Wrapping up a unique year, how to plan for the next one.
As 2020 draws to a close, it will certainly be remembered as a year of great challenges, transitions, and triumphs. No doubt the COVID-19 pandemic rattled the world economy and compelled the scientific community to spring to action to create a vaccine to combat this novel virus. It also compelled the insurance brokerage industry to adjust, innovate, and operate in new ways. With 2020 in the rearview mirror, let’s look at how best to plan for the New Year.
Top-performing firms continued their planning process for 2021 albeit with many more variants and contingencies. As you finalize your targets for this year, incorporating metrics measuring both short and long-term goals will help gauge progress, keep priorities on track, and maximize shareholder value.
Here are three key measurements to keep your eye on:
1. Contingents as a Percentage of P&C Commissions
This metric is calculated by dividing profit sharing income by Property & Casualty (P&C) commission income.
This measurement is an indication of how well your firm is leveraging the profit-sharing agreements in place with your carriers, as well as your ability to grow your book of business. Among participants in MarshBerry’s proprietary financial benchmarking database, Perspectives for High Performance (PHP), the average percentage of P&C commissions is 10.7%, with the Best 25% of this average group producing 17.5%.
This ratio is important to consider as you look to assess your internal underwriting ability. As your P&C commissions grow, this ratio should grow as well. A decreasing percentage, while P&C commissions continue growing, could mean your production staff are focusing too much on higher risk business. This may lead to higher loss ratios, and therefore, lower profit-sharing payments.
2. Operational EBITDA
This calculation represents Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) from core insurance revenue. This measurement is indicative of a firm’s profitability from commission and fee revenue only.
Among PHP participants, the average operational EBITDA margin is 8.3%, with the Best 25% of this average group functioning at an operational EBITDA margin of 19.8%.
Operational EBITDA is important to consider as you produce your budget for the new year. If you’re forecasting revenue growth, it may be necessary to budget for increased operational expenses such as gifts, promotional material for prospective clients, or bonuses paid to your production staff for signing a new client.
If operational EBITDA is decreasing while core insurance revenue is increasing, this may be indicative of overspending in any areas such as compensation, travel, client entertainment, etc.
3. New Business as a Percentage of Prior Years Commissions & Fees
Finally, this ratio is an indication of your firm’s total new business generated within a calendar year and does not include growth that is due to rate increase or acquisition. MarshBerry’s most recent PHP benchmarking report data indicates that the average firm saw a 13.8% average new business rate with 9.6% leakage. The Best 25% of firms achieved a 21.9% new business rate with 9.8% leakage.
The major difference between the above two samples was that the Best 25% of firms are seeing 12.1% organic growth compared to 4.2% organic growth of the average firm. The best firms lost more business but are growing at nearly three times the rate of average firms. At these organic growth rates, the Best 25% of firms will double in size in less than six years, while the average firm will take over 17 years to do so!
If you have questions about Today’s ViewPoint or would like to learn more about PHP and the impact it can have for your firm, please email or call Doug Jones, Senior Financial Analyst, at 616.214.3148.
As we keep our eye firmly focused on the industry and actions within it, we are taking a pulse on what firms are paying their sales, service, support and management personnel. Take a quick 10-minute MarshBerry Pulse survey to help us gauge how salaries, commissions, bonuses and employee benefit levels in independent firms have changed over the last year.
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