The Validation Combination

Growing a new recruit into a bona fide insurance producer takes years—and costs plenty. Hiring costs, salary, training, management time and mentoring all add up.

But it’s the highest-return investment an independent agency can make.

Developing a successful producer isn’t simply “money coming out of the pocket,” says Robert Pettinicchi, executive vice president and chief lending officer of InsurBanc, a division of Connecticut Community Bank N.A. It’s a vital investment to grow agency value.

Agent development is “an absolutely essential part” of an agency’s future success, says Kevin Stipe, president of advisory firm Reagan Consulting—whether the owners plan to sell or keep the firm independent. And according to a Reagan producer research study, producer development represents “a firm’s willingness to fund temporary losses on producers in anticipation of future returns.”

The equation for developing producers to the point of “validation”—where their production as measured by commission is equal to the cost of paying them—involves three key factors:

Time: How long is long enough?

Resources: What salary and development resources are necessary?

People: Who’s right for the job?

What To Measure

Can an agency even use an objective, mathematical system for an area that is often judged subjectively? It’s a must, says Bill Schoeffler of Oak & Associates, an agency consulting firm: “You can’t just get by with your gut instincts anymore.”

An agency can measure progress with key financial ratios as new hires walk the path from recruit to agent. Reagan Consulting says it’s possible to more clearly define the grey area of intuition by using the following measures of agency investment and effectiveness:

Net Unvalidated Producer Payroll (NUPP): the difference between what an agency pays its developing producers in direct payroll versus what the producers would earn under the agency’s normal commission schedule.

Expressed as a percentage of net revenues, NUPP is a good measure of an agency’s financial investment in producer hiring, according to Reagan Consulting’s 2014 study “Producer Recruiting & Development: Getting the Attention It Deserves—Achieving the Results You Need.”

For example, a recruit who has built up a $60,000-premium book of business would earn $18,000 if an agency’s standard 30% commission rate applied to the producer’s paycheck. But assuming the producer earns a $45,000 salary, then $27,000 of the salary ($45,000 less $18,000) is “unvalidated.” Bundling together those unvalidated amounts for all producers and dividing them by net revenue yields the NUPP figure for the agency.

A NUPP of 1.5–2.5% of net revenue represents “a healthy level of producer hiring,” according to the Reagan study. But that ratio measures dollars, not the firm’s effectiveness in its hiring practices. So it follows a companion benchmark:

Effective NUPP: the product of an agency’s NUPP and its producer hiring success rate.

A firm with a 2% NUPP and a producer hiring success rate of 56% (the industry average) would have an effective NUPP of 1.12% (2% x 56%). An optimal effective NUPP ranges between 1–1.5% of firm revenues, Reagan reports.

Tommy McDonald, vice president at MarshBerry, an agent/broker consulting firm that participates as an advisor in insurance agency purchases and sales, views book growth as “the ultimate indicator of producer performance. But in many cases, it’s a lagging indicator,” he says. A more forward-looking objective measure is “estimated pipeline revenue,” he explains, noting that a new producer must keep four times their sales goal “active in pipeline to stay on target.”

The best leading indicator? “The ability to set a qualified appointment with a decision maker,” McDonald says. “At the end of the day, if the producer cannot set quality appointments, it will be impossible for them to be successful.”

TIME

The window is generally about three years for a producer to validate. Most agency principals “know within six months whether or not the individual will make it, but will look to realize a monetary return in a three-year time frame,” McDonald explains.

At The Horton Group in Orland Park, Illinois, it generally takes about three years for recruits to “vest.” “But we have no firm deadline or criteria,” says Glenn Horton, CEO of Horton, a large multiline broker with 350 employees.

The agency uses both objective criteria—calls, prospects, appointments, new business revenue—and subjective criteria—cultural fit, work ethic, professionalism—for new producers, whom the firm dubs “unvested” prior to validation.

 “If somebody really shows they can’t get out and can’t close business after a year, you’ve got to let them move on,” Pettinicchi says. “I don’t expect them to fully pay for themselves in that time, but you’d have to see the right behaviors.”

RESOURCES

Agencies must welcome new producer candidates into an infrastructure that leads them along a road to sales productivity. “What you really need to do is create a system from start to finish,” Schoeffler says. “When you’re thinking about hiring a producer all the way through the hiring process, through the training process, through the long-term process—it has to all be filled out right in the beginning.”

The most successful firms “build out a pathway for these [recruits] that includes a curriculum for training and measurable mileposts along the way—and gets them tied in with a mentor,” Stipe says. “Firms that are doing really well in development today are taking it very seriously.”

McDonald agrees that training resources are vital. “It’s impossible to grow your business long term if you can’t figure out how to train people,” he says.

The Horton Group has hired 18 new producers in the past two years, and all are on course to validate. But it wasn’t always that way—the firm had to change to an organized training and development system. Horton calls producer development “more science than art,” characterizing it as a discipline that involves tools such as a range of training along with hands-on management involvement.

Agencies must think of development as “an investment and not purely an expense,” Pettinicchi says. “You have to really enable them to succeed. Support them. Give them the tools.”

PEOPLE

Many agencies “spend less than 2% of their time actually recruiting,” McDonald says, advising agency principals to adopt the mindset: “You are not in the insurance business— you’re in the recruiting business.”

Hiring for sales skills is a must. “Go outside the industry, find experienced salespeople that have sales skills—and not necessarily insurance technical skills—that can come in and be successful,” McDonald suggests.

“Being able to sell and then being able to bounce back from rejection is the important thing,” Schoeffler agrees.

Using psychometric testing for new candidates can help determine whether a recruit has the personality traits to become a successful salesperson. “You can learn insurance,” Pettinicchi says. “You can’t learn to be aggressive.”

It’s advice that clashes with the industry’s habit of hiring new producers mostly from other agencies: Only 35% of hires come from outside the industry, including just 6% from college, according to Reagan’s 2014 survey. By contrast, 55% are experienced producers while another 10% have insurance experience, but not a sales background.

The agency system ought to flip those numbers, experts agree. “You need to hire a bunch of them at the same time,” Pettinicchi advises. “Go out on a limb a little bit and bring in a few more, so they can actually compete with each other.”

Stipe agrees that hiring “in bunches rather than spreading them out as needs occur” is a smart approach—particularly for smaller agencies that too often hire based on events like agent retirements rather than using a proactive approach that creates a producer pipeline.

Productive agents “will pay for themselves and increase the value of your agency—and therefore increase your wealth down the road,” Pettinicchi says.

Peter van Aartrijk is an IA contributor. 

NUPP Analysis

According to the 2014 Best Practices Study update, here’s where Best Practices agencies fall when it comes to Net Unvalidated Producer Payroll:

Agency Revenue                Average NUPP

Less than $1,250,000                       3.9%

$1,250,000–$2,500,000                    2.7%

$2,500,000–$5,000,000                    1.2%

$5,000,000–$10,000,000                  1.1%

$10,000,000–$25,000,000                1.4%