Agency Consulting Group, Inc. has collected data and published Composite Groups of insurance agency operating performance since 1987 in order to provide benchmarks against which agencies can measure their operating performance and progress.
A significant number of agencies have used the annual benchmarking exercise to gauge the progress of their organizations. The benchmarking exercise has brought focus to the agencies’ Strategic and Tactical Plans since they can focus their improvement areas where they are weakest or where they have opportunities to capitalize on their strengths.
A planning Objective is only valid if it is 1) realistic, 2) achievable, 3) measurable and 4) objective. Benchmarking provides the objectivity for measurement of results.
Each year Agency Consulting Group, Inc. collates thousands of agencies’ operating results and averages them within agency size categories. We have found that four distinct agency types exist throughout the United States with size as a general commonality. The small agency (usually less than $1 Million revenue) is a family based organization. The Agency Business (usually between $1 Million and $2 Million) may still be family owned, but has adopted professional management. The medium sized agency ($2 Million to $3 Million) is family or corporately owned, usually with multiple owners and several layers of management. The large agency (over $3 Million) can be publicly held, merged or a subsidiary of a larger corporation as well as one of the previously described forms of company. It is often divisional, multi-level with long-term strategies in place for growth and development. Each of these size groups provide insight into their performance through their Operating Statements and their Balance Sheets. Operating statement categories have been more standardized over the years than Balance Sheets, so we chose to benchmark operating results first and Liquidity Ratios secondarily.
Each Composite Group generates averages of income categories (as a percentage of gross income) and expense categories (as a percentage of Net Income). Net Income is defined as Gross Income less Broker Expense, that commission paid to outside producers who are not employed by the agency and who own their own books of business. The reason we exclude Brokers Expense from Gross Income is that the book of business represented by Brokers Expense does not belong to, nor is it salable by, the agency.
The averages represented by the income and expense percentages are the first level of benchmarking that an agency should consider. Those averages include agencies of both high and low performance levels. It is simply an indicator of how the average agency in this size group performs in this category. Your agency’s performance compared to the Composite Group tells you whether you are above or below the average, not why you have achieved that level. While most deviations are explainable with analysis of the situation, the individual conditions of each agency make common explanations almost impossible. For instance, if your occupancy costs substantially different than that of the Composite Group, were the occupancy costs too high (or too low) because the agent owns the building (and was over-charging or under-charging the agency on purpose), because of location (Manhattan vs. suburban Des Moines) or because revenues that year were either exceptional (not recurring) or far below average for the agency?
Deviations from the Composite Group of over 10% (in either direction) should be explained by further analysis of your specific situation and the reason for the deviation explained in writing. If the deviation reflects a weakness, your agency has an opportunity for operational enhancements. If the deviation is acceptable, the range of deviation should continue to be reviewed each year, but panic need not ensue as a result.
A second level of benchmarking based on the same categories as those in the Composite Group is benchmarking your agency against your own history as well as against the Composite Group results. After all, the best gauge of your success is improvements in your own performance. So we suggest that you maintain your historical benchmarks (or we can do it for you) to provide annual (or more frequent) measures of your progress in each category.
The most important level of operational benchmarking is Productivity Benchmarking. The productivity factors used by Agency Consulting Group, Inc. are Revenue per Employee, Compensation per Employee, and Spread (the difference between Revenue per Employee and Compensation per Employee). Spread measures the revenue base available to non-compensation overhead and profit.
In 2000, Agency Consulting Group, Inc. is automating the data collection and analysis process through the Internet. This will revolutionize the Composite Group concept because the agencies’ analyses will be done in Real-Time with the Composite Groups, being updated continuously rather than annually. Since updates will be on going, an agency will be able to compare its performance against its peers at any time of the year.
Beginning early in 2000, agencies can complete a simple form that can be e-mailed directly to Agency Consulting Group, Inc. (firstname.lastname@example.org). That form is automatically entered into the database and an Operating Statement Analysis is done comparing each line of the agency’s revenue and expenses against the appropriate Composite Group. The agent will receive its analysis by return e-mail within 24 business hours of its submission. Agency Consulting Group, Inc. will continue to include a telephone consultation as a part of its analysis service for agents needing further assistance. Many agents use this facility to identify problems and solutions stemming from deviations noted in the analysis.
Agency Consulting Group, Inc. also benchmarks Liquidity Ratios derived from agency Balance Sheets. Liquidity Ratios measure a business’ ability to meet its current financial obligations. Since balance sheets represent a snapshot of an agency’s performance at a specific time (as opposed to the cumulative result of an Operating Statement), year-end balance sheets are valid to the degree that they represent the agency’s normal financial operations. For that reason, we strongly recommend that Liquidity Ratios be tested often. Many Agency Consulting Group, Inc. clients test liquidity ratios monthly to determine if changes have occurred that affects the business’ financial stability. The second phase of Agency Consulting Group, Inc.’s Benchmarking Automation (later in 2000) will be the addition of Balance Sheet data to the input form with resulting Liquidity Ratios automatically returned to the agent within one day.