When I joined my agency twenty-five years ago, we had an internal debate about whether our agency was a service organization or a sales organization. The results were clear: an independent insurance agency is a sales organization! Everything you do in your business is oriented towards selling insurance. Service is a byproduct of that. Sales are the most important thing. Without revenue, you're not in business.
An insurance agency has three main roles:
You might be shocked to find that you should not be hiring for your agency in this order - in fact, sales hires should be left for last. Read on to learn about the different roles, how to choose them, how to manage them, and when to let them go.
Let's talk about the sales function in your new business. Almost all agency founders are salespeople. And even if you aren't the number one salesperson in your business, you should strive to be: you are the person with the passion and the purpose to build the revenue of your organization. You are your agency's best advocate. You must always be involved in selling. And so, you will be your agency's first producer. More than likely, selling will be the highest value you bring to the agency for a really long time.
Of course, you will have other roles in the business, but you should never allow any of those roles to eclipse your role as the number one producer. When you look at the cost of replacing yourself in any other roles that you may perform, you will clearly see that the money you make for the time spent will always be greatest in sales.
As your agency grows, you should seek to eliminate from your daily work as many non-sales functions as you can. What many inexperienced agency principals do instead is the exact opposite, and this works against them.
When an agency grows, the service burden grows along with it, and you will find that you have less and less time to devote to selling. This will result in a lower growth rate for income over time. The inexperienced agency principal seeks to solve this problem by hiring producers to continue to grow income, while the agency owner spends an increasing amount of time on administrative tasks, which now include sales management. In my experience (and I have analyzed this with dozens and dozens of agency principals in the insurance industry) this is the wrong strategy.
I had a friend many years ago who was running a two-million-dollar agency. He had nineteen other employees in the agency but was the only producer. This is the ideal situation. It's difficult to replicate, but it's an ideal you can strive for.
With my friend’s example in mind, when should you hire your first producer? My answer is simple: when you have replaced all of the non-sales activities that you perform personally, and you have run out of time personally to sell any more business, that is the time to hire another producer!
In the independent agency system, the failure rate for producers runs about 90%, and it usually takes about three years for new producers to pay for themselves. This is additional evidence that you should delay hiring producers for as long as possible to protect your business.
One of the reasons that our industry has such a high failure rate with producers is we do a very poor job of hiring. There are a variety of reasons for this, but I believe the agency owner must understand that salespeople make terrible interviewers and hirers. If you are successful in sales, it is (at least in part) because you’re a people person. And you have a high need to convince others. As an interviewer, this results in the agency owner selling the prospective employee. This is made even worse by the sales personalities’ natural wiring to like everyone they meet. Not a good role reversal in an interview.
Another reason we hire poorly is that candidates misrepresent themselves. There have been some studies on the subject that indicate that up to 50% of applicants outright lie on their resumes. Certainly, in any interview, the candidate will behave in a way they think is conducive to getting the job. Have you ever met a candidate for a sales position who seemed shy and introverted? You may think that going through staffing firms or a staffing agency will ensure you only get candidates who are qualified insurance professionals, but remember an employment agency gets paid when you hire, and so their interest is not aligned with yours.
The answers to this problem are twofold. The first is to use some kind of applicant screening testing or survey. Two popular in our industry are Peoplesoft™ and Caliper™. They are expensive, but if they work, they are far cheaper than a bad hire. I personally have not had very good success with either and can’t recommend them, though I have colleagues who have had different experiences. I have had good success using Kolbe™ profiles and the Gallup Organization’s Strength Finder™ diagnostics. But far and away, the best tool I have used for understanding what someone is capable of is Culture Index™(CI). CI is sold as an all-you-can-eat testing system, and it can be expensive for a startup. We offer its use to our member agencies, yet another reason why Agency Development Organizations are so useful to a startup.
The last consideration in hiring a new insurance agent is to make sure they understand clearly what your expectations are for revenue production. You need to have a plan for this producer just like you have a plan for your business. This producer will cost you a great deal of money before he breaks even. You need to be clear what return you expect on this investment. I have found that my Sales Forecasting Tool, which you can download for free from my website at www.oneagentsalliance.net, is an excellent way to develop your plan for the producer, as well as educating them on the activities they will need to perform in order to make the income they desire.
Remember that there is a high failure rate for producers in our industry. It's important to have a good plan, an adequate salary base, and also to remember the old maxim—hire slow, fire fast—in order to maximize your chances at success with producers. I often ask producers, “What is the best day to lose a sale?” To which the correct answer is, “Today.” In other words, you never want to be in a position of throwing good money after bad, and I would say the maxim applies in spades to the agency owner. Your insurance staffing practices should be ruthless: the very first day that you have doubt that your producer will work out is the day you should let them go.
When the time finally comes to hire a producer, bear in mind that the agency must own the book of business. A number of years ago, I met an agency owner who was interested in doing business with my organization. He told me that he would check with his producers and let me know whether they wanted to proceed or not. I asked him, “Why do you need to check with your employees?” He replied, “Because they own their own books of business.” I looked at him and with great sadness asked, “Do you realize that all you own is a bunch of used furniture of little or no value?” Stunned, he told me he had never thought about it that way. The last time I heard about him, he was working as an agency manager in someone else’s agency.
You see, the value in an insurance agency is the book of business. And many inexperienced agency principals, in an effort to avoid paying a salary to a producer, or in an effort to recruit a producer to a relatively new agency, are quick to give away ownership of the book of business to the producer. When you do that, you make that producer a partner and potentially a partner who will own more of the business than you do. Don't make that mistake! The agency must own the book of business.
To make certain that this is clear between you and your new employee (as well as to anyone else who may become involved in a dispute, like a court), your producers must sign a non-piracy and confidentiality agreement on their first day of employment. That agreement should include a non-solicitation provision wherein your employee agrees not to solicit your clients should they leave your employment.
Some people still refer to these kinds of agreements as non-compete agreements. But non-compete agreements are generally considered to be against public policy and are therefore unenforceable in every jurisdiction that I'm aware of. You cannot prevent a former employee from engaging in the insurance business and competing with you (as the owner of their own business or as an employee of someone else), but you can prevent them from soliciting or stealing your agency’s clients. The only way you can prevent that is to have them sign a non-piracy agreement at the very beginning.
As we mentioned earlier in the chapter on tools, all employees, including producers, must be employees indeed. Some agencies attempt to make producers independent contractors to avoid the costs of workers’ compensation and FICA (as well as employee benefits). As mentioned earlier, there is simply no way that I have ever discovered that you can legally do that. If you are tempted to try, please be aware that you are potentially subjecting yourself to very large fines and penalties.
How should you pay your new producer? The methods and strategies are endless. They can be paid a salary plus bonuses, they can be paid salary plus commission, or they can be paid exclusively commission.
The disadvantage of paying any salesperson with a fixed salary should be obvious: they don't have any incentive to produce results.
That said, there is also a disadvantage in paying salespeople strictly on commissions, which may not be immediately apparent. When you ask someone to work on 100% commission - selling workers compensation insurance or property damage insurance, for example - you're asking that employee to take all of the risks in your employment relationship. What this does is make you an unattractive employer to the most talented people. In my experience, if you pay 100% commission, you will end up with the bottom of the barrel and experience a significant turnover of your sales team, which will amount to the same as working with temporary staffing or a temp agency - no commitment, no growth.
Some agency owners attempt to mask this 100% commission arrangement by providing for a draw against commission. While this may be slightly better than offering commission only, experience shows that if you have an unsuccessful producer who leaves, you will never be able to collect the draw you have advanced. You are paying a salary, but by calling it a draw, you eliminate your chance to hire the most highly talented people in a very competitive industry.
The disadvantage of paying any salesperson with a fixed salary should be obvious: they don't have any incentive to produce results.
Most agencies that find success with producers end up paying a salary plus commissions or bonuses to their producers. The trick with salary is to pay the minimum salary possible, but with enough guaranteed income to pay the salesperson’s monthly bills while they become established. There are a number of ways to structure salary and commission arrangements, and the National Alliance Research Academy publishes an excellent book that you can obtain as a reference to see how many different combinations of salary and commission work out over time (see the Resources section of this book for more information).
One of the mistakes that inexperienced agency owners make is to pay a greater commission rate to producers than they should. I often hear of producers being paid 50% or more of the agency commission as producer commission. This is almost as bad as allowing the producer to own their book of business! When you pay that much money in commissions, you rob the agency of its ability to make a profit.
I recommend that every new agency owner obtain a copy of the current issue of Insurance Agency Growth and Performance Standards, published by the National Alliance Research Academy (additional information is in the Resources chapter) and a copy of the Best Practices study published by Reagan Consulting on behalf of the IIABA. These two benchmarking surveys are useful for a variety of things, one of which is that they publish compensation rates as a percentage of income for agencies of all sizes and locations as well as product specialties.
A careful review of these two studies will show that, in order for an agency to make an adequate profit, they cannot afford to spend more than 30-35% of agency revenue on commercial lines production (including salary), or more than about 25-30% of agency revenue for personal insurance production. There are many ways to get to these numbers, and many agencies prefer to use commission schedules that are weighted towards new business production. I personally think this is an excellent strategy because it focuses the attention of the producer on producing, not on client service.
Whatever you choose, remember that you are the one who structures employment for producers in your agency. Be sure that you don't overpay them.
One final point about hiring producers is the topic of management and the skills required to do it well. It is widely understood among professional management types - those with business administration degrees, MBA’s, and Fortune 500 management experience - that capability or talent for a given skill doesn’t translate to the ability to teach, coach, or manage it. The very things that make you a successful salesperson work to your disadvantage as a manager. Impatience, high drive, and high connection with people and egotism (wanting recognition for personal achievement) are all hallmarks of successful salespeople, but work to your disadvantage when managing them.
Great sales managers are great teachers and coaches. They see talent and skill - which are often very different from their own - and nurture them. They are focused on numbers and have the patience to work with someone to bring them along. They are willing to achieve success through others, and don’t really like being the center of attention. With extensive experience in working with nearly 300 agency principals (startups and existing agencies that have joined my organization over the years), I can only think of a handful of agency principals who were effective sales managers. I encourage you to consider this very carefully, especially in the days before you can afford salaries for both producers and a manager.
The second function that you must provide for in any insurance agency is the servicing of the accounts that you have sold. Most agencies provide for this service through a combination of client service agents (or client service representatives) and insurance company service centers.
The traditional role of the client service agent (CSA/CSR) has been to provide for the service functions of the agency exclusively. In other words, they prepare insurance proposals, issue client-requested documents, and so forth but don’t engage in selling activities. That limited role for CSRs is dying rapidly today, however. Remember, agencies must be sales operations! I love this quote from management consultant Gary Hamel: “The sales department isn't the whole company, but the whole company better be the sales department.”
When you hire people to perform the service function, you should also look for people who aren't afraid to ask for the order. One of the reasons that the average independent insurance agency has only 1.6 policies per client is that they do a poor job of cross-marketing their business. That can be corrected with service representatives who are also salespeople. Begin by hiring people who aren't afraid to ask for the order and follow that up by making a significant part of those people's compensation based on either bonuses or commissions for new business.
An increasingly valuable component of agency service is the utilization of insurance company service centers. Many small agency owners have resisted using service centers because they believe they cost too much. I think that insurance companies have played into this misconception—and have missed an opportunity in the way they market these services to agency owners by describing the fees as costs rather than savings. What do I mean by this?
When you look at the cost to the average insurance agency to provide the service function to clients, it averages about 25% of revenue. Insurance company service centers typically charge agencies 1.5-2% of the commission they would ordinarily pay the agent. If the fee for the service center is 2%, and the average commission rate is 15%, then the cost to the agency for the service center is 13% of revenue, or about half the cost of serving the clients with their own employees. Service centers aren't expensive; they're cheap and highly cost-effective!
Being excellent businesspeople and recognizing the cost-efficiency of service centers, the majority of large agencies utilize them at a much higher rate than small agencies.
One tremendous advantage service centers offer is that they are usually open twenty-four hours a day, seven days a week, and three hundred sixty-five days a year. Their statistics demonstrate that clients, especially personal insurance clients, make about 25% of their calls to service centers after five o'clock or on weekends and holidays—periods of time in which you typically are not open.
A disadvantage of service centers is that if you have business placed with more than one company, it can be confusing to your client to know who to call. This is something that you need to educate your clients about in your service handoff after the sale. Or, increasingly, you can consider using a multi-company service center, an offshore virtual assistant service, or one of the U.S. based companies that utilize fractional, part-time, or retired customer service people to augment your people or carrier service centers. A smart, savvy entrepreneur is always thinking about how to turn fixed costs into variable expenses. Service centers, virtual assistants, and fractional service providers are all ways to do this.
Some service centers are not able to cross-sell or perform account routing activities for you, while some are. You need to clearly understand the services that are offered by the service center that you use. Most service center operations are very good at referring clients back to you for the things that they cannot provide - for instance if a customer requires professional liability insurance added to their current insurance coverage. Each service center you deal with will have a different set of operating procedures for how they interact with your clients and employees. It’s important that you fully understand those processes and train your employees on those differences.
A couple of final points about the client service agent: in order to sell insurance, they must be licensed to do so. Some states have special licensing for client service representatives, which is a limited insurance license. Without the full privileges of a producer license, CSRs cannot legally sell anything, including an additional premium endorsement. Since all people in your agency should be focused on selling, a limited CSR license is not an acceptable type of licensure for your client service representatives. You should ensure that they get a producer’s license.
Good service employees are among the most difficult to find in our industry. There has been a shortage of quality client service representatives for at least a quarter of a century. That means you should be looking for a new employee long before you need one. You should be prepared to hire a client service representative fairly early in the development of your business.
Many agency owners prefer to hire and train their people, rather than hiring someone with experience from another agency. The advantage of doing this is you get an employee with no bad habits (theoretically!), and you're able to train them exactly the way you like. The obvious disadvantage is this takes a long time. In my experience, you can have a personal insurance CSR able to competently quote new business and perform limited service functions within 90 days, with your active help, which may be all you need the first year or two of your existence. If you need a fully trained personal lines CSR, that will take two years. You can help speed that process up by ensuring that they get lots of training. Excellent training courses are available from almost all insurance companies today. The Certified Insurance Service Representative (CISR) program, operated by the National Academy, will help bring your new employee up to speed quickly.
Commercial insurance client service representatives, on the other hand, take as long as five years to be fully trained. Like their PL colleagues, they may be able to perform limited functions like small business quoting fairly quickly. Still, mastery of a complex role will take even the brightest several years, with excellent training and mentoring. If you are building an agency to focus on commercial insurance, it will probably be worth the expense and the time required to recruit an existing CSR from the beginning of your business.
Almost every consumer now serves themselves. When you shop at the grocery store, buy gasoline, make deposits of checks with your bank, and buy almost anything online, chances are that you are serving yourself. Businesses, led by huge online retailers, have changed the way people prefer to buy things, not just how they are sold. Statistics now show that insurance consumers are enrolling in insurance company self-serve options, including service centers, websites, and apps, 50% of the time. According to Matt Masiello, CEO of SIAA (which encompasses 3% of all independent insurance agencies), independent agents only use service centers 20% of the time. That is a significant and stunning disconnect between sellers and buyers!
As you start and build your agency, you must decide whether you want to swim in the flow of progress and success or trap yourself in the stagnant backwaters of the past. Creating self-service options for insurance consumers is easy. You can, and should, provide options on your website using the technology available from your automation vendor. It isn’t expensive to create your agency app, but it might be a better solution to make it easy for clients to download their insurance carrier’s app directly from your website. Making this part of your new client onboarding experience is a good best practice. Of course, as mentioned above, you should consider service centers for their customer self-service capabilities as well.
One last point about client service in general: the decision about how an insurance policy is serviced is no longer the agent’s choice. It's the consumer’s choice. The smart agent will not get in the way of insurance clients getting what they want. It's important that the agency provide all avenues of service to their clients, including self-service. This now includes insurance company service centers for both personal and commercial lines, as well as the personal attention of service people in the agency. The modern agent will not only offer all three means of service but will also have a plan to educate new clients and enroll them in the service method that they want at the time of the sale.
The third essential function in the agency is accounting and administration. Every business has administrative tasks that must be completed. Who will do the tasks like filing, ordering, and making sure that everyone in the business has what they need to do their job? In the beginning, this is likely to be you, the founder. When you hire your first service employee, this may be a part of their job as well. And as the agency grows, you will undoubtedly find that someone needs to be tasked with the myriad and miscellaneous administrative responsibilities. This individual is often called the agency manager. However you provide for it, you need to recognize that these tasks need to be done, and you should be very direct about who does them, so you can manage the function rather than “letting it happen” with no control.
One increasingly popular way to take care of these kinds of tasks is by outsourcing them. In many cities, businesses now exist that fractionalize almost all kinds of work, including administration. It would be a worthwhile use of your time to investigate whether this is available in your local community, as it will likely save you time and money.
Every business has to provide for the accounting function. “The language of business is accounting. If you can't speak the language you can't play the game,” says serial entrepreneur Keith Cunningham. And while you may be tempted to operate your business out of your checkbook for a period of time, you will inevitably learn that it's a mistake. Just as every agency needs an agency automation system from the day it opens its doors, every agency needs a balance sheet and cash flow reporting from its first month.
Having accurate and timely financial statements and knowing how to read them is what lets you know how well you're doing and what progress you're making. Banks and other lenders will demand them, and so will many insurance companies before they appoint you. The question is not “will you do accounting?”, but “who will do it?” Will you be the accountant as well as performing other functions in your agency? If you're a trained accountant, or you have skill or education in accounting, this may be an acceptable answer at first. Most good salespeople lack the necessary attention to detail to make them excellent accountants, so a better solution would be to pay a monthly fee to a bookkeeping service or to your CPA firm initially. Another option is to hire an insurance accounting service. Several businesses operate online, and they can do agency accounting for you, regardless of where you’re located. Their expertise in insurance agency accounting means that you’ll get excellent service for a very reasonable cost.
Eventually, as your agency grows, you may want to consider hiring a staff accountant. This will generally not be necessary until your agency revenues exceed $1 million.
Another unique set of administrative tasks that must be performed in any agency is the management of information technology resources, including hardware and software. As discussed elsewhere, agencies are responsible under a raft of state and federal privacy, data security, and other laws, as well as insurance carrier contracts for maintaining the integrity of their data. How do you do this? How can you possibly know how to do this? Large agencies have full-time people focused solely on this. Your business may not be as large as theirs, but your responsibilities are! The good news is that these services are widely available from firms that specialize in doing them for companies just like yours. You should contract with one for your needs the minute you open your doors.
The accounting reports that you should review every month include the balance sheet, the profit and loss statement, and a statement of cash flows. The balance sheet essentially tells you what you owe, who owes you, how much cash you have, and whether your net worth is a positive or negative number. The balance sheet is important for any business, but it is especially critical for agencies that are doing a significant amount of agency bill business because your ability to pay insurance company bills - known as accounts current - depends upon active and aggressive management of cash and accounts receivable, both of which are listed on the balance sheet.
The profit and loss statement (or the income statement, as it's also known) shows how much money you earned in a given period of time and where the money came from. It also shows the expenses you incurred. And finally, it tells you whether you made a profit or experienced a loss for that accounting period. This is a critical management tool. To be of maximum value, your profit and loss statement (as well as your balance sheet) should be performed on the accrual basis of accounting as opposed to cash basis. While many small companies select cash basis accounting, it does not line up expenses with income properly and does not give you as accurate a picture of how you performed in a given period of time as a set of accrual statements.
Many new business owners aren’t familiar with the difference between “cash basis accounting” and “accrual basis accounting.” Since I’ve expressed a preference for one over the other, I think it’s worth a brief explanation. Essentially, when you keep your books on a cash basis, you only record items of income and expense when you actually receive or pay them. While this is fairly simple, it results in an understatement of the actual net worth of a business, because the balance sheet fails to account for “accounts receivable,” which are those items of income that are owed to you. When I became a partner in my agency, we decided to restructure it from a corporation to a limited liability company. Essentially, we started over. We were a cash-basis corporation, and what I found interesting was that we received commissions, especially direct bill commissions, for a year and a half after the conversion! These unrecorded commissions were a substantial amount of money, and we didn’t consider them at all in our agency valuation.
Another significant disadvantage of cash accounting is that you see distortions in profit or loss due to timing differences in receipts or expenditures. These distortions make it harder to accurately forecast results, particularly as you grow. This means that some businesses end up using what is colloquially referred to as “modified cash” accounting. This isn’t a generally accepted accounting standard, and it should be avoided.
While the profit and loss statement will show whether you are profitable, it is important not to fall into the trap of thinking that profits equate to cash or to your ability to take money out of the business.
The advantages to accrual accounting are the matching of income and expense, a correct representation of net worth on the balance sheet, and an avoidance of see-saw income tax obligations that frequently result from cash accounting. A good accountant, who you will need when you start your business, can easily help you set up and maintain a set of accrual statements.
One of the most useful things you can do with your financial statements is to periodically benchmark yourself against other agencies of similar size and location. Benchmarking will help you to understand how well your agency is performing compared to those who share your size, product focus, and geographical location.
While the profit and loss statement will show whether you are profitable, it is important not to fall into the trap of thinking that profits equate to cash or to your ability to take money out of the business. Doing that will get you into a great deal of trouble.
Important to every business, but especially to startup businesses, is the management of cash. There is a statement you can print from your accounting system called a statement of cash flows (also called Sources and Uses of Cash). It shows you where cash is coming from and where it is going. It will also show you how much positive cash flow you created or negative cash flow that you used. This is different than profit or loss, and far more important!
The reason you cannot rely on the profit and loss statement to tell you how much money is available to spend (or take out of the business as distributions for owners) is that the profit and loss statement includes non-cash items like depreciation and amortization. The statement of cash flows is strictly about cash. Of all of the statements for the new business, I find it is the most important, and the one you most need to understand.
If you're not expert at reading financial statements, much less preparing them, it's worth taking the time to sit down with an experienced businessperson, or perhaps your outside accountant, and have them teach you how to read them accurately and carefully. Ultimately, how successful you are as a business owner will depend upon your ability to manage the financial aspects of your business, which includes understanding these financial statements.
Some agencies need to pay particular attention to accounts receivable. If your agency is doing any agency bill business—and this includes selling policies through wholesalers or brokers where you have to collect the money from the client, then pay for the policy—you need to pay a lot of attention to the management of your accounts receivable. The first principle you should establish in your agency is called binder billing. In other words, you don't bind an insurance policy without collecting from the client upfront one of the following: the deposit premium, the down payment premium, or the minimum earned premium - whichever is greater. This ensures that you aren't putting your company at risk for the premium on a policy you have bound.
Then, you have a choice of how to manage the subsequent premiums on a policy of this kind. You can either collect it as it is due, paying the insurance companies’ portion to them and retaining the part of the premium received that is your commission (which puts you in the position of actively managing accounts receivable each month), or you can insist that all agency bill policies are premium financed. If you choose to collect the premiums and pay the carrier yourself each month, bear in mind that you are putting yourself on the hook for the premium. If you don't collect it from your client, you will still have to pay the carrier. Some agencies feel that this is a benefit to them because they will make money on the float while you have possession of your client’s money and before you pay the carrier. I think of this as fool’s gold because agencies typically experience as much, or more, bad debt than float.
There is another way to deal with these agency bill receivables, and that is to use a premium finance company to finance them for the client. Premium finance can be an additional revenue source to your agency: because premium finance companies allow the agency to mark up the interest charged to the client, you can make a little extra revenue for providing the service (every 2%that you mark up, the rate will result in .52%additional income to you on the premium amount financed). The main advantage of premium financing is that it removes the risk of premium collection and payments from the agency.
The last thing I'd like to point out about the accounting function in your agency is that everything you do in your agency should be measurable. If you can't measure it, you shouldn't do it. The accounting system is one of the places where you can track things, along with your agency management system. You should establish key performance indicators (KPIs) to manage and review the progress of your business. KPIs are simply those key statistics that you want to look at every month, along with your financial statements, to tell you how well your agency is doing. Some of the potential KPIs you may want to consider monitoring are growth rate, policy retention rate, closing ratios (by policy type, carrier, client, and producer), mix of business by line of business, policies per client, revenue per account, largest current account, and so on. You should have goals for all of these things, and you should monitor them on a monthly - and certainly no less than quarterly - basis.