Agency Report Card
By Bill Schoeffler & Catherine Oak

It is the beginning of a new year. Some of us have made resolutions for 1999, some just focus on business as usual. For those people who think there is always room for improvement, the beginning of a new year, and all the related planning, is a perfect time to take a look back. Planning ahead requires an understanding of where you are now, how you got there, what works and what does not work.

What to Look At
There are five main areas of primary focus: 1) Financial Analysis, 2) Productivity, 3) Sales, 4) Book of Business Analysis, and 5) Agency/Carrier Relationships. The objective is to create an agency report card on performance in these areas. The analysis needs to include peer group comparisons, agency historical performance, a subjective feel for performance and areas for improvement.

There are many excellent resources for peer group analysis. Some provide just a compilation of results, others have the raw material for self analysis. The Agency Performance Results Study from CIC/The Academy of Producer Insurance Studies and Best Practices from IIAA are two comprehensive studies, which can be used for self-review.

Historical performance means simply looking at how the agency has performed year to year in
each of the areas reviewed. The subjective feel for performance is very important. Sometimes there are too many deviations or intangible 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.

Financial Analysis
Start off with reviewing the financial health of the agency. It is relatively easy and it will need to be done for taxes anyway. 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 at least 50% of the revenue.

Next take a look at the following balance sheet ratios: Trust Ratio (cash plus receivables divided by company payables), Collection Ratio (receivables divided by premium payables) and the Current Ratio (current assets divided by current liabilities). Review the aged receivables report.

How is the agency's collection practice?
Productivity Analysis
The next area to look at is staff productivity. The following information is needed: 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.

It is important to begin the review with the big picture. 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 spends a third of their time doing traditional CSR service work, then they count as 33% of a CSR and 66% of a producer.

Next, narrow the scope down to commissions per CSR and accounts per CSR. Compare the agency's performance to its peers. Another way to evaluate if the staff is productive is to calculate the "Spread" which is revenue per employee minus compensation per employee.

New Sales Review
Sales are of course a key indicator of agency success. It is important to review the new sales forthe agency overall and for each producer. An experienced producer in a typical agency should generate at least $30,000 to $60,000 in new commission dollars each year. For large firms with large accounts, the amount would be much higher.

The hit ratio of each producer needs to be determined. Hit ratios less than 25% to 33% will end up costing the agency money. 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.

Use the successful producers as a model.
The agency may have tremendous sales, however if there is a loss of business through attrition,
all the effort for new sales is wasted. Calculate the attrition rate for the agency and each producer. The goal should be around 10% or less attrition for the typical property/casualty insurance agency. High attrition rates are usually an indication that the business the agency writes is transient and either the client is price shopping or poor risks.

Book of Business Composition
It is valuable to examine the composition of an agency's book of business once a year. Find out
what the split of business is along each line: personal, commercial, life, group benefits, program
business, etc. Then 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. This diagnosis should also be done for each producer.

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?"

Agency Carrier Relations
The last area to check out is the agency's markets and the relationship with them. 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 their products that the agency has with the top fifteen industry groups the agency writes.

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?

Prepare Report Card
When the review is complete, create a report card with grades A, B, C, D and F for each of the key areas discussed. It is useful to also make comments on what is working well and areas for
improvement. This report card should be part of any business plan the agency may have for the
new year.

Just like a report card from school, the agency review should be revised periodically throughout
the year. Take the time to perform an agency diagnostic. 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.