Making the Grade in Agency Diagnostics

As individuals, the easiest way to see how well you are performing is to compare yourself to others. We all do it from time to time.

Likewise, with businesses, comparisons are a very useful tool to check performance. The key is to know what to compare–understanding what are the important indicators and which benchmarks are useful.

It is not useful to compare the test score of a third grader with those of an eighth grader. They are different ages, at different development levels, learning different things. Nor is it the same comparing SAT scores with ACT scores, even though they are both college placement tests. A conversion scale could be made to approximate the score in one test to the score in the other test. The conversion would not be very accurate for a variety of reasons.

Comparing one’s business to its peers is a great way to evaluate what is working right and what needs to be revised. It is also an important part of business planning. Planning ahead requires an understanding of where you are now, how you got there, what works and what things do not work. Once the current status is defined then a roadmap to the future can be drawn.

What to look for in a benchmark
It is import to understand the limits of using a benchmark. The agency owner provides the data collected in these surveys directly. The owner might have a different interpretation of what something means, or accidentally provide the wrong numbers. The goal for the survey publisher is to toss out obviously bad numbers and to collect enough data so that the overall trend is clear.

When seeking out a benchmark to use, make sure the information is meaningful to the agency. Most of the larger surveys break the information down, based on size of the agency and the general geographic location. Look for surveys that have information based on line of business as well. Keep in mind that some business models are very unique, so it might be very difficult to compare results. Also, firms that write the same size account can provide more meaningful productivity standards.

There are a fair number or resources to use for a comparison to one’s peers. We have seen and use two comprehensive studies that provide useful benchmarks for self-analysis. The Independent Insurance Agents and Brokers of America publishes “The Best Practices Study” and The Academy of Producer Insurance Studies (CIC) publishes “Growth and Performance Standards.” Both have a variety of benchmarks and they are cost effective to obtain. Various other consulting firms will have their own surveys, including Oak & Associates. We publish an Employee Compensation Survey for California agencies. Contact us if you would like a copy.

Where to start
The rule of this game is to keep it simple. The objective is to review the agency’s performance in five areas of primary focus: 1) Book of Business Analysis, 2) Sales, 3) Financial Analysis, 4) Productivity and 5) Agency/Carrier Relationships. The analysis needs to include peer group comparisons, agency historical performance, a subjective feel for performance and areas for improvement. Although many, many ratios and indicators can be calculated, there are just a handful of important ones which reveal most of what is needed to be known about the agency’s performance.

Book of business composition
It is a great starting point to examine the composition of an agency’s book of business since it defines the agency’s “personality.” The “personality” of an agency in turn will define what to expect in the other primary areas in the review process. For example, a large urban agency that sells only very large commercial accounts will have different expectations than a small town agency that sells all lines of insurance.

Start by finding out what the split of business is along each line: personal, commercial, life, group benefits, program business, etc. Then calculate the average size of account for each line. Also, how much of the agency business comes from the top 10 accounts. Finally, analyze what the distribution of business is by industry. This diagnosis should also be done for each producer. Compare the results to the agency’s peers with the appropriate benchmarks.

Sales review
There are three important indicators to review for sales–both for the agency overall and by individual producers: 1) New Sales, 2) Hit Ratio, and 3) Attrition Rate.

An experienced producer in a typical agency should generate at least $30,000 to $60,000 in new commission dollars each year. For large firms with large accounts, the amount would be much higher.

Hit ratios less than 25 percent to 33 percent will end up costing the agency money. The technique of producers with low hit ratios needs to be checked and adjusted. Often, the producer fails to pre-qualify the prospect.

The agency may have tremendous sales, however if there is loss of business through attrition, much of the effort for new sales is wasted. The goal should be around 10 percent or less attrition for the typical property/casualty insurance agency. High attrition rates are usually an indication that the business the agency writes is transient and either the client is price shopping or not a good risk.

Financial analysis
For the financial review, one of course would need income statements and balance sheets. Don’t forget to obtain the accounts receivable and account payable reports.

First look at the changes in revenue and expenses to prior years. Has it gone up or down? What is the percentage of the change in each category? If there are major changes, what was the reason? Sometimes the change is because of a non-recurring event. The real problem is if the situation has gotten progressively worse over the years. Subtle changes each year can add up to a big change.

Is the agency spending more or less for each expense than its peers? Make sure that the peer group used is a fair comparison. Use a benchmark that is for agencies of similar size, book composition (personal lines, commercial lines, life and health) and if possible geographic region. If the agency is significantly different from its peers, why it is so and should there be any adjustments made to your operation?

What is the bottom line? Is the agency profitable? A good rule of thumb is the total return for the owners and producers (compensation, perks and profit) in an agency should be at least 50 percent of the revenue.

Next take a look at the following balance sheet ratios: Trust Ratio (cash plus receivables divided by company payables), Collection Ratio (receivables divided by premium payables) and the Current Ratio (current assets divided by current liabilities). Review the aged receivables report. How good is the agency’s collection practice?

Productivity analysis
The next area to look at is staff productivity. The following information is needed: 1) an employee list including the percentage of time each employee (and owners) spends on production, service, administration and management, 2) compensation for each employee, and 3) commissions and number of accounts each CSR handles.

It is important to begin the review with the big picture. Calculate revenue per employee, per CSR, and per Owner/Producer. These are the simplest and most important ratios for productivity. Keep in mind to not use the job titles, but the percentage of time the employees spend in each category. If a producer spends a third of their time doing traditional CSR service work, then they count as 33 percent of a CSR and 66 percent as a producer.

Next, narrow the scope down to commissions per CSR and accounts per CSR. This should be broken down by line of business if the CSR handles more than one line.

Compare the CSRs to each other and the agency’s performance to its peers. There may need to be some subjective adjustments. For example, a CSR may have had to move a book of business from one carrier to another. Also, some types of business may be more complicated and service intensive than other types and this could affect performance if a CSR’s book is heavily niched.

Another way to evaluate if the staff is productive is to calculate the “Spread” which is revenue per employee minus compensation per employee. This will help determine the profitability of a book of business. It may make sense to get rid of a book of business that generates little profit due to high costs in serving it.

Agency carrier relations
The last area to check out is the agency’s markets and the relationship with them. List all the carriers with volumes, commission rates (or commissions), loss ratios and contingents received. Analyze how the agency’s book of business stacks up with the existing markets. There are several benchmarks to use, but this category needs to be considered very subjectively.

During the review, some of the questions that should be asked and answered include: Will volume commitments be met and how will it be done? Are there new markets the firm should seek out? Is the volume spread too thick or too thin? Is the agency maximizing profit sharing agreements?

Prepare a report card
When the review is complete, create a report card with grades A, B, C, D and F for each of the key areas discussed. It is useful to also make comments on what is working well and areas for improvement. This report card can become the basis of a business plan.

Just like a report card from school, the agency review should be revised periodically throughout the year. Take the time to perform an agency diagnostic. Owners that are too busy to reflect on their business’ performance will usually reach a plateau, since they do not have a firm foundation to build on.

So be willing to revise the old and unproductive ways of running your business by implementing new and efficient techniques that will make the agency a success.

Bill Schoeffler and Catherine Oak are partners at Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at (707) 935-6565, by e-mail at: bill@oakandassociates.com, or visit :www.oakandassociates.com.

Topics Agencies Profit Loss