Use Multiple Perspectives To Value Your Agency

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Youve spent a career building your agency and you have reached the point where you want to realize its accumulated value. Yet, everyone has an opinion on what that value is. How do you demonstrate which is the appropriate one? Maybe you can get some help by looking at the value from an insurance companys point of view.

Your primary insurance companies have a vested interest in a successful transition for your agency. Not only do they have a large in-force block of business; they are also concerned with the future production of your agency. Consequently, they want you to implement a successful succession plan as well as continue to see your agency grow.

As we mentioned in an earlier article (see NU, Nov. 11, 2002), all agencies have unique profitability characteristics, as well as differing market focus. Accordingly, the agencies of any insurance company are not homogeneous. Just as you have to evaluate each segment of your business, the insurance company must evaluate each of its components. They must also evaluate the relative profitability of each of their distribution sources. So lets address the question of where your agency fits in the companys view.

The Company Perspective. The agencies of any given company, whether captive or independent, vary in many different ways. If we were to segment them into groups, we would consider differentiation by many factors. Examples of these drivers are persistency, size of in-force block, current and historical levels of production, expenses, number and longevity of agents, and characteristics of current production.

There are many others but the first challenge for a company is to determine the critical drivers of their success. For example, a company specializing in the upscale market would consider case size as important whereas a home service company would not. Sophisticated mathematical modeling (like the kind actuaries do) could be used across many parameters, but essentially there are only two to four critical ones for a given organization.

Although the components of the analysis are similar for the agency and the company, the focus may be different. For example, the type of product sold, and its relative profitability, may be more important to the company than the agency, where first year compensation may be the critical item. Similarly, the agency may need to look across multiple companies whereas the company focus must be singular. Additionally, profit drivers may be different for the two (e.g., persistency vs. productivity).

The Agency Perspective. For simplification, lets consider the implications of only two variables: persistency and five-year average production level. As Figure 1 indicates, relative profitability can be depicted by a chart with four cells. On the vertical axis is persistency ranging from low to high? (Note: definition of low or high varies by company and relates to pricing assumptions or expected results. Each company must evaluate this independently.) The horizontal axis looks at average production, again ranging from low to high.

Each agency can be mapped into one of the four cells, with the company being a composite of its agencies. This is a fairly straightforward process once agency data is developed. Each of the cells has a different profitability factor, which ultimately relates to the value of the agency. Companies assume that high profitability emerges from the upper right cell–but the real question is where do the four cells fall relative to each other in profitability. Is high-persistency, low-production better than low-persistency, high-production? If you look at it from an agency perspective, the same question arises but is framed differently: Is your agency better being large, with high overhead but mediocre experience, or smaller with high quality? Each company and agency must address this question.

The actual analysis will be a little broader, encompassing three or four parameters. Although it cannot be depicted on paper (two-dimensional space), todays personal computers can develop a multi-dimensional picture that provides refinement for the company as well as variation by agency characteristics.

From this type of analysis, the company will better understand the relative profitability of its agencies and you will understand where you fit. More importantly, it will give you information on how you might change your operation to improve its value whether you sell, hire successor management or continue to operate it yourself. That will help identify the required skill set of your successor. Finally, it can help you understand the relative value of your agents and how best to compensate them. (This is also true for the company.)

Other elements may also emerge from the analysis, with implications for both your agency and your primary companies. Examples are:

1. Should your agency deal with fewer companies and put more reliance on your primary carriers?

2. Is your compensation appropriate for your level of contribution to your companies?

3. Even if the company does not undertake a detailed analysis, should you?

On the other hand, this type of analysis can lead to improper conclusions if not conducted properly. As the mathematics can get complex for the agent, it is important to utilize some outside help to get an objective view. This is particularly true in determining the critical factors to be evaluated. The key is to keep it simple enough to understand and utilize, yet focus on the important elements.

Understanding the profitability and value of your agency is not unlike a company understanding those items across its distribution system. If you engage the company to help you, the result can help you maximize your value at transition as well as demonstrate to your carrier your relative value. It may mean change from the companys point of view, but that change can be beneficial to all involved.

Les Durland, FSA, CLU, is president of Durland Consulting, a firm specializing in distribution, marketing, and product development for the life insurance industry, Tucson, Ariz. He can be reached at lesdurland@aol.com.

Larry Corbitt, CPA, is a principal of ASI, an actuarial/financial consulting firm in Atlanta, Ga. He can be reached at lcorbitt@asicorp.biz.


Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.