by Tom Doran, August 2003

National Underwriter

In 1950, there were 16.5 workers paying in to the Social Security system for each benefit recipient. Today, there are only 3.2 workers per recipient. According to current projections, in 2029 there will be fewer than 2 workers per recipient. Current projections also indicate that the Social Security system will continue to operate in the black until 2012, at which time system expenditures will exceed contributions. By 2029, the accumulated surplus ($2.6 trillion) will become exhausted and the system will become bankrupt. Pretty scary stuff, both for baby boomers who'll be counting on Uncle Sam to provide meaningfully for their retirements and for our children and grandchildren, who'll be left with a very sizeable retired population to support.

The reality is that any system with an excessive number of beneficiaries will eventually fail. Beyond this, any system with unproductive workers will crumble given enough time. Insurance agencies are no different. If your insurance agency remains in balance in terms of revenue generated (production) and benefits paid, your "system" is sound. If not, "reform" may be in order. Fortunately, there are several very easy-to-calculate productivity metrics to assist you in determining the relative health of your agency "system": 

• Revenue-per-employee: (agency revenue divided by the number of agency employees (on a full time equivalent basis)). This essentially represents the money being paid into the system on a per-employee basis.
• Compensation-per-employee: (total compensation paid (this includes all salaries, commissions, bonuses, health benefits, retirement contributions, and payroll tax withholdings) divided by agency employees. Compensation per employee represents the benefits being paid out of the system on a per-employee basis.
• Spread-per-employee: revenue-per-employee less compensation-per-employee, or what you have left over (on a per-employee basis) after you've paid everyone. The spread is used to pay all the other agency expenses. Hopefully, after all the other expenses are paid, you'll still be left with a nice profit.
• Average annual new commission per producer.
• Average book of business serviced per CSR.

As with all metrics, these productivity measures must be viewed with a somewhat critical eye. There can be very sound reasons why any of these measures might appear askew. For example, your compensation-per-employee number might appear high (and thus your spread per employee quite low) if you paid substantial bonuses at year-end to reduce your taxable income. Your revenue-per-employee might appear lower than average if you're in the process of staffing up today to meet future growth objectives. Your new commissions per producer figure may be lower than average if you have a stable of young, unvalidated producers.

Having said this, these productivity metrics remain invaluable indications of your agency's overall health. Take a few minutes to measure your own results against those comparably sized Best Practices agencies. If you're lagging the pack on any of these measures, this may be an indication that your system is out of balance and in need of attention. If you're ahead of the game, great - figure out how to do even better. Here are some general suggestions to consider if you're looking to improve your agency's productivity:

• Invest in technology, training and streamlining procedures to improve productivity - make sure that the agency's procedures are uniform, consistent, up-to-date, understood, and adhered to. In addition, make sure that all work being done takes full advantage of today's agency management systems' capabilities. Are you doing things right or are you doing things the way they've always been done? Further, are you doing the right things in the right way?
   
• Manage your producers towards desired results. First, make sure that your producers are meaningfully compensated for new business written and that they're held accountable for doing so. Does your agency have specific and realistic new business targets in place for each producer? Are financial consequences in place for producers based on actual results?
   
• Next, make sure your producers are writing the right business. No commission split in existence can make up for business that's unprofitable for the agency to write given its size or the servicing it requires. This is why many agencies are moving to producer compensation plans that are tied to the overall profitability of the producer's book of business rather than its size.
   
• Allocate support personnel appropriately to ensure that your best producers are free to produce - make sure that your "star" producers have all the help they need in terms of support personnel. Make sure your inactive producers don't consume resources better allocated to the producers writing the new business.
   
• Compensate based on performance, not tenure. Set specific and realistic goals for employees that can be measured and then tie compensation to success in reaching these goals.
   
• Regularly compare whatever productivity metrics you consider to be meaningful against Best Practices agencies and manage with an eye for continual improvement. Current Best Practices results are always available at www.reaganconsulting.com or www.iiaba.org.

Unfortunately for the Social Security system, it is essentially "led" by politicians with a 2-6 year time horizon between elections. Any substantial reform to improve the health of the Social Security system is unlikely given the unpopularity of reform with older Americans and the power these older voters wield at the ballot box. Sadly, it's more important to most politicians to be reelected than it is to fix politically explosive problems. Leave that to the next generation to figure out.

Leaders of insurance agencies have much more flexibility and incentive to improve their own systems. Our free market economy quickly and efficiently rewards the proactive and punishes the inactive. If only the same were true in our political system.

Tom Doran (tom@reaganconsulting.com) is a Principal with Reagan Consulting, an Atlanta-based management consulting firm that serves the insurance distribution system. Visit Reagan Consulting at www.reaganconsulting.com.