Agency contingency bonuses and underwriting profit sharing can significantly add revenues to your agency. Therefore, it is so important to strategically plan for this. Part of managing an agency is exploring options to increase revenue and furthermore your agency’s bonuses. Let’s review a few key strategies on how you can accomplish this.
Become Part of an Agency Network
This is the best way to instantly increase profit sharing for a small to medium size agency. Because most of these master agency groups have twenty or more agencies, with some regional and national groups having hundreds of agencies, profit sharing is based on the combined volume of all agencies in the group. These groups can participate in the most generous top tier profit sharing bonuses because of a higher combined volume. While membership in these groups can cost thousands a year in either fees or commission splits, in most cases, the pooled profit sharing returned to agency members are well worth the return on your investment.
Acquire an Agency
With an acquisition, one plus one can equal three when it comes to profit sharing. The reason this is possible is because of minimum profit-sharing volume requirements. If a carrier has a 500k minimum requirement to participate in profit sharing, an agency with 200k of premiums and another agency with 300k of premiums would not make profit sharing on their own. However, combining these two books gives a production volume of 500k. If these agencies combined have 150k of underwriting profit at a 6% bonus, the new ownership would get a 9k bonus that they would have never received on their own. When an agency combines all the carriers from the acquired agency into their own, they are much more likely to hit the minimum volume requires that triggers these bonuses. Insurance agencies sell for a premium because agency owners know this, they know the agency that they are acquiring will not only bring in more revenue from commissions, but will help increase the revenues of their existing book.
Merge with Another Agency
A merger will do the same things as described under “Acquire an Agency.” Volume is one key component to increasing an agency’s profit sharing. While a merger is not for everyone, it’s a great way to increase profit sharing and contingency bonuses if this is an option for you. A merger can be done in a number of different ways, including paying the partners based on their own production and splitting expenses. A number of consultants can help you with this, you can find a list of M&A consultants under Merger & Acquisition Consultants on AgencyEquity.
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Loss Ratio Management
While production is important, there is no profits to share without a profitable book of business. This will only happen by managing the agency’s book of business and writing quality business. One way to do this is by working with the carriers and their underwriters by re-underwriting poor performing accounts. Another way to do this is to have rules in place that attract the more profitable type of business. For example, multi-line accounts tend to be more profitable. You target this business by advertising for it. This is just one of many examples. Many carriers and agency networks can help you manage your loss ratio and tell you what you can do to improve your numbers. Take advantage of this, it will mean more revenues for your agency.
Invest in your Agency
Increasing your agency production to meet profit sharing goals requires you to market your agency. Look at marketing as a return on investment rather than as an expense. If you are spending about one year’s commission for each quality client you are bringing in, you are doing well for several reasons. First, you will help your profit sharing goals. For example, if your profit-sharing requirement for a certain carrier is 400k in premium and you only have 300k, it will be well worth spending approximately 15k to bring an additional 15k in commissions (about 100k in premium). Chances are, not only a good percentage of that will renew in one year, but if you are profitable by 200k and your profit-sharing bonus is 8%, you bring in an additional 16k. In some cases, it may be worth spending more than one year’s commissions in marketing if you have a very favorable loss ratio. The bottom line is growth equals more profit sharing and the only way to do this it to grow organically.
Agencies that strategically plan will outperform their competitors, be able to pay higher wages to attract quality staff and bring home higher returns. Well managed agencies can increase their commission revenues by 20% or more with profit-sharing bonuses. Furthermore, while this can be 20% of an agency’s revenues, it’ can be a significantly higher percentage of the agency’s net income. This is something well worth investing your time in and being proactive to make sure you are maximizing these bonuses.
