by Shirley Lukens, October 2004

National Underwriter

The 2004 Best Practices Study, done in conjunction with the Independent Insurance Agents & Brokers of America, provides a more comprehensive look at the high performing agency than ever before.  In addition to updating the highly valued financial and operational benchmarks -- and adding several new ones - this year's study takes a look at some of the strategic issues facing these agencies with a focus on their future direction.

Perpetuation Plans

First, agency principals were asked about their plans for the future ownership of their agencies.  Among the trends revealed:

• Internal perpetuation or an internal sale to their employees or family members was the top response in all but the largest and smallest revenue categories. 

• Nearly half of the agencies in the "Under $500,000" category indicated that they planned eventually to sell to a third party.  

• Responses in the "Over $25 Million" group were evenly divided between those that planned an internal sell and those that were uncertain about future ownership at this point in time. 

• Across all categories, relatively few said they ever planned to merge with another privately-held agency.

The responses to this question are not surprising.  The significant number of small agencies planning to sell to a third party simply reflects the difficulty these principals have in recruiting and developing internal future owners, as well as their desire to retain close ownership until they retire. 

At the other end of the spectrum, the largest agencies - which use their independence as a recruiting tool by offering the opportunity for equity ownership - have principals who recognize that a third-party sale typically generates a selling price 25% to 30% higher than an internal sale.  Many find that hard to walk away from and are currently weighing the benefits of both options. 

Although more than half of the agency principals in the study indicated that they plan to sell to employees or family members, they are realistic about the challenges of attracting talented employees, raising and investing capital for continued growth, and adjusting to an ever changing insurance marketplace. 

One agency principal summed it up very well when he said, "I used to think that getting started early was the key to internal perpetuation.  I have come to realize that even the most well-thought-out plan is no guarantee that we will succeed in perpetuating our agency.  It is a never-ending struggle."

Investments to Grow Revenues

We also asked this year's agencies how they planned to grow future revenues. 

• Interestingly, the top strategy by far in all but the two smaller revenue study groups will be to invest time, effort and resources in producer recruitment and development.  Ninety percent of the agencies with revenues over $5 million indicated that they plan to hire at least one new producer in the coming year. 

Many of these agencies have successfully hired new producers during the previous year and plan to build on that momentum.  Although a majority of the new producers came from another agency or broker, a surprising number were hired from other industries including financial institutions, stock brokerages, manufacturing, pharmaceuticals, and equipment sales. This finding highlights one of the top challenges facing this year's Best Practices Agencies - a shortage of experienced talent within the industry. (See Chart)

• A focus on new business development using the agency's centers of influence to obtain referrals is the next most planned strategy by the agencies in all but the largest and two smaller revenues categories. 

• The third most important planned strategy is to concentrate on cross-selling and total account development.  However, it is the top strategy for agencies with revenues under $1.25 million and the second priority for agencies with revenue over $25 million.

• Only in the largest agency category was acquiring an agency or book of business a significant strategy.

Agency principals were also asked to rank the importance of various lines of business in their revenue growth plans.  The following chart shows the percent of agencies that consider the lines to be a "very" or "extremely" important source of future revenue.

The bigger the property-casualty agency, the more likely they are to consider group life and health sales a critical component of the overall business.

In addition to traditional P&C and L&H policies and support, Best Practices Agencies are providing and plan to continue providing their clients with a variety of other products and services.  Premium financing, pension/profit sharing (401k), loss control/engineering, risk management consulting, self-insurance programs, and investment products top the list.

Maintaining a Competitive Advantage

In spite of a softening market, carrier consolidations, commission cuts, and other challenges, the 2004 Best Practices Agencies still managed to perform very well during their last fiscal year.  Overall they averaged a 15.8% growth rate in net revenue and enjoyed an average pro forma pre-tax profit of 24.0%.  Revenue per employee, an important productivity measure, averaged $133,103, up from last year's overall average of $125,366.  They would not have been able to achieve these results without a competitive advantage. 

When asked to share the keys to achieving and maintaining this edge the most frequent response was "the quality and depth of our people."  In fact, this response dwarfed all others. 

The Best Practices Agencies acknowledge that they would not be able to provide the high level of service and obtain the new business they get without the extensive skills, knowledge and expertise of their staffs.  They invest heavily and continuously in the ongoing education and training of their people.  As one agency principal explained, "We know that if we hire and develop only the best employees, the rest will take care of itself."

Other keys to achieving a competitive advantage include:

• Maintaining a client focus with a strong commitment to service

• Capabilities and services offered

• Strong carrier relationships

Interestingly, carrier relationships were also viewed as a top challenge.  In light of carrier consolidations, loss of markets, volume commitments, and general market conditions, most of the agencies are working very hard to maintain their relationships. 

Obviously, the larger agencies have more clout due to their volume but they too work at partnering with carriers that hold similar values and objectives and want to establish win-win relationships.

For more information about the 2004 Best Practices Study contact Shirley Lukens at shirley@reaganconsulting.com or Jennifer Becker at jennifer.becker@iiaba.net.

Shirley Lukens (shirley@reaganconsulting.com)  is a principal at Reagan Consulting, an Atlanta-based management consulting firm that serves the insurance distribution system.  Visit Reagan Consulting at www.reaganconsulting.com.