An exercise to develop a picture
of what it costs to write and keep an account on the books
There are many moving parts along the journey to understanding
and identifying account profitability—but it is well worth the effort to uncover it.
By Cheryl Koch, CPCU, ARM, AAI, ACSR, AFIS, and Mary Belka, CPCU, ARM, ARe, RPLU, CIC
How do we determine the profitability of our accounts? The best operations questions often come from already great agents, who have an unquenchable thirst for becoming extraordinary. We love the puzzles they pose and welcome the opportunity to travel along on their most interesting journeys.
This puzzle, which we’ve been asked to solve lately, seems simple—but it’s not always easy (to paraphrase Warren Buffet). This exercise forces you to understand and account for the time spent on every step, in order to develop an accurate picture of what it costs to write and keep an account on the books—and how much revenue it needs to generate to be profitable. Let’s jump in.
Step 1: Compile an agency revenue array
It is critical to deal with facts—not feelings—about profitability. Because it can seem daunting to measure, too many agency owners “go with their gut” on this question. We recommend a more measurable approach, beginning with our straightforward report showing the overall revenues for each department, pulled from your system and arrayed as follows:
- Begin by running a book-of-business report by department (commercial lines [CL], personal lines [PL], benefits, etc.), of all accounts by commission from largest to smallest from your system. Import the report to Excel and create meaningful commission revenue tiers (e.g., CL tiers are generally >$10K; $5K – $9,999; $2.5K – $4,999; $1.5K – $2,499; $1K – $1,499; $500 – $999; and <$500. Suggested PL commission tiers might be >$1k; $750 – $999; $500 – $749; $250 – $499; $100 – $249; and < $99).
- Capture this data in a simple document with columns; start by showing the commission tiers down the left-hand side, total revenue in each tier, percentage of total revenue, number of clients, and percentage of total clients. (Feel free to contact us via email for a prototype if you need it.)
- The primary purpose of this initial report is to pinpoint the relationship between your revenues and number of clients and to understand where your vulnerabilities—and solutions—may lie. For instance:
° Are there fewer than 20 CL accounts repre-
senting 50% or more of your total CL revenue?
° What percentage of total CL accounts develop
less than $500 revenue?
° What is the agency’s actual pure net income
per account—or per tier of accounts?
° Are you paying producers renewal premium
on accounts that don’t require producer
involvement? What should the threshold be?
Step 2: Calculate average time spent per step for all processes
Agents have asked us specifically about the ability to pull per-account expense information from their agency management system. Several systems have activity-related functionality that helps agencies track costs related to servicing/account handling.
While it generally doesn’t provide the full story, these tools can provide a foundation for determining account servicing costs. It’s good to use them if you have them available. Consistent implementation, utilization, and auditing increase the effectiveness of this approach.
Dissecting the primary processes to determine specific average times for every step is an eye-opening exercise. In fact, just detailing every step can be a big undertaking. Renewal and new business make a great start, as they are time-consuming processes in most agencies, when handled properly.
An additional challenge is that both processes are made up of many steps; yet they are never completed all at once, so it can present a challenge when trying to develop time frames for each step. You want to measure total “hands-on” time versus elapsed time.
The renewal process should always be started at least 120 days in advance of expiration to allow for all steps to be completed. Certain CL account categories may start 150 to 180 days in advance.
Both renewal and new business have many identical steps, so it is less daunting than it may seem at first. From there, you can determine the average time spent on each step of your agency’s endorsement, non-renewal, cancellation, audit, certificate/evidence, bid bond, and claim processes as well.
Once calculated, create a chart of time frames you have determined for each process.
Note: If you are outsourcing any steps, the process for determining account profitability is unchanged.
Step 3: Calculate the average cost of a minute for your agency, to determine the average cost of each process
A simple formula we use is to divide the combined annual salary and employee benefits of all employees, including owners, by 100,000 (approximate number of working minutes per person in a year); then divide again by the number of employees. It is a rough estimate, as it doesn’t include all operational expenses—but it’s fairly close.
Then, it’s just a matter of applying this “minute of time” calculation to each process, to determine the cost of a minute at your agency—and the total cost of handling each account.
Step 4: Dig deeper with additional reports
Now that you’ve created a basic foundation, you can expand your quest to increase the profitability of your accounts. Your agency management system is a treasure trove of relevant data. Consider running additional reports to help create target client parameters and/or “coach” existing accounts into becoming more profitable. For instance:
Number of policies per account by tier. There is a definite correlation between the number of policies per account and account profitability—and retention.
Number of accounts with mono-line policies—invariably in the lower tier(s). Create marketing plans to round accounts.
- Number of accounts with monoline excess and surplus (E&S) lines policies. Create “up or out” marketing plans to round these accounts within specific time frames. If allowed by the state(s) in which you operate, consider fees to bring total revenue to profitable levels.
- Establish minimum limit/coverage thresholds and run reports to determine which accounts have inadequate limits (or coverage). Perform risk management reviews to address any findings.
- Are all tech stack components being utilized to their full potential? What is the return on investment (ROI) on all technology systems/components? Operational oversight is critical when it comes to optimum technology utilization.
- Is there a concentration of “low net” accounts that requires a high level of servicing? You may need to adjust minimum thresholds for writing certain categories of new business to maintain profitability. You can still write these accounts—but they must be bigger to be profitable. Work to develop as much standalone account profitability as possible, to increase your overall agency financial strength.
- Addition by subtraction. Are there parts of your book that are no longer a match, and that could be sold in order to create capacity and/or reinvest in the agency in order to increase profitability?
Operational food for thought
As you go through the effort of determining account profitability, you may find that continuous improvement is addictive. New opportunities for improvement will reveal themselves to you. Some thoughts and caveats:
- Segmentation of small accounts increases profitability. When account managers handle both large and small accounts, the tendency is to do things the same way. Unfortunately, that means they tend to handle smaller accounts like larger accounts when handling both. This can unnecessarily increase the time spent on smaller accounts, reducing overall profitability.
For best results, all small accounts should be written with no more than three to four markets—no E&S or agency bill. Renewals, as a rule, should not be remarketed. There should be no need to quote with more than two markets when quoting/remarketing. - It can feel too “bold” to eliminate producer involvement altogether on smaller CL accounts or on PL accounts, once written. However, this can have a significant, positive effect on profitability when handled properly. Producers are freed to concentrate on writing target accounts, and account managers can get more done without producers in the mix, especially when it comes to unnecessary new and renewal marketing.
- The final question regarding account profitability, when all options have been exhausted, is “When—and how—do we part ways with persistently unprofitable accounts that are no longer a match for our agency?” No one wants to lose accounts; however, when it is no longer a match, it simply becomes painful for all concerned to continue to work at cross purposes.
Unprofitable accounts that cannot be improved upon should be eliminated whenever possible and replaced with accounts that are a better match. There are several options, including arranging for a broker of record (BOR) to an agency better suited to handle the client’s needs.
Summary
There are many moving parts along the journey to understanding and identifying account profitability—but it is well worth the effort to uncover it.
These relatively simple steps can start you on a path to doing many things you might have put off up until now: things like developing an “ideal client” profile, segmenting commercial lines accounts by size, increasing revenue per account and revenue handled per account manager, using your tech stack to better advantage, updating procedures, and eliminating duplication. The possibilities are endless!
The authors
Cheryl Koch is the owner of Agency Management Resource Group, a California firm providing training, education and consulting to producers, account managers and owners of independent agencies. She has a BA in Economics from UCLA and an MBA from Sacramento State University. She has also earned several insurance professional designations: CPCU, CIC, ARM, AAI, AAI-M, API, AIS, AAM, AIM, ARP, AINS, ACSR, AFIS, and MLIS.
Mary M. Belka is owner and CEO of Eisenhart Consulting Group, Inc., providing management and operations consulting to the insurance industry. She also is an endorsed agency E&O auditor for Swiss Re/Westport. A graduate of the University of Nebraska, Mary holds the CPCU, ARM, ARe, RPLU, CIC, and CPIW designations.
