Independent insurance agency principals are so busy with day-to-day operations of writing and servicing accounts and managing employees, they can lose sight of the dollars and cents of how the agency is performing. However, managing the agency’s financial performance may be the most critical thing a principal can do. This means managing several factors.
Focus on revenue, not premium. An agency’s revenue is its oxygen, and revenue is not the same as premium. Carriers focus on premium; agencies must focus on the percentage of that premium it receives as commission, plus revenue from other streams. There are three primary ways for an agency to grow its revenue:
- Acquire new clients.
- Sell more insurance to existing clients.
- Purchase or merge with another agency.
The third method takes time to accomplish and might not make sense for an agency at a particular moment. However, any agency can sharpen its focus on the first two at any time.
Manage your prospect pipeline. Insurance agency sales trainer Roger Sitkins talks about crafting the perfect pipeline. He encourages producers to imagine their ideal future clients, identify the agency’s and their expertise, and look for untapped connections with the LinkedIn profiles of their best clients. Further, he urges agencies to focus on revenue per sale as a metric for measuring success. A strong pipeline is a competitive advantage.
Budget based on commission and fees, not profit-sharing. Every organization from a household to a Fortune 500 company needs a spending plan, also known as a “budget.” Creating a budget means making assumptions about the resources available during the budget period. These include anticipated revenue and the agency’s savings and investments. What they should not include is potential profit-sharing from carriers. By definition, profit-sharing is based on the profitability of an agency’s book. While a high quality book is more likely to be profitable, some things are outside the agency’s control. Even the best accounts may suffer catastrophic losses from weather events, severe truck accidents, or a liability loss with a large reserve. No agency can be assured that it will receive profit-sharing. They should not count on it when budgeting. Think of profit-sharing as a nice dessert you might not have room for.
Assume you will lose business. In a competitive marketplace, it is inevitable that an agency will lose clients. No one wants to lose them, and excellent service and strong relationships will help hold them, but life happens. The renewal quote comes in with a large increase and you have no alternatives. A long-time personal lines client sells her home and moves out of state. A client’s family member becomes an agent and they feel obligated to give him their business. You may decide that a client relationship is unprofitable or abusive to your agency. Whatever the reason, plan on some attrition when you create your budget.
Monitor progress toward long-term goals. You may have a goal of growing the agency’s revenue by $100,000 per month over the next three years ($3.6 million total.) You might have a goal of growing your earnings before interest, taxes, depreciation, and amortization (EBITDA,) a common measurement used in determining agency value, by a certain percentage each year. Whatever the goal, you cannot know how well you’re progressing toward meeting it if you don’t monitor your progress along the way. This makes quarterly or monthly review of performance reports essential.
Whether your plans are for you to eventually hand your agency off to the next generation in your family or younger partners or to sell it, you want to make it as valuable as possible. Careful management of financial performance will help you do that.
