The Connected Business of Insurance
July 30, 2013
Two key factors contribute to an insurance agency’s long-term success and value: organic growth and profitability. Organic growth refers to the rate in which an agency grows its revenue through expanded sales efforts rather than the acquisition of existing revenue from another agency or agent. The second key factor, profitability, is the measure of an agency’s true financial viability. If an agency isn’t turning a profit, it’s unlikely to hold significant long term value.
So, how do you take your agency’s organic growth and profitability rates and figure out how you stack up in the industry? Below are insurance agency best practices and key performance benchmarks that indicate if your agency is headed towards long-term success.
Performance Benchmarking: Critical for Improving Operations
The Independent Insurance Agents & Brokers of America (IIABA) provides a best practices study to assist agencies in comparing their performance against the leading U.S. agencies. Performance benchmarks include focusing on measurements that are specific to increasing an agency’s value, such as stronger operations or making an agency more attractive to potential buyers. As a result, there are a variety of benchmarking tools that measure agency value and its performance, including organic growth rate, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) margin, and productivity based on revenue per employee.
The Rule of 20
An extremely useful benchmark is the “Rule of 20,” a simple tool to determine if an agency is creating value for its shareholders. Generally speaking, an outcome of 20 or more, regardless of the different combinations of growth and profitability, indicates that the agency’s shareholders can expect to earn 15-17 percent per year through stock appreciation and/or profit distributions.
Beyond the Rule of 20, other helpful benchmarks involve measuring risk, productivity and financial management. A risk benchmark, for example, would factor in an agency’s diversification. If a company’s revenue is exclusively with one carrier, it is considered high risk. It is also considered high risk if all agency clients are within a particular industry or, worse, if the majority of revenues come from one key client.
Understanding your agency’s performance and management as compared to your competitors, both financially and operationally, is essential to its vitality.
If an agency’s resources are ineffectively managed, the agency most likely will suffer eventually, regardless of the current growth and profitability. Effective management will lead to long-term success and, ultimately, increased value.
What performance benchmarks is your agency measuring, and how have they contributed to your agency’s success?
Shirley Lukens is a principal and senior consultant at Reagan Consulting. She is responsible for researching and developing various industry studies including the annual Best Practices Study, a joint project of Reagan and the Independent Insurance Agents & Brokers of America (IIABA), a national trade association, in which she served for 12 years before joining Reagan in 1998. As VP of Industry Affairs for IIABA, Shirley conceived and launched its highly regarded Best Practices initiative, and was responsible for all its performance enhancement programs, products, and services. Shirley is a frequent contributor to insurance industry publications, and a popular leader of Best Practices workshops at agencies, industry meetings and conventions.