When a State Association recently posed this question to us it repeated the same question asked by groups of agents throughout the United States.
Each year agents see their automation costs increasing. Simultaneously, the insurance companies seem to assign more responsibilities to agencies with lower compensation, citing the efficiencies of automation as the reason for moving workload from the carrier to the agency.
Agency Consulting Group, Inc. has been keeping track of insurance agency performance since 1987. With over ten years of data, we can easily view the trends of automation costs and personnel costs across thousands of agencies. Our statistics covering a thirteen year period is split by agency size, Group One agencies under $1 Million in revenue (averaging $705,000 in 2000), Group Two agencies between $1 Million and $2 Million (averaging $1.7 Million in 2000), Group Three agencies between $2 Million and $3 Million (averaging $2.7 Million in 2000), and Group Four agencies over $3 Million (averaging $7.7 Million in 2000).
The problem with statistics is that the same agencies do not respond to the survey each year and so many agencies have been acquired or merged during the last fourteen years.
Group One agencies probably represent the most accurate view of trends. Less of them were merged together or sold to one another than were merged with or sold to larger concerns. The Group One agencies remaining are, by necessity, more advanced and more efficient than the agencies that disappeared during the last decade or more.
Group Two agencies cannot be analyzed because they suffered the most ownership change during the past fourteen years. Most agencies between $1 Million and $2 Million either got that way through acquisitions and mergers or were, themselves, acquired during this period.
Similarly Group Three and Group Four agencies spent the last fifteen years growing through acquisition, rather than through natural growth.
Here are some telling statistics with respect to Group One agencies that can be used to analyze the questions at hand:
Averages and Growth – The number of agencies responding to Agency Consulting Group, Inc. each year continues to grow. However, the same agencies do not necessarily respond every year. This reduces the accuracy of averages, but the ‘law of large numbers’ still applies.
Agency Revenues grew by 48% during the fourteen-year period that Agency Consulting Group, Inc. has maintained statistics (avg. 3.4%/yr). Remember, this growth occurred during the record-setting soft market, so the growth represents more a growth in client base than in premium levels.
During the same period, the number of office personnel (excluding executives) shrunk by 7% while office compensation grew by 46.6% (avg. 3.3% per year). We have a smaller staff getting paid more to manage more clients. This certainly sounds like the agency force has become more efficient during the period studied.
During this same period Group One agencies have spent 48.5% more on automation costs from $3,500 per year in 1987 to over $17,000 per year in 2000. This statistic supports the assumption that increased data processing has resulted in increased efficiencies within agencies. If you find that you spend considerably more than the Group One (under $1 Million) agencies, remember, the operating costs reflected in these statistics do not include the cost of purchasing automated systems and agency management systems. Those costs are reflected on the agency Balance Sheets, not on their operating statements. However, lease costs are reflected in these costs. Our statistics reveal that most small agencies lease, rather than purchase their Agency Management Systems.
So far, the statistics reveal that less people are handling more clients in a more automated atmosphere. The good news is that automation works to permit an employee to manage more clients.
On the other hand, company up-loads through agency input of customer data directly to company systems also cost agencies countless hours that the agents never spent before. The level of automation technical knowledge required by agency personnel is much greater than that needed to simply inquire and update customer data. This is one reason for the higher compensation necessary for greater technical skills required of new and existing employees.
The unknown factor in agency staffing and expense is that expense added because of the additional workload and technical requirements of inputting data to a variety of different carrier systems, rather than just once to the agency’s management system. The number of personnel in agencies was reduced by 7% during the last fourteen years. How much more efficient would the agencies have been had the carriers adopted a true Single Entry Integration, as proposed by industry groups over the years? Instead, the companies each require unique forms of upload and some still require entry by the agency into the company systems, a very time consuming task for a staff who is supposed to primarily serve customers.
Add to this mix the downward trend in both commission rates and contingency compensation and we can understand the agents’ consternation over the upward trends of compensation and processing costs combined with the downward trend of carrier compensation.
Are there solutions to these problems? Yes. We have seen many leading agencies, both large and small, shifting product lines to higher margin products and services. We have seen leading agents moving at accelerating rates toward true paperless offices through optical scanning systems (attached to Agency Management Systems and from third party vendors). We have seen active negotiations with carriers for loss ratio and volume commitments in exchange for more beneficial compensation programs.
We have NOT seen an agency successfully “pushing the tide” by arguing with carriers over workload and commission rates for normal or nominally profitable business. The companies must guard their profits for their stockholders, even at a cost to their distribution system. If we, as agents, understand this as a fact of life, we can more readily subscribe to innovations, products and services and our own methods for sales and service as answers to maintaining or growing profit levels in light of the pressures on workload and compensation.
Just Remember:
The “Good Old Days” weren’t –
The world is populated by Belly-Achers and Innovators, the Belly-Achers make noise, while the Innovators make money.