Even Best Practices Agencies Struggle to Grow in Soft Market

Revenue Growth Proves Challenge; Hiring New Producers Remains Priority

The Independent Insurance Agents and Brokers of America (the Big “I”) in October released its annual Best Practices Study. The independent study includes the “Rule of 20” statistic which provides a quick means of calculating whether an agency creates value for its shareholders.

“This year’s study indicates that the Best Practices Agencies are proactively taking steps to grow even in a very soft market and during tough economic times,” says Madelyn Flannagan, Big “I” vice president for education and research.

Although positive revenue growth was difficult to achieve, Best Practices agencies continued to invest in new production talent. The majority of those agencies with revenues over $2.5 million hired at least 1.5 new producers during the last fiscal year, with the largest agencies hiring an average of 9.4 new producers. The average starting salary across all the revenue categories ranged from $52,000 to $95,000. The largest agencies, those with revenues over $25 million, tended to hire more experienced producers while those in the lower revenue categories tended to hire producers with less sales and/or insurance experience.

The “Rule of 20,” a new benchmark introduced last year, is a quick means of calculating whether an agency is creating significant returns for its shareholders. The outcome is equal to the agency’s Pro Forma EBITDA X 50% + Organic Growth Rate. Generally speaking, an outcome of 20 or higher means an agency is generating a shareholder return that is equal to or greater than that typically expected of an insurance agency/brokerage. A score of less than 20 indicates room for improvement. This year’s outcomes reflect the severity of the soft market over the past year.

Positive organic growth was difficult to achieve for most agencies and shareholder returns were adversely impacted. Only one study group, the $1.25 – $2.5 million revenue group, achieved a “Rule of 20” outcome greater than 20, the desired threshold.

The leading agencies included in the annual study must be nominated for participation. Once every three years, the Big “I” asks its insurance company partners, state association affiliates and other industry organizations to nominate those agencies they believe to be among the most efficient and high performing agencies in the industry for each of the studies’ revenue categories. These agencies are asked to submit operational information in many areas. This information is evaluated and ranked, culminating in the choice of the top 30 agencies in each revenue category earning the status of “Best Practices Agency.”

This year’s study shows overall that agencies are doing much more with fewer people, and the organic growth rate was much stronger than expected. When asked the reason for their success, the new crop of Best Practices agencies said, overwhelmingly, regardless of agency size, “the quality of our people.” This quality can be defined as a strong work ethic, expert knowledge in agency products and services, as well as a high ethical standards and dedication. These factors coupled with advanced proficiency in agency technology allowed the 2008 Best Practices Agencies to push productivity levels higher than ever.

Topics Trends Agencies Profit Loss Pricing Trends Market