April 28, 2020
Tips to Increase Your Independent Insurance Agency Profit Margin
16 min read
Most agents, in my experience, focus on growing their agency's top line - we're always thinking about our new business rate. Many agents are really and rightfully concerned with their retention rate, because they want their overall top-line growth rate to increase year over year.
I think that is great. But I think we're starting in the wrong place. I think you should focus on growing your bottom line.
Years ago, I was on a trip with a friend, and I was very excited about the growth rate that we were experiencing in our agency over the last couple of years. And he said: “You know, Tony, I don't care about my top-line growth rate. I only focus on the bottom line, and everyone in my company is incentivized to grow the bottom line.”
Well, that piece of advice over 20 years ago, really hit home with me. Yes, new business is important, because it helps the bottom line. But let's focus on growing that thing at the bottom of our financial statement. If we do that, the top line will take care of itself.
There are lots of benchmarking studies that can be consulted to tell an owner what the “average” or even “best practices” agency generates in business profits. And the smart entrepreneurial agency owner consults these regularly and tries to operate their small business to beat that independent insurance agency profit margin!
Historically, small agency margins have been in the 10% range, including bonus income. Agency owners who want to maximize their agency’s value, prepare for acquisitions, or create other opportunities for growth typically operate their business to double that number or more.
So just how do you increase agency revenue to increase profit margins? Increasing profits margins not only makes you more money now, it makes your agency attractive to buyers when you’re ready to sell.
Profit should always be a concern. For one thing, it imposes financial discipline. For another, it shields the agency against the vagaries of income fluctuations due to market conditions or weather. So how can you independent insurance agents boost your profits?
You need to focus on new business first. And this doesn’t mean you have to go find new customers.
Selling insurance is an important insurance agency business management tool. As independent agents, we’re very service-oriented instead of sales-oriented. Yes, you need to keep current customers happy, and that’s a priority, but your top priority should be looking for new business to increase sales.
High growth agencies become successful by bringing in new business and developing existing accounts.
In 2018, organic growth for the average agency was 5.3%, yet a report by MarshBerry revealed that high growth agencies reported an impressive 19.5% organic growth rate! They also exceeded the threshold they needed to ensure that growth outpaces any lost business, writing new business at more than 20% of the previous year’s commission and fees.
Here are some easy-to-do ideas to improve your profits organically.
Call Lapsed Customers for a High Conversion Rate
I have a very simple idea, one that everyone knows about, but my idea is so simple that no one ever does it. Sound crazy? Of course, it does. But stop and think – how many great ideas have you heard in your career where you think “of course!” and then don’t pursue it?
I’ve had that experience – a bunch of times. Business coaches must get it a lot too.
So, before I give you my idea, promise yourself you’ll try it. Okay, ready?
First, let me ask you a question. What was your retention rate for the last three years? Subtract that from 100%. What then was your slippage, non-retention, etc? For the average small agency, it is about 15% per year. This means that if you’re running an average insurance brokerage you’ve lost 45% of your customers in the last three years!
What would you do if you could have one third or one half of them back?
If you could do that, in a year, you’d grow by 15% to 22.5%, right? Divide your growth rate last year by that number.
The average growing insurance business grew about 5% last year, so if you could do this and you’re average, you’d increase your growth rate 300% to 450%. Regardless of your actual numbers, I hope you get my point.
Ready for my idea?
It's really simple. Call your old lapsed customers back!
Almost all of them will be glad to have you quote!
What’s your conversion rate? It’ll be higher with these people because they know you, trust you already, and will be happy to come back.
I have a partner who has a department that focuses solely on this, and they win back a huge percent of those they call. Here’s another great idea – do what they do and hire someone with a customer service or sales background to focus solely on this.
Let’s do the math. Assume a $2 million book of business and a $2,000 average account size. That’s 1,000 customers. And 45%of that number is 450. Assume you can resell a third of them.
That equals 150 “new” customers at $2,000 premium each or $300,000 in new business. That’s $45,000 in “new” commission income. For a $300,000 revenue agency, that is a LOT of new business for the amount of time spent. Multiply or divide for your agency’s size.
This is such a simple, powerful, and profitable idea, and yet only the most successful business growers will even try it. Are you one of those?
Sell Additional Insurance Products to Current Customers
I often talk to agency owners who have a nice book of business but would like to increase agency income. Of course, being insurance brokers, they’d like it even better if it didn’t involve much work or expenditure of money. Well, I have some suggestions on how to do that. I’m going to give you three ideas on how to make more money on your existing book of business. These ideas:
Are easy. Your staff can do this with virtually no help from you.
100% profit. They require no marketing or sales expense to implement.
Have the added benefit of increased retention.
Will make you a better agent in the eyes of your clients, who may then refer you to friends and family.
Interested? I thought so.
An Umbrella for Every Customer Makes It Rain
My first idea is to sell an umbrella to every customer. I know you’ve heard this before. But let me ask you, “How many of your customers already buy an umbrella?”
If you have 1,000 customers they all need one on top of whatever property and casualty insurance they may already have. Why? How much money does it take to settle a claim where your insured puts someone making $10 bucks an hour in a wheelchair for life? The short answer is $1 million dollars. $350k for the hospital. $400k in the bank at 5% to replace the lost income and $250k for his lawyer (I’m being optimistic here, by the way). So, where does your client get $1 million?
Their umbrella of course.
Now, if you sell all your customers an umbrella (by quoting one every time, and having your staff explain the math as part of the sales process) you will make $20,000 in commission ($135 premium x 1,00 x 15%). It’s easy. It’s 100% profit, from a profitable product. We all know increased lines of business increase retention (what’s that worth by the way?). And you’re looking out for your customer, so you’re a better agent.
You’re having a silent argument with me, aren’t you? You say you don’t have 1,000 customers and you don’t have a close rate of 100%.
To which I reply – then get busy! But also remember that many people need more than $1 million and the second million costs $100, so if you offer it you really will get your $20,000.
What’s stopping you?
Raise Your Customers’ Auto Insurance Limits
Let’s make $24,000, just with a little proactive account management.
I want you to simply raise your customer’s auto limits. Our agents are supposed to sell a minimum liability limit of $50,000/$100,000 but you know that’s not enough, right?
So, simply raise all your customers to $100,000/$300,000. You can sleep at night, they’ll have better coverage (they still need an umbrella) and guess what? You’ll make more money. Here’s how:
The premium difference between these limits averages $40.
The policy is for 6 months
The average family has 2 cars
So, $40 times 2 is $80. $80 times 2 is $160. $160 times 1,000 is $160,000. $160,000 times 15% is $24,000.
Easy as pie.
Now, some of your customers will be cheapskates and not increase their limits. I get that. But others need to raise theirs to $250,000/$500,000. They will make up for the cheapskates. I promise.
So, now we’ve found $44,000 in extra profits for your agency! Are you interested yet?
Well, consider that that bottom line has equity implications. The average agency today is selling for seven times profit. So, just requiring these two small changes in your staff have increased your net worth by $308,000!!
That’s $352,000 in your net financial position (income + assets) in just a few months with almost no work. Interested?
Sell Life Insurance
I’ve given you two ways to increase your net worth by more than $300,000 and your net profits by more than $44,000 per year! Now I’d like to give you just one more idea that, if you implement it instead of just thinking about it, will raise your income by an additional $16,000.
Sell. Life. Insurance.
I know. Not a popular idea. At least until you have an uninsured customer die.
Anyway, I’m not talking about a hard sell here. You can get a program for your computer that automatically quotes term insurance for every customer. Then a broker finishes it up for you. It’s really pretty easy.
Of course, because a broker does all the work you only get part of the commission. Can you live with 100%?
If you have 1,000 clients you really have 2,500 people covered. The average 40-year-old can buy $100,000 of term insurance for $175 per year. The average 10-year-old costs $50 for the same amount. So, that’s $400 in premium potential per household.
If your closing rate is just one out of 25 (that’s 4%), you make $16,000! In actual practice, the closing rate is usually higher and many families need more insurance than that. But I like to be conservative.
So, with three very simple and easy-to-implement ideas that require almost no effort on your part, we have increased your agency’s profit by $60,000! I know that’s more than the $50,000 I promised. Sorry not sorry!
Also, we increased your net worth more than $300,000! And your retention rate will go up. How much will that make you?
So, are you in this business because you like to golf or do you wanna make some money?
Write Your Policies with OAA Strategic Partner Carriers
Recently, I spoke to one of our member agents and asked her why she was placing $200,000 of business with an Excess and Surplus (E&S) lines broker instead of writing that business through a Strategic Partner Carrier of OAA. She told me it was because she liked the broker and didn’t want to offend her.
I sometimes think we get so busy just trying to get the work done in our agencies that we forget why we took the risk to start our own business in the first place. Most of us started our businesses so we could control our own destiny, and make more money. Remember?
I don’t like offending people either, but like what Kevin O’Leary, the hyper-successful “Mr. Wonderful” from the television reality series, “Shark Tank,” always says: “It’s the money that matters in business!”
Let’s look at the financial consequences of this agent’s decision to ignore the money by comparing placing this policy with a broker vs a strategic partner carrier:
Excess and Surplus Lines Broker
Premium Volume: $200,000
Broker Commission (10%): $20,000
Strategic Partner Carrier
Commission available (15%): $30,000
Bonuses available (11%): $22,000
Difference in Income = $32,000
Our agent partner was forgoing $32,000 in additional compensation (260%!) to not offend someone? Incredible! But, that’s not all. I asked the agent, “Would moving this business require any more work?” The answer was, “No.” So, where does the revenue go? To the bottom line of course.
Agencies are valued on a multiple of profit. Seven to eight times profit is the going rate. So, this additional $32,000 in income meant the agency value would increase by $256,000! That means the total value of moving the business to the agency owner would be $288,000. That is a 1,440% increase in economic benefit to the agency owner from one simple change!
We are all in business to make money. Yes, we are busy. But are we busy doing the right things? The primary responsibility of a business owner is to maximize the money the business makes. Is there a chance you have some profit and income leaks in your business? Don’t waste a good opportunity to save money and increase cash flow.
Speaking of Excess and Surplus Policies…
As agents, we don’t like to write Excess and Surplus (E&S) lines business if we can avoid it. The commissions are much less, there is no profit-sharing, we have higher expenses in quoting, issuing, and servicing the policies and the forms are non-standard increasing our errors and commissions risk.
E&S looked at this way pretty much sucks, doesn’t it?
I’m certainly not going to try to change your mind about this here. Let’s find common ground. What I’d like to do is give you some suggestions for at least increasing what you get paid when you have to write it, and some suggestions for lowering your expense factor.
The first thing I recommend is to use a premium finance company that you select instead of the one the broker recommends. Premium financing is extremely lucrative and the finance companies are very willing to pay someone for the privilege of financing the premium. They are going to pay either the E&S managing general agent (MGA) or you. Probably not both.
Use your own finance arrangement. If you do much of it, you can negotiate an override of a point or two that has nothing to do with marking up the customer’s rate. This “point or two” is very significant as it can represent 10% to 15% more revenue to you on each policy. Or you can let the broker have it. It’s your choice.
You can also mark up the rate yourself. Many savvy agencies do this with some rate markups as high as 5%. This can result in another 10-20% increase in revenue. Some agents think customers will object, but I’ve never had a customer, in more than 20 years, refuse a premium finance agreement due to the rate. I simply show them the relatively small dollars of the interest portion, invite them to pay cash or use their bank line and watch as they sign the contract.
Another important thing to do with E&S is to concentrate your business with one or two MGA’s. When you give them more of your business you can ask for and receive more commission. They are getting 15-25% commission and paying you 10%. They have room and they will pay more if it’s worth it to them to get your volume. Spreading your business all over the place doesn’t pay.
Use MGA’s with online quoting and rating capability, which are much more cost-effective. Doing it the old way costs more money. Quit that!
Charge fees. State laws vary, but you can generally charge fees and increase pricing if you don’t receive a commission. Work that out with the broker and set your compensation. Even if you want the commission, many state laws allow you to charge a fee that covers your cost of services like tax filing, certificates, or other things. Of course, you need to disclose, and you need it to be worth it to the customer, but this can add a lot of revenue.
E&S will probably never be as profitable as standard business but the gap between the two can be a lot smaller than it is for a smart business person.
Put Your Business Where You Get Paid the Most
As each year nears its end, insurance company executives troop through our offices asking for more business in the next year. Often those discussions include talks about what they’re offering in terms of compensation.
Unfortunately, in the current environment, those discussions often involve offers to pay less, not more, as carriers struggle to make money in a low-interest rate/high commoditization environment.
May I encourage you to push back?
If you’re a high growth agent you have something very valuable that every company wants: Organic growth. This makes you more valuable than agents who are not growing (read: the vast majority). If you are producing good loss ratios you are worth even more.
As carriers become more sophisticated and data-driven, they’re making increasingly sophisticated distinctions between agents. They know better than ever before who makes them money and who doesn’t. If you are one of those who do, you should be asking for better than average compensation. You won’t always get it but you should be persistent.
Here’s something else:
Put your business where you get paid the most!
Now I know the immediate reaction you are having is to say, “I put business where it’s best for the customer”. To which I call BS.
Most agents put it where it’s cheapest. Then they put it where it’s best for the customer.
I think you should always put it where it’s best for the customer. Every time. That’s not always the cheapest! But I think your second criteria should always be “who pays me the most”.
In the first place, you’ll make more money, and in the second, you will encourage those carriers who pay less to up the ante. Why would anyone give business to a carrier who pays 8% commission when 15% is available at a competitive rate to the customer?
It’s nuts but it’s done all the time. Why would anyone put business with a company where you get no contingency instead of one where you do? That’s crazy too.
You should know what everyone pays you. Decide the best deal for your customer, then yourself, and then sell that. When companies complain, show them what others pay you and tell them when they step up to the plate with a better deal you’ll reward them.
Maximize Profits Makes Your Agency Attractive to Buyers
Readers of “The E-Myth” book series by Michael Gerber understand that most business owners really own a job and not a business. If you have this mindset, you’re probably most concerned about growing your personal income.
But for growing agency owners who want to run their agencies as a business, what they get paid is a secondary concern. Of course, business owners want to make a living! And they hope to make a better one than they could as an employee. Otherwise why take the risk?
However, real entrepreneurs - as opposed to a typical business owner - are also concerned with building value.
This type of owner realizes that someday the opportunity to sell the agency will present itself. Or the opportunity to buy another agency will.
They realize that agency profitability will be a key component in either situation.
Agency buyers want to know not only how much revenue an agency produces, but they are keenly interested in how much profit it makes.
Revenue is just the beginning of value. Profit is what creates it.
As I told you earlier, small agency margins historically have been in the 10% range. This has included bonus income. Agency owners like you, who want to maximize their agency’s value or prepare for acquisitions or other opportunities to grow your business, typically operate their business to double that number or more.
In the end, buyers of agencies want to see that the agency is profitable and that all the money isn’t being spent. They will look most favorably (i.e., pay more) for agencies that consistently generate profits in the 20% or higher range.
Perhaps you’re thinking that to do that you’ll have to cut your salary or your commission level. But remember: profit is just another way to pay yourself as the owner. Also, remember that how you account for the money left over after all the other expenses are paid (gross profit margin) is a critical component of agency value.
Just Don’t Sacrifice Growth for Profits
Back in 2013, I wrote a three-year business plan for our company, and one of the most important decisions I made at that time was to reduce our margins. When I wrote the plan we were a highly profitable company. In fact, we were too profitable.
Perhaps that last statement takes you by surprise. Let me explain.
Every business person knows to make money you have to invest money in your business. This investment is what fuels growth in the long term. Many business people long for the day when they will not have to invest and the business will grow on its own. But, it never will.
Our business enjoyed a compound annual growth rate (CAGR) of 35% annually over the first 10 years. We invested heavily in our growth over that time, and after becoming profitable in year three our profits grew steadily, outstripping our top-line growth by the end of the decade.
Then growth slowed.
Our growth rate in our 11th through 13th year in business fell to 8% to 9%. That’s not bad, but certainly not what we were used to. The good news was we were making a lot of money! So, who can complain?
But I knew something was terribly wrong.
No business ever “arrives” at the place where continued success is guaranteed. The minute you begin to think that and take your foot off the accelerator, you immediately begin to slow, and eventually, go backward.
The ultimate result of this is going out of business if you let it go on long enough.
I knew our slowing growth was due to a lack of commitment to the business, demonstrated by taking more and more money from the business, and our failure to invest those resources back into the company.
I decided in 2013 to dramatically increase investment in the business. I did that by resolving to cut our profits in half.
When you invest money in your company, it is like blowing on the embers of a seemingly dead fire. Flames don’t immediately begin again. But, as you add more resources to the business, like logs to the fire, it grows hotter, and eventually, you are growing again the way you were. This is what happened to our company.
In 2013 our growth rate increased to 16% as we began fanning the flames. In 2014 our growth rate increased again. In 2015, we had a 46% increase in revenue, our best year up to that point.
The fire is burning again. But what about profitability? Did the investment pay off?
Yes, it did.
Our profits in dollar terms grew by 250% in three years after making the necessary growth investments. We did this by deliberately investing 50% of what we were taking out of the business three years before, putting it back into the company.
Our business is not unusual. This is every business’s story including yours. What’s your situation? Are you still growing the way you once did? If not, you must refuel the fire. And if you want to grow continuously, and reap the profit rewards, you must never stop!
Tony Caldwell is a modern “renaissance man,” who is not only immensely successful in the field of insurance, but is also a writer, children’s advocate, mentor and even a licensed pilot.
Always keen on helping others make their dreams come true, Tony and his team have helped independent agents grow into more than 250 independent agencies. This has made OAA the number one ranked Strategic Master Agency of SIAA for the last 5 years, and one of Oklahoma's 25 Best Companies to Work for.
Tony loves to share his knowledge, insight and wisdom through his bestselling books as well as in free mediums including podcasts and blogs.
Tony and his family are members of Crossings Community Church, and he is very active in community initiatives: he’s chairman of It’s My Community Initiative, Inc., a nonprofit working with disadvantaged people in Oklahoma City; and chairman of the Oklahoma Board of Juvenile Affairs., and he has served through many other organizations including the Salvation Army, Last Frontier Council of the Boy Scouts of America, and the Rotary Club.
In his spare time, Tony enjoys time with his family. He’s also an active outdoorsman and instrument-rated commercial pilot.