by Robbie Smith, April 2003

National Underwriter

The past ten years have brought huge change to the independent agency system.  Agents and brokers endured a prolonged soft market only to move to a hard market with limited capacity.  Many agencies have had to "reengineer" their business because of automation. The entrance of banks into insurance distribution has created a new and powerful competitor.  Many insurance carriers have faced insolvency or significant realignment of their underwriting practices.  And all agencies had to endure the threat of disintermediation because of the Internet.

Ten years ago, many were predicting the demise of the independent agency system.  It was also ten years ago that the Independent Insurance Agents and Brokers of America began its Best Practices Study as a tool to empower agents to address many of the challenges that they faced.  The Best Practices Study has become an industry standard for financial and operational performance data.  As the Best Practices Study begins its second decade, we would like to highlight some of the management best practices that have been adopted by the leading agencies in the country.

• Strive to make daily incremental improvements.  Many agencies look at improvement as a one-time event.  Whether it's the investment in automation, employee training, or the hiring of new producers, the highest performers are constantly trying to improve their overall operation and strive to make incremental improvements on a daily basis.  Because of this, new performance measures are emerging.  For example, goals such as increasing the average account size by producer or increasing the average new business account size are now being measured.  Since increasing the average account size is an important part of increasing a producer's total book of business (and his or her income), the ability to track these results are a vital part of helping a producer increase his account size.  Other important statistics that need to be regularly monitored include revenue per employee in each department and by each function. Your agency should endeavor to improve your marginal productivity, or revenue per employee, by at least 10% per year in each department.

• Reward your stars and shoot your dogs.  Agency principals often respond regarding their agency's strengths by saying, "...our people are our most valuable asset."  The truth is, the right people, defined as dedicated, hardworking, and knowledgeable people are your greatest asset.  The wrong people represent your greatest liabilities. 

  The leading agencies continually strive to reward the right performance, which they define as "doing the right job the right way with the right attitude."  One leading agency told this story:

  "... We categorized each employee in one of four groupings.  We evaluated their overall performance by asking two questions - first, are they willing or unwilling to do their job to the standards that we expect? Second, we then categorized them by asking are they able or unable to do their jobs to our standards?  Employees that were rated as both "willing and able" received a bonus and a substantial pay raise.  Those who were willing but unable received a specific training program to improve their skills.  Those who were able but unwilling were given a mandate to "get on board with the agency" or risk losing their job.  Those who were judged unwilling and able were terminated."

  The agency reported that morale immediately improved as the staff recognized management's willingness to appropriately reward good performance.  Another retiring agency principal made a final observation about his experience in the business, "don't confuse tenure for experience or else you will end up with an organization that is incapable of any change - positive or negative."

• Make Producers Produce-No Exceptions (including the Owners). The highest paid people in a sales organization should be the salespeople.  Unfortunately, many agencies are built around business models that allow producers to arrive at a certain sized book of business and then stop producing.  Whether it is by paying a substantially higher new business commission rate, or a lower renewal rate, the best agencies in the country reward new business with a superior compensation plan.  As one agency principal shared, "...my competitor's are buying agencies at 1.5-2.0 times revenue.  I am paying my producers 60% for all new business over $100,000 annually.  I am getting these results from over one-half of my producers with the top guy consistently doing over $250,000.  I would rather pay higher producer splits for new business than over pay for acquired business...much of which I do not really want anyway."  This same agency pays only 22% for renewal business unless the new business production is greater that $50,000 per year.  For total production of over $50,000 in new commissions per year, the renewal split moves to 30%.  The principals shared that the results only kicked in when they decided to hold themselves accountable to the same compensation plan as the other producers.  "This is a business where a sales culture can not be faked.  If the guys in charge will not produce, how can we expect others to produce?"

• One Servicing Size Does Not Fit All.  There is a reason that the 80/20 rule has become a part of today's business vocabulary ... it's true.  And in no place is it truer than in an insurance agency.  Unfortunately, many agency principals do not know the account names, size of accounts or other characteristics of the 20% of the accounts that comprise 80% of their revenues.  While we all must respect the "trust relationship" of any family or business that entrusts your agency with their insurance coverage needs, the ability to say "no" to the prospects that you can't effectively or profitability serve is a defining characteristic of the highest performing agencies.

  The access to expertise and servicing resources that are available to a "major" account should not be compromised by the endless demands of small, price sensitive clients.  So while the Best Practices Study preaches the virtues of account retention, the truth is that there are many accounts that you want to leave your agency ... if only to become a headache for your competitor.  The best agencies allow them to leave ... and in fact encourage them to leave.

• Keep Your Key Companies in the Loop.  In the challenging insurance carrier environment that defines the last two years, the best agencies in the country have a very close working relationship with their key insurance companies.  In many cases with the Best Practices Agencies, the relationship between the branch manager, marketing manager, underwriters and producers are stronger now than ever before.  This does not always mean that business is always being written at the price, terms and conditions that would be desired.  However, it ensures open and clear lines of communication between the companies and their agents.  Specific steps that are being taken by agencies to ensure that the communications remain strong include advance notification by the agency if a significant piece of business is being remarketed.  Or, involvement by the company during the mid-year stewardship meetings or renewal meetings to ensure no "surprises" at renewal.

These are just a few of the management best practices that have been adopted by the leading agents and brokers.  Taking the financial and operational performance results of the Best Practices Study and building management strategies that help achieve and exceed the financial benchmarks should be your goal.

Reagan Consulting looks forward to another ten years working with the agents and brokers, and with the support of the insurance carriers that support the Best Practices initiatives; we hope that the independent insurance agency system will become stronger than ever.

Robert C. Smith  is a former principal of Reagan Consulting, Inc., an Atlanta based management consulting firm that serves the insurance distribution system.