Yesterday’s edition of Today’s ViewPoint showcased how agency and brokerage owners have enjoyed an enviable business position thanks to strong economic performance. With potential changes ahead in the macroeconomic environment, agency owners should be asking themselves if they want to hold, fold or double down. Today’s ViewPoint examines what it means to double down: to make the strategic decisions necessary to stay in business and maximize value.
The first step is determining an operating structure to attain predictable, profitable growth. Start with defining what organic growth means: new business minus leakage, with leakage defined as the combination of rate, account retention and risk compression. When comparing the best to the rest, the best have superior new business production. You can’t control the rate environment and exposure base, but leadership can influence account retention.
While retention is critical, most firms focus intently on keeping clients and, as a result, have high account retention. What can fall by the wayside is new business production and creating the systems to realize goals. According to MarshBerry’s proprietary database, Perspectives for High Performance (PHP), the top quartile of insurance firms write new business equivalent to 23.5% of prior year-end commission. The bottom 75% write closer to 13%. What is your ratio? The best operators establish a new business goal equivalent to 20%+ of prior-year commission.
Insurance Agency Growth Strategies
Once a goal is established, the next step is to structure your business to attain that goal, and this requires revisiting the strategic plan to focus on four core initiatives: producer definition, accountability, reinvestment and equity ownership succession.
Most insurance firms in the industry have survived because of their strong community presence, a handful of hard-charging producers and expertise in at least one area. Because of these strengths, most firms have been able to sustain growth despite having a true sales culture. While expertise, brand integrity and relationships will drive growth, without a sales culture, new production will be sporadic. The Best 25% of firms have clearly defined producer expectations and separate sales/new business from account retention and service. The masses have yet to take this step. As a result, too many of the “producers” in the industry are really expert service people.
While experts at service and retention are critical to the success of a firm, they should be managed differently than a production staff. When pushed, they will forever claim that it is impossible to achieve the type of new business activity that is required, activity that a true producer can attain year-in and year-out.
After setting defined expectations for producers, it’s time to layer accountability into the sales process. Producer accountability should be based on a mandatory minimum level of new business production (e.g. $100,000 in revenue) and a stretch goal (e.g.$150,000 in revenue). The plan should also incorporate negative and positive compensation incentives. For example, a producer who does not meet the minimum should face an automatic renewal rate reduction (e.g. from 25% to 20%). Those who hit the stretch goal should be eligible for enhanced new business commissions (e.g. from 40% to 50%). Service people who have been called producers will balk at the structure, while true producers will jump at the chance to have a performance-based compensation plan.
The real wild card is whether you can manage through push-back from legacy staff as you try to reengineer your retention/service business into a growth business. Instituting minimum and stretch goals accompanied by consequences and incentives will reward true producers, expose those in the wrong role, create the impetus to redefine individual roles, and generate expense savings to invest in the next generation.
The most important component of long-term sustainability is the continual and systematic reinvestment in the next generation of sales talent. In the average agency, according to PHP, approximately 28% of producers are under the age of 40 compared to 41% percent in high-growth firms. Peak performers recognize the need to constantly reinvest to offset age creep, and they have a method to continuously search and screen candidates. They are also slow to hire and quick to fire.
Firms with a regimented recruiting strategy are able to target candidates with insurance experience, college graduates, proven salespeople from other industries, or a combination of the three. Contrary to popular belief, focusing a reinvestment strategy on proven salespeople from other industries has the highest probability of success. The best producers were taught the insurance business, not taught how to sell.
Producers with insurance experience who are available are usually unattached for a reason. You may get lucky, but more than likely, you are hiring someone else’s problem. And, hiring someone fresh out of college can work, but most college grads have never had a bad, real job. Try as you might, most college graduates cannot conceptualize how good an employer you are because they have nothing to compare you to, and many eventually bounce because of a perception that the grass is greener elsewhere.
For all these reasons, the highest probability of success is hiring proven successful salespeople from other industries. In fact, if done properly, validation success rates can exceed 70%. It is infinitely easier to train someone in the intricacies of the insurance business in a defined area of expertise than to instill a passion to compete, a desire to build relationships and an unyielding drive to hunt down new business.
To manage a natural salesperson, it is important to separate activities from results. If you manage to the right activities, the results will follow. To ensure success, new hires should be required to validate their salary by attaining specific monthly activities that test their ability and willingness to hunt. And these activities should start within the first four months of employment, not after three years of training. Leaders emphasize intense technical training only after a producer has proven the ability to attain aggressive sales activity targets. To the extent that sales related activities are not attained in a given month, the producer’s validation salary should automatically decline the following month, with no exceptions. A person in this position will either step up their game or seek employment elsewhere. To ensure that reinvestment activities are sufficient, it is critical to budget for it. Peak performers spend approximately 3% of revenue annually on aggregate unvalidated pay in the sales area.
Equity Ownership Succession
As the average age of Insurance firm’s owners continues to increase for businesses of all sizes, having a plan in place to transfer equity ownership has never been more important – nor can the planning begin early enough! Equity succession planning may seem daunting, however, it can be accomplished in a few different ways – including identifying a good capital partner for debt or equity, or broadening ownership over time to key stakeholders.
When considering a good capital partner, understanding 1) the trade-offs between debt and equity partners, and 2) the ideal capital structure of your firm, are important. A good equity partner will take a minority ownership interest in your firm, and if not already created, assist in the formation of a Board of Directors to help all equity holders understand your insurance agency growth strategies. A good debt partner will lend against the firm’s free cash flow, without any personal guarantees, to broaden ownership for key stakeholders.
When broadening ownership to key stakeholders, first establish criteria and then explain that the opportunity is “theirs to lose.” The result of such a process is a long-term acute focus on predictable, profitable growth that has been financed by the ideal debt partner discussed above. This leverage provides the motivation to drive new business production and organic growth, even from those who are not working in a sales capacity.
Broad ownership also aligns the interest of key players around risk, return and a plan to build wealth. The recipe for maximizing value has many ingredients, but predictable, profitable growth is essential and achieving this is only possible when owners work in concert.
Play Your Hand
Now is the time to play your hand. Most Insurance firms have not reinvested in the next generation and have failed to institute a viable growth strategy. Even so, insurance firms are in high demand by the buyer market—and valuations are at a premium. Firms that forge ahead successfully with a proper insurance agency business plan, execution and internal equity succession will win the game and walk with returns that few other investment alternatives can compete with.
What is Your Insurance Agency Business & Growth Plan?
What will you do? Will you hold, fold or double down?
If you have questions about Today’s ViewPoint, or would like to learn more about how MarshBerry can help your firm plan for its future, please email or call Brian Refici, Vice President, at 440.769.0321.
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