To make a profit in the insurance agency business there are many things to work on. They include commission rates received from insurance companies, overhead expenses, and most of all - payroll. When I talk to newer agency owners about making more money in their agency the thing they are most focused on is what insurance carriers pay them.
Let's look at this. If the average agency commission rate in a given agency is 12%, what does it do to income to negotiate average rates up to 13%? The answer is it drives revenue up 8%. While I think this is a worthy goal, and my company delivers average commissions much higher than that, this is not the biggest lever you can pull to increase net income or profit.
To get the biggest bang for your buck in any situation, you need to look at the biggest opportunity. Where are the biggest numbers, or the biggest numbers you can change, in your business? They're in payroll.
Payroll is the number one expense in any service business and this is especially true in an insurance agency. When I think about managing payroll I tend to want to look at what other businesses like mine are doing. I also like to look at the numbers that businesses larger than mine are producing as a comparison. After all, I want to be bigger! In the agency business there's no better place to look than the “Best Practices Study” produced by Reagan Consulting and the Independent Insurance Agents and Brokers of America.
When I compare smaller agencies to larger ones for personal lines support staff, I immediately notice that support staff get paid more in big agencies, and I notice that they service similar sizes of books of business as in small agencies. Hmm. No juice to squeeze there as long as my service team is handling an average of $205,000 in total revenues per year. What about producers in personal lines? The study shows that the large agencies pay about 10% less for new business but significantly less for renewal. Large agencies pay an average of 17% to producers for renewal commissions compared to nearly 28% paid by small agencies. This results in a much lower average commission rate paid by larger agencies to producers. The same thing happens in commercial lines commissions though it isn't as pronounced as it is in personal lines.
What is dramatically different, between larger and smaller agencies, is the size of the book of business being sold per producer and the size of the book of business being serviced by service employees. Both are bigger in larger agencies.
What can we learn from this? First, smaller agencies pay producers more than they have to. Second, smaller agencies can grow their service team into managing larger books of business. Third, smaller agencies could adopt large agency practices of shifting virtually all service to the service team. That will facilitate the right sizing of CSR portfolios and allow the producer to continue to produce new business.
Taken together, these three things have a big impact on Spread, which I discussed in my last blog. With the potential to accelerate and improve retention, all of this promotes profitability.
Sure, you can complain to insurance companies that they don’t pay you enough. Good luck with that! Or you can focus on things that you control to improve profits. What are you going to do?