual expense associated with these extra people is in excess of $600,000. A state-of-the-art computer system for an agency such as this could cost up to $300,000 initially and $25,000 per year ongoing. To break even over a five-year period, the agency would need to reduce the head count by seven. To realize a three- to four-point increase in profitability, the total number of employees would have to go down by 10.

Certainly a direct improvement in productivity and profitability is not the only reason for automating. A good system can allow the agency to enter into aggressive marketing programs. It can also provide much more professional and responsive service both to customers and to insurance companies. Most important, it enhances the jobs of the insurance professionals who work there by allowing them to focus on sales, risk management, and underwriting issues rather than pushing paper. The ideal computer system will assist the agency with increasing revenues while it enhances the retention rates of accounts, company relationships, and employees. When combined with the increased levels of productivity, it's clear that the proper and effective implementation of automated systems can have a tremendous impact on the agency's bottom line.

It's therefore a total mystery why so many agency owners are failing to take full advantage of the automated systems in which they've invested. This lack of total commitment can manifest itself in various ways.

One of the worst decisions that's often made is to exclude agency principals and/or producers from having to use the system to obtain policy information, prepare correspondence, and communicate with others inside and outside of the office.

Another common mistake is to take the training process too lightly. Effective utilization of the system is a process, and making sure that everyone knows how to use the basic programs and the upgrades is an ongoing and often full-time job. Trying to get by with the bookkeeper as a part-time systems coordinator/trainer is tantamount to shooting yourself in the foot. Rather than running at full speed, the agency and its systems implementation process will merely limp along.

A third common error is to plug the system into the existing set of manual procedures without taking the time to re-evaluate the way every single function is being handled. Automation has an impact on virtually every agency process. Failure to acknowledge that fact will result in duplication and an increased chance for mistakes that then must be corrected.

The balance of this article presents productivity measurements for the average agency. Firms that are effectively utilizing automation will usually have results that are at least 25% better than the average. As you compare your results to these guidelines, look for areas where you're at or below the average level. Critically analyze why your agency is not at 125% of average, looking first at the utilization of automated systems. Develop a program for addressing the areas that need improvement over next year and set some goals based on above-average performance levels by multiplying the average shown here by 1.2 or 1.25.

To help you select the appropriate composite to use, the following chart presents a profile of the agencies that comprise each of our four peer groups. For example, if your agency would fit into the large peer group based on revenues but is primarily Personal lines with relatively small account sizes, it might provide a more accurate comparison to use one of the smaller composites for some of the analyses. In general, for productivity comparisons, use whichever peer group most closely resembles your business mix and account size. This might mean that you'll have different peer groups for Commercial and Personal lines and employee benefits.

Agency Revenues $547,984 $1,252,590 $2,250,500 $5,194,600

Comm.l/Pers. Mix 47/53 62/38 72/28 74/26

Avg PC Comm/Acct $210 $588 $1,001 $1,546

# Commercial Cos. 5.7 8.6 14.4 16.3

# Personal Lines Cos. 5.6 5.8 6.6 6.8

Avg Comm. % CL/PL 13.3/14.0 13.4/14.1 12.6/14.1 12.1/14.2

The most commonly used measure of productivity for service firms is to determine how much income is generated per person working there. The following revenue per employee figures include all agency operating revenues (commissions, contingents, investment income) divided by the total number of people working in the agency, including owners and salespeople. The compensation per employee includes all payroll taxes and employee benefits in addition to W-2 and 1099 salary and commission payments. The difference represents the amount of money left over after paying the employees to cover overhead and profits.

While the revenue per employee figure is almost $30,000 higher in larger firms with larger average account sizes, the difference is only $10,000 higher. People who are handling larger accounts can generally service bigger books of business but these employees are often more technically oriented and/or have more experience and are therefore more expensive. Because most independent agencies are privately held firms, the reported profit margins might not be a true reflection of actual profitability, so it's important to keep that in mind when making your comparisons of the profit per employee.

Revenue/Employee $68,498 $83,506 $90,020 $103,892

Compensa/Employee $40,006 $44,510 $50,913 $60,119

 

Difference $28,492 $38,996 $39,107 $43,773

Profit/Employee $5,617 $7,265 $7,112 $8,104

One of the more attractive things about growing is that over time it affords sales and professional employees the luxury of delegating administrative tasks to middle managers and clerical personnel. The result of that specialization is a reduction in the relative number of people involved in sales and servicing and an increase in the number of administrative employees who often have lower salary levels. This delegation process in turn leads to higher levels of revenues per person in the sales and servicing areas, as is illustrated in the chart below.

Note that in this table we have used total revenues, not just commissions. The purpose for this comparison is to provide an idea of the total number of people the average agency needs to generate a certain level of revenues. An agency with $750,000 in revenues and five producers would have a revenue per producer figure of $150,000 (compared with $260,956 for the average). This would indicate that there's substantial room for growth in the producer's books of business in that subject firm.

% in Production 34% 32% 31% 29%

Revenue/Producer $202,957 $260,956 $290,387 $358,248

% in Customer Svc. 55% 50% 48% 47%

Revenue/Service $124,542 $167,012 $187,542 $221,049

% in Adm./Mgmt. 11% 18% 21% 24%

Revenue/Admin. $547,984 $463,922 $428,667 $432,883

Over the past three or four years, there's been relatively little change in the commissions handled per service personnel in Commercial Lines. Part of this relates to the deepening of the soft market and part of it is due to the fact that this department is often the last to receive significant benefits from automation. Personal Lines productivity, on the other hand, has increased dramatically over the same period of time. Service personnel in highly automated agencies with commissions per account of around $200 can handle close to $200,000 in commissions per person. Personal Lines CSRs nationwide have an average compensation level of $30,000 (salary plus benefits). The profits from this department alone can go a long way toward funding additional investments in automation.

Employee benefits/Group insurance is another area of actual and potential profitability. The average account size has been steadily increasing as premiums are on the uphill swing, unlike premiums in Commercial Property/Casualty, which have been decreasing during the course of the soft market. Service personnel in agencies with larger average account sizes are now handling in excess of $300,000 in employee benefits commissions per person versus $200,000 per person in Commercial Property/Casualty. Salary levels for CSRs in both departments are comparable, indicating a substantially higher profit potential in the Group department. This is one of the main reasons why agencies should strive to increase the percentage of their income from this source.

In the best of all possible worlds, profit-sharing income would be gravy-something that's not necessary to fund the agency operation. Its receipt is not guaranteed and is truly contingent on certain things happening or not happening. More insurance companies are building growth and volume thresholds into the formulas so even an agency with excellent loss ratios might not receive any bonuses for a year or two. At the beginning of this decade, too many agency principals were counting on profit-sharing checks to support their budgets. Some learned the hard way that this practice was putting them on very thin ice. Those that didn't sell out or go under are much more conservative today. In fact, only one of the peer groups had a contingent/profit ratio in excess of 100%, compared with all four of them back in 1992-1993.

Cont//Employee $3,493 $5,261 $8,282 $7,272

Cont./PC Account $13.91 $24.51 $45.50 $33.39

Contingents/Profit 62% 72% 116% 90%

Contingents/Owner $18,631 $37,577 $60,896 $61,631

For the third year in a row, all four composite groups saw a reduction in the number of agency principals. It's not clear whether this is simply coincidence or whether it's an indication of future internal perpetuation problems as more people are selling their interest than are buying into agencies. As a result of the smaller ownership groups, the contingents per owner and the revenues per owner are now much higher than they once were.

More important for owners who remain is the continuation of a trend that began five years ago. The return per owner has been steadily increasing since hitting a low in 1992-1993. While not back up to the hard-market glory days of the 1980s, the percentage of revenues and the amount of money available for owners to take out of the agency as W-2 income and profits is once again respectable and even quite impressive in the more productive and profitable agencies. Depending on the size of the agency, the principals are averaging from 21.9% to 33.6% of revenues as a combined investment return and compensation for services rendered. Note that 15.2% to 39.3% of the ownership return came from contingent income. Owners in the average agencies received from $122,748 to $192,817 this past year, with owners of the more profitable firms in the $150,000 to $250,000 range.

Number of Owners 1.5 2.1 3.4 5.9

Revenue/Owner $365,323 $596,471 $661,912 $880,441

Owner Return Ratio 33.6% 29.2% 23.4% 21.9%

Return/Owner $122,748 $174,170 $154,887 $192,817

% from Contingents 15.2% 21.6% 39.3% 32.0%