by Shirley Lukens, October 2002

National Underwriter

The Independent Insurance Agents & Brokers (IIABA) and Reagan Consulting released the 10^th edition of the annual Best Practices Study this month.  The release marks the anniversary of an initiative that began in the fall of 1992 to help independent agents build the value of their most important asset - their agencies.

In the early 90s, tougher competition, a soft market, and the sluggish overall economy had forced many agencies to sell, merge or go out of business.   However, a handful of well-run agencies were not only surviving in this environment, but were also prospering.  By studying these successful agencies and brokers, the IIABA hoped to provide member agents with meaningful performance benchmarks and business strategies that could be adopted or adapted for use in improving agency performance, thus enhancing agency value.

The principals of Reagan Consulting were retained to create and perform the first study of The Best Practices of the Leading Independent Insurance Agencies in the United States.  The "secrets" of these agencies boiled down to one thing -- a commitment to continuous improvement.  Whether they were striving to better understand and meet client expectations, investing in employee development, working to enhance company relationships, adopting new technology, or refining the agency's business focus, they wanted to be better tomorrow than they were today.  The impact of such a commitment can be remarkable.

Comparing key results of the 1993 Best Practices Study with the 2002 Best Practices Study Executive Update shows that the better agencies in the country are indeed better than they were 10 years ago.  Over the last decade operating efficiency has improved dramatically; and profitability, the cornerstone of determining agency value, has soared. 

Much of the improvement comes from greater productivity. Excellent support systems have been put into place to allow key people within the agencies to maximize their time. Better implementation and utilization of technology and more streamlined workflows have allowed the agencies to grow without adding new people. Many study participants have stated that salary savings is a major consideration when determining whether or not to purchase and adopt new technology.

Interestingly, compensation expense has gone up in the largest two revenue categories while declining in the other categories.  Although a 1993 to 2002 comparison is difficult to make because the largest revenue size study group prior to 1999 was "Greater Than $5 Million", the increased expense is not unexpected.  The larger agencies have tended to be more sensitive to monitoring head-counts, staffing more leanly all along. Their philosophy can be summed up by a quote from Jim Collin's book Good to Great in which he quotes a Wells Fargo executive as saying, "The only way to deliver to the people who are achieving is to not burden them with the people who not achieving."

At the same time, competition at this revenue level has forced many of these firms to offer top salaries or more attractive compensation packages in order to attract and keep top talent,  making it more difficult to squeeze expense points out of the line item.

Nearly one in five Best Practices firms were involved in an acquisition during their last fiscal year.  This activity, which has remained high for several years, may also be a contributing to improved operating results across all categories since well-executed mergers and acquisitions can yield significant increases in productivity and expense reduction, producing results that would not have been obtainable to the individual firms. 

Concurrent with the acquisition activity was steady internal revenue growth that continued to hover around an average 10% rate for all participants.  Those who suggest that the current hard market has influenced the results need to understand that the study reflects the participants' most recently completed fiscal year end performance, which for 85% of the agencies was 12-31-01.  Although the market had begun to change early in 2001, the hard market we are now experiencing was not the factor it is likely to be in the next update.  A much greater influence on this year's results is the long-term financial and management discipline of these leading agencies to obtain steady revenue growth, maintain good profitability, and manage the risks affecting agency value.

While it is impossible to attribute the improved ten-year results solely to the Best Practices initiative, the annual Best Practices Study has contributed significantly by setting high standards for agency performance and creating the awareness of what is possible.  The study results suggest that the better agencies just keep getting better.  Perhaps the message provided is "continuously improve or fall further and further behind."   For those agencies willing to embrace Best Practices philosophies and commit to enhancing their performance, a complete family of Best Practices resources and tools are available to help.  The 2002 Study Executive Update and a listing of the Best Practices Tool Kit can be viewed on the websites of IIABA (www.independentagent.com) and Reagan Consulting (www.reaganconsulting.com). 

Shirley Lukens is a Senior Vice President and Principal with Reagan Consulting , an Atlanta-based management consulting firm working with insurance agents, brokers and companies.  She produces the annual Best Practices Study.