Agents Capitalize On Prosperous Times

So, given a prosperous environment from which to think strategically about the future, what to do with this prosperity we find ourselves enjoying? Depending on your particular situation, you have many great options to choose from.

This is an excellent time to invest in the future growth capabilities of your agency. Having lived through the most recent soft market, we all remember those days not so long ago when an agency had to sell a lot of insurance just to remain flat, never mind grow. During the soft market, an 8-to-10 percent annual growth rate in revenue was exceptional for a mature agency. Those days will return.

Have you used the economic fruits of the current hard market to invest in your agencys ability to sell insurance when the market turns? Many agencies are doing just that.

Very few investments pay off in the same way as a properly managed producer development program. Our research indicates an investment in young production talent delivers a 40 percent-plus return-on-investment, even if only one in three producers you hire ultimately validates your hiring decision. (This impressive investment return rate assumes, however, that the two unsuccessful producers are returned to the marketplace in a timely fashion for them to find a better career fit.)

With a shortage of investment opportunities outside the business to match this return rate, many agency owners are plowing profits right back into the agency in the form of new production talent.

How about the mature producer with an existing book of business? Thats a great option in these profit-flush times. Many agencies are using todays good fortune to buy books of business from producers without restrictive agreements. A commission-plus-bonus approach for three-to-five years can be used to do so on a fully tax-deductible basis.

For example, assume you locate a producer with a $300,000 book of commission business. Lets assume the producer indicates shed join you if youd pay her two-times revenue for her book, or $600,000. Well, why not consider paying her your ordinary commission rate for the renewals on the book plus a bonus totaling 40 percent of retained commissions for five years to get to the two-times figure (.40 times five equals two)? Given that the bonus would be deductible to the agency as ordinary compensation, your effective revenue multiple falls to less than 1.1-times revenue on a present-value basis.

What about adding production talent to expand and enhance the products and services your agency has to offer? Many p-c agencies, recognizing that they have already sold their clients once, are investing in life and health producers to take advantage of cross-sell opportunities. Other agencies are using todays profits to invest in risk managers, claims personnel and other resources to increase the agency's value proposition.

Another prudent strategy you may want to consider is hiring account executives to assist your star producers in the support of their books of business so that they can spend more of their time actually selling. Although these account executives can be pricey, they can prove to be an excellent solution to the problem of the producer whose book has grown to the point he has little time to generate new business.

Needless to say, a producers book of business must be sizeable for this investment to pay off–typically north of $750,000. In addition, its generally a workable solution only if the star producer is willing to subsidize a portion of the investment in the account executive via a reduction of his own renewal commission rate.

Assuming our $750,000 producer would be willing to cut his commission rate by only 5 percent, $37,500 of the cost of the new account executive would be paid for. For the right producer, even with this nominal investment on his part, his overall income will increase as a result of his increased new business flow. Plus, hell be doing what he does best–selling insurance.

In fact, the economics of this plan even support a waiving of the producers 5 percent commission cut if he hits a sufficiently aggressive new business goal. As with an investment in new production talent, our research indicates a 40 percent-plus return on the agencys investment in the account executive.

Another excellent investment to consider involves improving your agencys productivity levels, typically expressed as revenue-per-employee. Whether its in the form of upgrades to your agency management system and computers, additional training for your support personnel and producers, or upgrading your support staff, investments should be considered today that will enable your agency to handle tomorrows revenue growth without having to make significant additions to your employee base.

For these and many other investments, time will be necessary to recoup these investments. Excellent though they may be, these are all long-term investments.

Many agency owners with a shorter career horizon are considering a different path–a sale of the agency. Given todays high agency valuations in the marketplace, this may be a perfect time to transition ownership completely, whether its to a third-party buyer or existing employees.

These owners may realize that the time, expense and effort necessary to fund future growth may not be ideal given their own time horizons. For those in this position, there has been no better time in recent history to cultivate the fruit of their years of hard work through a sale of the business.

Regardless of whether your ultimate decision is to grow or sell your agency, now is the time to put a plan in action to accomplish your specific objectives. There really has never been a better time.

Tom Doran is a principal with Reagan Consulting, an Atlanta-based management consulting firm that serves the insurance distribution system. He can be reached at tom@reaganconsulting.com. For more information, visit Reagan Consulting at www.reaganconsulting.com.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.