If you are interested in running or building a high-quality agency/brokerage that is focused on commercial (though not exclusive to commercial), below are nine critical metrics.
The following metrics are a subset of the detailed metrics I provide exclusively for my clients. My firm has developed the most important metrics for agents and brokers at a depth previously unseen in our industry. Our predictive metrics eschew averages and quartiles, which are absolutely horrible metrics in a performance environment and should likely be avoided at all costs. If you are interested in obtaining a comprehensive set of additional predictive metrics for your organization, contact me to learn more.
1) The most obvious metric is always maintaining a trust ratio of 1.1 or better. As the growth of surplus lines has exploded, agency bill business has increased significantly increasing the importance of this insurance specific financial metric.
Any ratio less than 1.0 (although I suggest using 1.1 so you have a little cushion) indicates that if management is relying on professionals and those professionals are not advising this is an issue, those professionals are inadequately knowledgeable about the industry. If management is running a sub-1.0 trust ratio on its own, management is incompetent, ignorant, or cheating. A ratio of less than 1.0, in every single state, indicates the agency is likely violating multiple laws and potentially committing fraud.
2) Maintain working capital of at least 30 days. This metric used to be commonly accepted but then the money supply grew infinitely, and debt was so easy that many people, including some serial buyers, stopped paying attention.
As noted, my data and analytics are the best I’ve seen, and I have completed deep comparisons to more well-known benchmarks. To that point, contrary to what some “experts” are advising, Wall Street definitely recognizes high debt loads by valuing the debt-ridden firm far less, with all else being considered. A firm that lacks adequate working capital is valued even lower.
3) Be sure your account manager/CSR/account executive tenure runs at least four years overall for a firm within the normal growth range. When agencies have high staff turnover, retention is impaired which reduces the ability to grow, even if the agency is otherwise capable of growing quickly. Additionally, high turnover leads to more E&O issues, worse morale, and lower customer satisfaction. In other words, absolutely nothing good comes from high staff turnover.
If you have high staff turnover, management is the problem. Identify what management is doing wrong.
4) Much focus has been placed, particularly by buyout firms, on producer compensation. On an apples-to-apples basis, producer compensation usually decreases to less than 20% once their books are adjusted for all the accounts excluded from their compensation calculations.
The “best” producer compensation ratio varies by agency depending on the line of business, job description (does the producer just produce or do they also service and if they service, how much do they service, etc.), and the resources provided to the producer. In some shops 25% is too high while in others, 35% might be too low.
Most agency owners and executives do not think through what producers should be paid other than to identify what other local shops are paying. A huge opportunity exists with better analysis to hire good producers from other shops without overpaying.
5) House business. One of the only reasons serial buyers are able to survive is because they move so much business to the house. House business has the highest profit margins. A house book constituting at least 20% of all commissions provides a tremendous subsidy with which new talent can be developed.
6) Commercial producers should generate a dead minimum of $300,000 in commissions after five years. Anything less than this is an indication the producer is not a fit for the agency, the producer is not cut out to be a producer, or the agency failed to develop the producer to their full potential. Figure out what went wrong and avoid that mistake going forward.
Adding on to this, all experienced producers should be at $500,000.
7) Carrier books need to be at least $500,000 with even the smaller regional carriers. The agency’s main carrier books should exceed $1,000,000. These are the bare minimums. Anything less than this makes the agency unimportant to the carrier, and this increases the agency’s vulnerability.
Also, don’t place more than 40%, at the very most, of your premiums with any one carrier. Even the best carriers are run by humans who make bad, even ridiculously illogical decisions, and having more than 40% of your book with any one carrier creates material vulnerabilities.
8) Procedures: an anathema to all producers and owners. To paraphrase a famous movie line from the Treasure of the Sierra Madre, “We don’t need no stinking procedures!” Well-run agencies not only have excellent procedures, but the producers follow those procedures! The end result is a lower cost organization, with lower E&O exposures, and believe it or not, the producers sell more!
Measure compliance. The compliance score should be at least 90% by desk and employee, including producers. WE have a proprietary low-cost test.
9) Growth. In a soft market, growth should be at least 5%. In a hard market, growth should be at least 10%. Anything less indicates the agency is falling behind. Analyze why it is falling behind and lead the changes required to overcome the hurdles you’ve identified.
If you adhere to these nine metrics, your agency/brokerage will likely prosper beyond your expectations. If you want to excel with more exclusive, predictive, in-depth insights, or if you need assistance working through these nine points, contact me at chris@burand-associates.com.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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