Look Back Before Moving Forward

5 Critical Areas to Review

For many, 2010 was another tough year. A number of you are probably disappointed in how little you “accomplished” this past year. You may even feel that you have had a set back.

Some of you might be thinking that at this point in your life, you might have expected that you would be better off financially, in your personal life and in business. It might seem that it is taking way too long to get to where you ought to be by now. Why can’t you get your act together?

Relax. Nothing is wrong with you. The problem is that you are measuring success by what you believe is your ideal situation. Even the most successful people are quick to tell you how their lives could be better.

For most of us, an “ideal” isn’t an “ideal” unless you still haven’t accomplished it yet. Whenever you get close to your “ideal” situation, your “ideal” then becomes bigger or better in order to maintain some distance from your current situation. If your happiness and life satisfaction are dependent on reaching your ideals, you will perpetually be dissatisfied.

The solution is to measure how far you have come. If you never take the time to reflect on your achievements, your vision will forever be on the horizon. You need to acknowledge your achievements. Reward yourself for all that you actually did do this past year.

This article has a few exercises for you to do to help review your agency’s results for 2010 and prepare for 2011. So, grab a piece of paper and sit down.

5 Critical Areas to Review

For those people who think there is always room for improvement, the beginning of a new year with all the related planning, is a perfect time to take a look back. Planning ahead requires an understanding of where you are now, how you got there, what works and what does not work.

Key Performance Factors

When it comes to understanding agency performance, there are five main areas of primary focus to review: 1) financial analysis; 2) productivity; 3) sales; 4) book of business analysis; and 5) agency/carrier relationships.

To get a good understanding of the strengths and weaknesses of an agency, the analysis needs to include peer group comparisons as well as agency historical performance. Historical performance means simply looking at how the agency has performed year-to-year in each of the areas reviewed.

There are many excellent resources for peer group analysis, such as “Growth and Performance Standards” from the Certified Insurance Counselors Program/The Academy of Producer Insurance Studies (www.scic.com) and “Best Practices” from Independent Insurance Agents & Brokers of America (www.iiaba.net). Also, Oak & Associates can perform an individualized analysis of your agency performance.

There also needs to be a subjective assessment of performance, areas for improvement and strengths that can be exploited. Sometimes there are too many deviations or intangible factors to be able to confidentially compare a certain criteria to a peer group performance or even an agency’s own historical performance. A strong “gut feel” goes a long way in analysis. This type of analysis will provide insight to the meaning behind the numbers and gets the entrepreneurial juices flowing.

Financial Analysis

A good starting point is to review the financial health of the agency. It is relatively easy and it will need to be done for taxes anyway. For the financial review, one of course would need income statements and balance sheets. Don’t forget to obtain the accounts receivable and account payable reports.

Productivity Analysis

Is the existing staff operating efficiently? Is the agency properly staffed? The best way to answer these questions is to review workloads and agency productivity. Keep in mind the single biggest factor in a profitable firm is a productive staff.

Start with the collection of the following: 1) an employee list including the percentage of time each employee (and owners) spends on production, service, administration and management; 2) compensation for each employee; and 3) commissions and number of accounts each CSR handles.

New Sales Review

An obvious key indicator to the success of an agency is new sales. New sales are a function of the effective use of agency resources. Collect sales information (new sales and total book of business) by producer and the agency overall.

Calculate “Hit Ratios.” Poor hit ratios will end up costing the agency money and wastes the time of both producers and staff. The technique of producers with low hit ratios needs to be checked and adjusted. Often, the producer fails to pre-qualify the prospect.

Calculate the attrition rate for the agency and each producer. Keep in mind that even if an agency has tremendous sales, if there is a significant loss of business through attrition, the effort for new sales is like digging out of a collapsing hole.

Book of Business Composition

So now that the agency sales are understood, it helps to find out what exactly was sold. What is the composition of the agency’s book of business by line of business: personal, commercial, life, group benefits, program business, etc.? Calculate the average size of account for each line. Also, how much of the agency business comes from the top 10 accounts? Finally, analyze what the distribution of business is by industry.

The review should evaluate if the mix of business is healthy for the agency. Niche selling is usually more profitable, however, it is also riskier. If the agency has a lot of small accounts, then the procedures in place for selling and servicing them are critical in order to make a profit.

Make sure that producers concentrate on larger accounts. Streamlining a producer’s book by removing small and non-conforming accounts to a Small Accounts Department or CSR to handle will work wonders in their ability to focus on new sales.

Market Relations

The last area to check out is the agency’s markets and the relationship with them. List all the carriers with their volumes, commission rates (or commissions), loss ratios and contingents received. Analyze how the agency’s book of business stacks up with the existing markets.

Compare all the carriers and the products that the agency has with the top 15 industry groups the agency writes (e.g. manufacturers, retail, contractors, etc.). What are the strengths and weaknesses?

The Final Report

Look for a second opinion on the final findings by soliciting the input from key staff and outside advisors.

Owners that are too busy to reflect on their business’ performance will usually reach a plateau, since they do not have a firm foundation to build on. By making this effort to review agency performance there will be a noticeable improvement and the agency will enter into the strata of the high performing firms.