By: AgencyEquity.com
As an agency owner, you are responsible for running a business that is financially well-managed. Smart agency owners make strategic decisions that lead to a more profitable business. This means analyzing different options, determining whether those options are viable, and implementing changes to increase revenue and reduce expenses. Without discussing aggressive policy growth, this article gives you five ways to increase revenue, reduce expenses, and become a more profitable agency.
Carrier Commissions
Agencies looking to increase revenue should first prioritize doing business with carriers that pay higher commissions. Some may think this is unethical, but we don’t. Consider doctors who only accept certain insurance plans based on how much the plan pays them. Businesses have expenses, and well-managed agencies realize they lose money by accepting a very low commission rate. Also, by selecting carriers that pay higher commissions, the marketplace corrects itself against those that pay low commissions. What incentive do carriers have to pay a higher commission rate if their agency partners continue to submit a flow of business to them? If the pipe dries up, then those carriers will have no choice but to increase their commissions. Please note that you must follow your state laws when it comes to placing business.
Higher Premiums and Multi-line Accounts
Many agencies are busy, as placing business has not been easy over the last few years. But chasing every piece of business makes no sense and will eat up your time without a corresponding return on that investment. Established agencies need to set parameters for which accounts they want to prioritize. When you focus your time on trying to win more profitable accounts, you have a better shot at winning those accounts. This means stop quoting everything and focus more time on the accounts you want. Spend more time with the prospects you want. Get to know their risk, advise them, and explain coverages. This dedicated attention will increase your chances of winning those prospects. Keep in mind that prospects who only care about price, not coverage, are not going to be very profitable over the long run. Their retention rate is lower, their loss ratio is higher, the amount of time you will service them will be higher—all for a lower commission because price shoppers often have to go to a carrier that provides lower rates and lower commission. Stop thinking about the short run and think about the long run. If you lose this type of client, then you have lost nothing. But if you lose the insurance-conscious customer that came highly recommended to you, then you have lost a longer-term, lower loss ratio customer who would have been likely to refer other quality business to you.
Set Your Parameters
When you have structure in your agency, it keeps you focused and efficient so you spend more time winning your targeted accounts. Here are some parameters that will help your agency be more profitable:
- Minimum premium – Set the minimum premium you will accept for an account.
- Multi-line minimum – You may have a policy that you don’t do mono-line or a minimum of two accounts or a policy that you only write the entire accounts of a household or business.
- Type of business – Define what type of business you will accept. This applies more to commercial lines, such as the business types. It can apply to personal lines too, though in a different way. It may mean that you take only accounts that would be considered preferred and only written with admitted carriers.
- Source of the business – Define the source of business you want to accept to prevent wasting time. For example, internet price shoppers often contact a half dozen or more agencies. If they want the “cheapest insurance,” it’s time to run because they will have no interest in building an agency relationship. There is also a small chance you will win such business, so this eats time and is not efficient. Learn where you get your best prospect, and this is what an agency should focus on.
These parameters can be expanded, for example, by using a different set of guidelines for personal and commercial lines. There can always be exceptions, such as those with a strong link to your existing clients, but include such descriptions in your parameters. If the customer doesn’t fit the bill, then refer them to another agency. This way, you build an agency of highly profitable business rather than high-maintenance businesses that are unlikely to be profitable.
Use Outsourced Staffing Services
Large companies have used outsourced staffing from abroad for a few decades now. It can cost 25% to 50% as much as having your own in-house staff. Outsourcing removes the HR headaches and transfers them to the outsourcing company. It’s a win-win in nearly every way. Some agencies use a blend of their own staff and outsourced staff, with their own staff interacting with customers and the outsourced staff handling tedious back-office work, such as rating and market placement of accounts. Other agencies have a well-trained English-speaking staff who work with customers. With outsourcing, you are much more likely to find staff than in the tight labor market we deal with here in America. Furthermore, your agency can save significant money, which can be a major factor in becoming more profitable.
Refinance High-Interest Rate Loans
Interest rates are coming down, so if you have a loan in place, it may be a good time to investigate refinancing options. Furthermore, if your credit score has improved since you last took out a loan, there may also be opportunities to refinance any agency loan that you have. This can often save you thousands of dollars a year, all for just spending a few hours filling out a loan application and providing supporting documents. This is one of the easiest ways to increase your profitability.
Acquire an Agency
One of the best ways an agency can become more profitable is to acquire another agency or books of business. This is because the greater the agency’s revenue, the lower its expense ratio becomes. For example, you only need one management system, one E&O policy, and one office; these are often fixed expenses that don’t increase much as your new revenue stream grows. Furthermore, many profit-sharing agreements are based on premium volume. This means that acquiring avenues for additional premiums with certain carriers may qualify you for profit sharing, while your current volume does not. This could mean thousands of dollars from profit sharing.
Those who strategically manage their agency will see greater profits. Owners who act as producers and forgo managerial duties may be profitable, but they also miss out on great opportunities to increase their agency’s revenue. Agency strategy involves planning and executing such plans, which can yield amazing results.
