The foundation for agency value takes root in the expected future cash flows of the entity. Thus, forecasted and realistic growth rates of both revenues and earnings remain a critical driver of value. And any forecast for tomorrow is predicated upon yesterday’s and today’s actual performance. One mechanism to consistently drive revenues, earnings and value is the establishment and building of a Select Business Unit, comprised of accounts below a certain agency commission amount (select unit threshold) that are handled by a separate service staff.

Earnings growth

Seventy-six percent of high-growth insurance agencies, as defined in the MarshBerry database, have a select unit in both commercial lines and health insurance. Once accounts under the select unit threshold are sold, the accounts are immediately placed in the select unit. Two things now happen to drive profit.

First, by leveraging the select unit, the agency is able to more proactively and profitably service these accounts. The dedicated service personnel in the select unit proactively reach out to clients via phone, e-mail and other electronic forums thereby managing profit relative to commissions. While many will state that the accounts in this unit are at risk and will leave for lack of personal attention, the exact opposite more often proves true. Account retention is enhanced via more customer touches but without the face-to-face expenditures that eat away at account profitability.

Second, producers are not paid renewal commissions on these accounts as the accounts are already being serviced by the dedicated service personnel. Please note that agencies leveraging select business units love small accounts, as this business is often the most profitable business in the entire agency. That is why agencies will still pay producers first-year new business commissions to write such accounts for the agency. However, this select business will be most apt to remain profitable when one person is paid to do one job—in this case, a customer service representative. Maintaining profitability on a $200 commission account that we visit twice a year, take golfing and then treat to a professional baseball game proves difficult. The select unit model affords producers the time necessary to target and write larger accounts that will drive their book size, their personal income and agency earnings.

The highest valued agencies consistently code a higher percentage of agency accounts and commission dollars to select units (or “house business”) thereby providing the propensity for increased agency earnings. The average agency will code approximately 8.1% of total agency commercial commissions to select units while high-growth agencies will code 10.4% of total commercial commissions to select units. At the same time, the average agency will code approximately 6.6% of total agency group commissions to a select unit vs. 10.1% for high-growth agencies.

This percentage differential in high-growth, high-value agencies helps fund the infrastructure for building the select unit while continually facilitating increased margins. However, the owners of these peak agencies do not take home all this additional cash. Instead, they reinvest this money (and more) back into the agency growth platform (account executives, technology, differentiation services, etc.) to arm their sales staff with the resources necessary to write more business.

High-growth, high-value agencies will actually maintain slightly lower actual profit percentage margins than their peers. The lower margins are the result of the continued short-term investments that translate into future value. At the same time, these peak agencies also grow their earnings base at a higher rate than their average peers, thus providing the long-term quantitative justification for short-term investments.

Revenue growth

While growth is a byproduct of many factors, there is a direct correlation between the amount of new business written and the select unit threshold ratio. The best agencies write new business equivalent to 20% of prior year commissions and fees and have a select unit threshold ratio approaching 70%. Some peak performing agencies have pushed this ratio to as high as 125%. These organizations acknowledge the fact that the marketplace will support new accounts above the agency average account size and thus push the sales staff to proactively target larger accounts. By contrast, the rest of the agencies in the industry on average write a smaller volume of new business, which is caused in part by maintaining a lower threshold through an organizational focus and acceptance on writing smaller accounts.

Mathematically, when reviewing the bottom 20% of the total accounts coded to a producer’s book, department, or the overall agency, such accounts typically represent only 1% to 3% of overall commissions. Producers with the highest book size and take-home earnings historically trade down such accounts to provide capacity for writing larger accounts. And they have done this voluntarily. The books of the most successful producers are characterized by far fewer accounts and a much larger average account size relative to the average producer. The best agencies are now simply replicating the success of the best producers across the entire sales force.

The higher the select unit threshold, the more capacity producers have to focus on new business. Segmenting smaller accounts into a dedicated unit with an appropriate threshold optimizes the amount of time the rest of the service staff can proactively use to manage larger accounts. Producers in this environment are more comfortable with delegation and, as a result, have additional time to focus on relationship development, prospecting and requesting referrals. Remember, retention also improves given that accounts traded down receive better service attention. Simply put, smaller accounts can be managed via a more regimented and proactive touch process within a select unit vs. sporadically within a producer’s book of business.

Some producers may very well play the victim when faced with trading down accounts, accusing leadership of reaching into their wallet. Forward thinkers recognize that the producer is not the victim. The producer is the beneficiary. Just ask those with the largest books. Systematically cleaning out the bottom of producers’ books enables producers to drive more new business, a larger book of business and a bigger paycheck. By contrast, agencies with a low threshold generally employ producers who have hit a book of business and compensation ceiling. Leadership in higher-performing agencies effectively communicates to the production staff the benefits—for both the producer and the organization—of trading down accounts.

In high-valued agencies, the commission volume within the select unit increases over time due to the systematic, annual trading down of the smallest accounts out of producer books. In essence, increases in the select unit threshold apply to both new business and existing accounts. Important to note is the fact that establishing the select unit threshold is not a one-time event. Instead, the thresholds are reviewed annually and the entire staff understands that they are subject to increases.

Agencies across the nation are aggressively attempting to drive revenue and earnings growth by embracing change. Implementing a process to systematically increase the volume of commission handled by the select unit is one of many techniques that can be implemented to enhance value. Agency owners should evaluate producer books, calculate the optimal select unit threshold and contemplate refining the select unit plan as part of their 2011 value enhancement strategy.

The author

Patrick T. Linnert is executive vice president of MarshBerry.