The Connected Business of Insurance
October 12, 2018
The insurance industry is a challenging and evolving marketplace. To keep from getting left behind, agencies must continuously look to improve their performance. 25 years ago though, there weren’t meaningful industry metrics or benchmarks for insurance agents to compare their performance to. Reagan Consulting and the IIABA, “Big I,” responded to this need in 1993 by developing the Best Practices Study to identify the operating and financial characteristics of top performing agencies in the United States.
By studying the leading agencies and brokers in the country, Reagan Consulting and the Big “I” hoped to provide agents with meaningful performance benchmarks and business strategies that could be adopted or adapted for use in improving agency performance, thus enhancing agency value.
After 25 years, why does the initiative still matter? It matters because healthy firms can control their own destinies by understanding their business value levers, setting goals, managing carefully and strategically and leveraging opportunities.
5 Key Metrics Agencies Should Be Tracking
The Best Practices Study includes a variety of metrics on growth, profitability, productivity, perpetuation readiness, sales culture and more. However, there are five key metrics that every agency should track to best assess and improve their overall performance.
- Organic Growth
Growth and profitability are the two variables that most impact your agency’s value and most closely influence your agency’s long-term viability. To grow and attract the best talent in our industry, you have to be a winning organization. Winning in our industry boils down to your ability to grow and generate strong profit margins. Organic growth is a great starting point to get a sense of where you are compared to the top performers in the industry. At the end of the day, winners and also-rans in this industry are generally characterized by their ability to grow organically. How do you compare with your peers?
- Sales Velocity
Over the years I’ve heard agencies say, “We want to grow 10% a year” – and that’s the end of the discussion. What they haven’t done is ask, “How much new business would we need to write to accomplish that?’” If you want to grow by 10% and you’re giving up 7 percentage points on rate, retention and exposure realities, you’ll need to write 17% in new business to get to your 10% growth goal. The Sales Velocity metric can be a real help in understanding how likely you are to be able to achieve your growth goals. Expressed as a percentage, Sales Velocity is calculated by dividing this year’s written new business by last year’s commissions and fees. By isolating the new business component of your organic growth, Sales Velocity will help you to assess your own performance and develop realistic growth goals.
- Pro Forma Profitability
It’s important for your agency to generate strong profit margins. This is the money you’ll use to hire new producers, invest in new technology and to make other the investments required to grow your business. Pro forma profitability is the actual profitability of an agency after non-reoccurring/extraordinary revenue and expenses and excessive owner compensation/perks are normalized. It is the best measure of profitability to allow you to compare your agency to top performing agencies.
- Net Unvalidated Producer Payroll
One issue we’re struggling with in the insurance industry is the ability to attract and retain young talent, specifically producers. The key metric we developed to determine if an agency is making an effective investment in its new producers is net unvalidated producer payroll (NUPP). This metric is a percentage of an agency’s annual revenue that is invested in payroll compensation for young and developing producers, over and above what their books of business would entitle them to receive. The average agency’s NUPP is between 1.0% and 1.5% and the more successful agencies tend to have a NUPP of greater than 1.5%. NUPP is a great way to ensure that you’re making an appropriate investment in next-generation producers.
- New Commissions & Fees and Total Book Sizes for Validated Producers
OK, I cheated – there are actually 2 metrics here. But both very important. New business per validated (mature) producer is another key metric in better understanding your agency’s sales culture. By understanding better how your producers are performing relative to your peers, you are able to identify and address new business performance gaps that are hindering your overall growth. Your average book size per validated producer is critical to understanding the efficiency of your producer and support teams. Knowing what book sizes producers in peer agencies can support and service enables you to establish achievable goals and workloads for your producers and support staff. If your producers are handling materially smaller books of business than your peers, it may be an indication that you are understaffed or in need of additional training and supervision.
Overall, focusing on the best practices that drive agency value remains one of the best disciplines available to firms of all sizes looking to achieve their long-term goals and maximize their values.
For more insights on benchmarking and key findings from the 2018 Best Practice Study, watch the “Benchmarking the Industry: The Best Practices Study” webinar I recently hosted.
Tom Doran is Senior Vice President and Principal at Reagan Consulting. Tom joined Reagan Consulting as a consultant in 1993 and became a principal in the firm in 1995. He is a Certified Valuation Analyst (CVA) with an undergraduate degree in Computer Information Systems and a Masters of Business Administration from Georgia State University. Before joining Reagan Consulting, he worked in the computer industry, both as a software developer and as a management consultant. Tom’s areas of expertise include merger and acquisition representation, agency valuation, ownership perpetuation planning, agency valuation enhancement and strategic planning facilitation. Tom is a regular contributor to Reagan Consulting’s industry studies and is frequently published in various insurance industry publications. He also speaks on a regular basis to industry trade groups and associations on a wide variety of topics concerning the insurance distribution system.