While organic growth has slowed, profitability remains steady at the top-performing independent agencies in the country.
The newly released 2016 Best Practices Study, which provides benchmarks and analysis of the group of 260 Best Practices agencies, reveals how they are thriving in a difficult environment—and how all independent agencies can follow their success strategies.
Every three years, the Big “I” collaborates with Reagan Consulting to select Best Practices firms throughout the nation for outstanding management and financial achievement in six revenue categories: less than $1.25 million; $1.25-2.5 million; $2.5-5 million; $5-10 million; $10-25 million; and more than $25 million. Big “I”-affiliated state associations and insurance companies nominate agencies which are then qualified based on operational excellence. The Best Practices program reviews financial and benchmarking information for the participating agencies and provides updates the following two years.
This year’s benchmarking analysis examines four key challenges facing the insurance brokerage industry:
Slowing growth. The average Best Practices firm grew organically by 6.9% in 2015, down from the recent high of 9% in 2012. For most Best Practices agencies, consistent organic growth—or non-acquisition growth—is the most important goal. Sales velocity is a benchmark designed to measure the single most important driver of organic growth: new business. Defined as new commissions written as a percentage of a firm’s baseline (prior-year) commission and fees, sales velocity can create organic growth, even in a struggling marketplace.
Best Practices firms generate a sales velocity averaging about 15%. This is well above the industry norm of approximately 12% and helps explain why Best Practices firms tend to outgrow the rest of the industry.
Although growth has slowed, Best Practices agencies find that specialization can create new revenue streams. Today, most Best Practices agencies derive a significant portion of their revenue from areas in which they specialize, because focused expertise can differentiate a firm in a crowded marketplace. For the largest firms, nearly half of revenue comes from industries in which they specialize.
Increased consolidation. The consolidation pace has steadily increased since 2009, when merger & acquisition activity temporarily cooled in the wake of the Great Recession. According to SNL Financial, 2015 was a record year for deal activity, marking 469 transactions.
Most agency shareholders face a dilemma created by this frothy market. Best Practices agencies address it by doing whatever it takes to close the gap between the lower internal agency value and the higher “street value.” The higher values delivered by third-party buyers typically result largely from expense reductions—producer compensation, owner compensation, staffing reductions—that the seller must agree to implement after the deal is closed. Today’s agency owners recognize that they can narrow the difference between internal and external value by getting more serious about making these changes on their own, without selling their business.
Another strategy the active M&A marketplace has produced is an offensive one. After years of believing they were priced out of the acquisition market, today’s Best Practices firms are jumping into the acquisition fray. They typically focus on smaller, local agencies owned by friends or respected competitors.
Aging workforce. The average age of employees at most agencies has significantly increased. A workforce that is too heavily concentrated among any single age group will create a succession challenge if a large group retires within a small window of time. Best Practices firms recognize the dual necessity of investing in talent and managing age concentrations to ensure stability of leadership, production and client servicing. Agencies best positioned to achieve long-term independence tend to employ generationally balanced production talent.
Many producers’ clients are heavily concentrated among their peer group. As producers approach retirement, decision makers at many of their clients may be doing the same. Regardless of whether or not the decision maker is on the verge of retirement, it is not unusual for a producer’s book of business to undergo a higher level of account attrition as they retire.
Because of this, many Best Practices agency leaders have developed plans and protocols for transitioning producer books for business when they retire. Savvy firms also emphasize early succession planning for all key leadership positions.
Disruptive technology. New technologies may disrupt the traditional broker model. According to CB Insights, a firm that tracks technology investments in the insurance industry—dubbed “InsurTech”—the first half of 2016 marked 82 investments in insurance startups, totaling more than $1 billion.
These startups permeate every segment of the insurance industry. Best Practices agencies monitor InsurTech developments so they can effectively respond to emerging changes.
Two areas that seem to have above-average vulnerability are small commercial property-casualty and small group medical. Agency owners should know the percentage of business generated by these business segments. Wherever possible, agents need to find ways to match or exceed the value proposition technology players offer, while retaining the all-important client relationship and risk management expertise that form the heart of the existing insurance brokerage industry.
This is the 24th edition of the annual Best Practices benchmarking analysis and the first year of the current three-year study cycle. The complete report is available for purchase as an e-book.
Katie Butler is IA editor in chief.