Agency Vital Signs

By Al Diamond, President, Agency Consulting Group, Inc.

Agents throughout the agency universe have asked us how they can determine the health of their agencies – in a nutshell. of the boat and hope it doesn’t sink to the bottom of the sea. Until the water reached a vital organ, they thought they had a swimming pool.

We tell them that the first indicator is the feeling at the pit of their stomachs. It never lies, but it can be fooled in either direction. If you have a cold feeling in the pit of your stomach that something is wrong, it probably needs further analysis. Sometimes it happens when you can’t pay your bills. Other times it happens when, one after another, several of your customers that you have assumed were “safe” find other homes without giving a real reason. Something is wrong, but you can’t put your finger on it.

Most agents have pretty substantial egos and will point the fickle finger of accusation toward the carriers’ actions, the activity, or lack thereof, of the employees, the market, the economy, and the clients themselves. The only person without blame is the agent themselves – for becoming lackadaisical and not paying attention to the very things that made them successful in the first place. Some of these agents have “retired in place.” Whatever the cause, after investigating and find problems within your agency, the cold feeling was right and changes need to take place.

More insidious is the feeling that we fooled ourselves into believing that everything is all right, even when the indicators turn downward and go “into the red.” Countless agents have called Agency Consulting Group, Inc. when the wolf was at the door and they were at the verge of bankruptcy – too late to do anything but bail the water out What each of these types of agents DIDN’T HAVE was a way to measure their VITAL SIGNS, the business equivalents of the blood work, the blood pressure gauges and the lab work that your doctor does to determine how well your physical body works.

There are similar signs that are available to you to determine how well your agency works. ACG would be happy to establish them for you, give you a baseline and design a plan to resolve the problems that exist within your agency that could spell trouble for you soon or in the future.

Here are some of the VITAL SIGNS that you can measure in your agency. This should be done monthly – but not just for the month. It should be done on a Year-To-Date and Rolling12-Month basis to properly judge where you stand and whether trends are changing for your business.

NET GROWTH OF CLIENTS – How many clients did you have in the previous period YTD and Rolling 12? How many do you have now? We know that the market tends to harden and soften and changes the revenue that we obtain from our customers. But the agency will generally remain healthy as long as it has more clients every year. Counting clients is not easy in most agencies because agency management systems don’t provide that kind of data. But if you count active policyholders at the end of a year and then

add new customers and subtract lost customers (when their last active policy is gone) you can determine a valid customer measurement.

CUSTOMER RETENTION – How many clients did you have total for the prior period YTD and Rolling 12? How many OF THOSE CLIENTS, excluding new clients written since that period, do you still have? If you had 1000 clients in the last year-to-date and have 1100 currently (with 200 new clients this year), your client retention is (1100-200)/1000 = 90%. Some agents write a lot of new business each year and lose a lot of existing clients. They are like gerbils in a wheel, running like crazy but never really getting anywhere. And, while the exercise might be good for you, you won’t have the energy or money to keep doing this forever because it costs more to get new customers than to keep them.

GROWTH OF AVERAGE COMMISSION PER CLIENT – Growing the customer base each year is important to the long-term future of the agency. Keeping as many customers as possible allows you to spend your efforts on fewer quality new customers each year instead of having to write 10% of your customer base in new customers each year just to keep even.

Cross-selling different products is an excellent way of enriching your bottom line AND forming closer relationships with your clients. Customers already know they need additional coverage; whether they purchase it from your agency or from other sources. Cross-selling products and informing your clients of the advantages of your agency’s services keeps them with you longer and the clients do not attempt to jump ship every time a “lower cost” offer” solicits them.

REVENUE GROWTH IN EXCESS OF EXPENSE GROWTH– From a business sense this is the real basic business philosophy. If you already make a profit, growing your revenue more than your expense each year will increase it. If you have slipped to a “loss” position, controlling your expenses to 5% below your revenue growth each year will bring you back to profitability. If you tend to take all of the net income of the agency in your various forms of compensation, perks and benefits, consider creating a compensation account for yourself; one that pays exactly what you would pay someone else to do the job that you do within the agency. Have a second compensation account for yourself that still pays you what you want, need or have available in the agency, but allows you to see it as profit that you are passing back to yourself outside of the work effort value that you put into the agency. This is still your money and can come to you in bonus, benefits, perks, or dividends. But revising your Operating Statement in this way clarifies the Net Revenue Growth and Net Expense Growth (including your base compensation for the job that you do, but not the ‘extra’ compensation that you get because it is available). This action gives you a much clearer view of whether your agency is growing revenues more than expenses each year.

If an agency maintains accurate financials, it can generate an accurate Balance Sheet every month. While your Operating Statement is your bank account and piggy bank, the Balance Sheet gives you the weight, heart rate, cholesterol count and blood sugar count for the agency, as your doctor’s visits does for your personal health. And the Liquidity Ratios common in insurance agencies are absolutely accurate tell-tale predictors of both healthy agencies and agencies that will face some form of crisis in the future.

There are between six and ten Liquidity Ratios that can be calculated for any agency with an accurate Balance Sheet that will tell you both the health trends of the agency and whether you are close to a financial crisis. They are the Acid Test (Quick Ratio), Working Capital, the Current Ratio, the Receivables to Payables Ratio, the Trust Ratio and the agency’s Tangible Net Worth.

Yes, we are suggesting that you not only know your insurance products and your clients, but that you also know your own business. The cowboys among us can still manage by the seat of their pants, but the rest of us will find it much more satisfying (and profitable) to measure our Vital Signs and act accordingly.