Not too late for Agency Reviews

Even though we are one third of the way through 2002, it is still not too late to see how the agency has performed for 2001. There are no more excuses. The holiday season is gone, taxes are paid, and there are no peak renewal dates for at least two months.

Most of us talk about reviewing agency performance and developing a business plan, but just a few actually do it. Make a commitment now, at this point of the article, to actually review the firm’s performance. 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.

Peer Group Analysis
There are many excellent resources for peer group analysis. Some provide just a compilation of results while others have the raw material for self-analysis. 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 in-tangible 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. 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.

First, look at the changes in revenue and expenses to prior years. Has it gone up or down? What is the percentage of the change in each category? Look at each expense category. Is the agency spending more or less than its peers? What is the bottom line, is the agency profitable? A good rule of thumb is the total return for the owners and producers (compensation, perks and profit) in an agency should be targeted to be at least 50 percent of the revenue.

Next take a look at the following balance sheet ratios. The trust ratio (cash plus receivables divided by company payables) should be at least 1.0 to 1.2. as well as the current ratio (current assets divided by current liabilities). If a firm is good at turning receivables into cash, the collection ratio (receivables divided by premium payables) should be .60 or less.

Review the aged receivables report. How good are the agency’s collection practice? Accounts over 90 days old are usually considered uncollectable. Remember – the goal is to sell insurance not to be a bank.

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.

Usually the hardest part of this exercise is to determine who is doing what role. In fact, don’t be surprised if redundancies and unnecessary tasks are uncovered. Still, it is important to begin the review with the big picture. Clean up of workflow can be done later.

The bottom line is the bottom line. Calculate revenue per employee, per CSR, and per owner/producer. Keep in mind to not use the job titles, but the percentage of time the employees spend in each category. If a producer truly spends a third of their time doing traditional CSR service work, then they count as 33% of a CSR and 66% as a producer.

Next, narrow the scope down to commissions per CSR and accounts per CSR. Compare the agency’s performance to its peers. Sometimes the comparisons to peer group numbers are not accurate because an agency may have a unique book of business, such as program business. In these cases subjective judgment is required.

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.

It is important to understand not just what the new sales numbers are, but what the potential is for each producer and the agency overall. A bright young producer might have poor production results if he or she is not properly trained. A burnt-out but seasoned producer might be revitalized if a good marketing and servicing team provides proper support and he or she develops and keeps to a sales plan to get out of the rut.

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. Calculate the attrition rate for the agency and each producer. High attrition rates are usually an indication that the business the agency writes is transient and either the clients are price shopping or poor risks.

Another sales indicator is 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.

Sometimes producers just are not approaching businesses that match up with the products the agency has expertise in writing or has competitive markets to place the risk. The current hard market can turn things topsy-turvy. Make sure the producers are properly trained. Have them take a sales class every two or three years, such as “The Dynamics of Selling” offered by CIC/the Academy of Producer Insurance Studies.

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 ten 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, the procedures in place for selling and servicing them are critical in order to make a profit. It is important to distance oneself from the book of business and objectively ask the question “is this book valuable or should its composition be changed?” The lack of carriers in a hard market might
influence the answer to this question.

Are the producers selling good business that fits in well with the agency book and its markets? 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. In today’s hard market condition this exercise should provide some fun. List all the carriers with 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 fifteen industry groups the agency writes (e.g. manufacturers, retail, contractors, etc.).

Some of the questions that should be answered include: will volume commitments be met and how will it be done, are there new markets the firm should seek out, is the volume spread too thick or too thin, is the agency maximizing profit sharing agreements?

Part of the process should include a “what if?” scenario study. What if a key market pulls out? Where would that business be moved? It will be very beneficial to seek out reputable MGAs and surplus lines outfits. New channels need to be readily available while the hard market exists.

The Final Report
The final product should include all the reports previously described as well as lots of comments on what is working well and areas for improvement. 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. Take the time to perform an agency diagnostic. 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.

Bill Schoeffler and Catherine Oak are partners in the international consulting firm Oak & Associates based in Northern California. The firm specializes in financial and management consulting for national and international agencies, including valuations, mergers, acquisitions, clusters, sales and marketing planning, as well as perpetuation planning. For more information, call (707) 935-6565, e-mail catoak@sonic.net, or visit www.oakandassociates.com/catoak/.