Does personal lines business have an important role in youragency's future growth? Most midsize and large agencies don't havea clear picture of the strategic role personal lines should play.Part of the problem is their inability to measure the value ofinvesting in new producers.

Since it is an afterthought to their core commercialproperty-casualty and benefits business, we've watched agencyowners vacillate over what to do. Should personal lines be grownaggressively? Divested? Simply be milked for profits?

In today's environment, growing personal lines business isdifficult. Agencies don't typically have dedicated personal linesproducers, and competing head-to-head with direct writers isdaunting.

However, despite its typical low growth rate, personal lines isoften steady, extremely profitable business. A well-run personallines department can generate margins that are 10-to-20 percenthigher than on commercial business.

Many of the industry's top performers are reinvesting the excessprofits from their personal lines department to fund growth incommercial p-c and benefits. For some agencies, their entireinvestment in future growth is being funded by that strategicstepchild--personal lines!

In today's soft commercial market, investing in organic growthis critical. The most important investment is in your productionteam--hiring and developing new producers. Some agencies are warybecause of the cost, as new producers don't typically cover theirexpenses--or "validate"--until two-to-four years after beinghired.

However, foregoing this investment can significantly limit anagency's capacity to grow organically. With current marketconditions, agencies have to write new accounts to grow revenues,and increasing the number of accounts typically means adding moreproducers.

Agencies that aspire to grow are increasingly asking how muchthey should invest in new producers. They need a benchmark!

Reagan Consulting recently developed a statistic called theNUPP--Net investment in Unvalidated Producer Pay. Expressed as apercentage of revenue, the NUPP provides a way to benchmark theamount of direct investment an agency is making in its futureproduction force--which is typically made of one or severalproducers who are not yet "validated" (that is, producers whosepayroll expense is greater than what they would generate if paidaccording to the agency's normal producer commission schedule).

The "net investment" of an agency should not be confused withthe gross amount of pay and/or other expenses being invested in newproducers. The net investment in an unvalidated producer is thedifference between what the agency pays a producer and what theywould earn under the normal commission schedule.

For example, if an agency that pays a 35 percent commission ratehas a new producer with a $100,000 book earning a $50,000 salary,the agency is making a $15,000 net investment in that unvalidatedproducer ($50,000 salary less $100,000 times 35 percent in producercommissions).

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The accompanying table provides an illustration of an agency'sNUPP. The NUPP is then expressed as a percentage of revenues toallow a comparison with other agencies. We've found successfulagencies often have an NUPP of 1.5 percent of revenues or more.This means, for example, that an agency with $20 million inrevenues should be investing--on a net basis--at least $300,000 inunvalidated producers.

In other words, the agency is paying those producers $300,000more than they would earn under the agency's normal producercommission schedule.

In our view, an NUPP of 1.5 percent or higher is a healthy levelof investment in an agency's growth. If an agency is investingbelow that figure, it may not be doing enough to ensure futurerevenue growth and value creation.

Keep in mind the NUPP is only intended to measure the purepayroll investment in unvalidated producers. As a benchmark, tomake it comparable against other firms, it is intended to besimplistic. It is not designed to measure all of the otherancillary expenses that accompany new producers--such as overheadexpenses and support costs, etc.

So when these other costs are accounted for, the actualinvestment being made in new producers at any given time might bemore than twice the NUPP.

What does the NUPP--which is typically invested in commercialand benefits producers--have to do with personal lines?Unfortunately, many agencies skimp on their NUPP because theircommercial P&C and benefits divisions alone can't support thenecessary investment.

But, amazingly, a typical agency's entire NUPP can be funded bya well-managed personal lines department.

How? A personal lines department is, on average, 10 percent of alarge agency's overall revenue (according to the "2007 BestPractices Study.") Assuming the personal lines department createsmargins that are, on average, 15 percent higher than the agency'sother departments, the firm is generating 1.5 percent of totalagency revenues in excess profits from its personal linesbusiness.

These excess profits can be reinvested to fund its entireinvestment in unvalidated commercial and benefits producers.

The lesson is that the strategic value of the personal linesdepartment for many agencies is the investment fuel it provides forfunding future growth in other departments. Personal linesdivisions shouldn't be taken for granted--they should be run with akeen eye for profitability.

In today's competitive market, investing in growth anddeveloping producers is more important than ever. Manage yourpersonal lines business effectively, and you'll have the cash youneed to make this investment and to drive agency value in thefuture.

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