I once used this example with my own team: “If you're in a canoe and you're going down a river that's going nine miles an hour, and you're going nine miles an hour, are you making the progress that you should?”
Of course, the answer is no. Only if you're going 12, 15, 20 miles an hour, you can say that you are going faster than everybody else.
This applies to the insurance industry, especially when you’re analyzing what your company earns and your financial health and operating profit. One of the things that happen at different points in the market cycle is that we get the benefit of a lot of rate increases, and the correspondingly higher commissions and fees create what I call artificial growth (as opposed to real organic growth).
And so, calculating your true growth rate is a little bit difficult and requires a little bit of judgment. But you've had conversations with your carriers and you know what they're telling you, and you know what your own experience is with respect to how fast their rates are growing - commercial lines, personal lines, life insurance, property and casualty lines, all are subject to fluctuating over a long period of time.
The true growth rate is a function of:
- First of all, year over year sales
- Minus year over year retention
- And then either plus or minus what's happening with insurance company rate growth or decrease
That tells you what your true rate of growth is!
One day, I discovered the concept of spread, and when I looked at revenue per employee and commission per employee I realized we were low compared to the benchmark studies. This confirmed what I thought at the time, which was that we were overstaffed and working with inflated operating expenses, which were hurting our gross profit margin and cash flow, and lowering our insurance agency profit margin.
As an agency owner, you've got a million things you've got to do every day, but taking some time to analyze your business and your key performance indicators is vital to your agency growth and to bringing on real long term business increase.
Insurance agency KPIs
Let's talk about the most important KPIs that you should be focusing on month by month, starting with the mother of all KPIs: EBITDA.
EBITDA is the acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. Basically, it's your bottom line adjusted for the things that vary from agency to agency.
You should know and measure your bottom line by your EBITDA and not by your net profit. You want to know the ratio of your EBITDA to your income, expressed as a percentage, and then compare it to other agencies of the same size, geography, type of business, and growth rate. This is how you can really see if you are making enough money at the bottom line. If your EBITDA is significantly off, you should be investigating your operating costs, insurance agents, book of business, and finding where there is money left behind.
Here's my suggestion: start with expenses. The average insurance agency wants to make 20 to 25% EBITDA, which means that $1 in expense savings is worth many dollars of revenue. Many agency owners focus on the top line when they really need to focus on their expenses.
Knowing whether your EBITDA is too high or too low, compared to similar agencies, will give you a clue. If your EBITDA is significantly higher relative to other insurance agencies, it might make you want to stop and ask yourself: “Am I paying my staff correctly? Am I correctly staffed?”
If you're making 30 or 40% EBITDA you should probably be looking at whether or not you're actually investing enough money in your business to continue that growth at the rate that you want.
If your EBITDA isn't where it needs to be, you can either adjust your top line - in other words, grow into your expenses - or reduce your expenses.
Another key performance indicator that you should monitor and measure in your agency is Spread. Spread measures something very similar to the cost of goods sold in a manufacturing business.
It's very easy to calculate. You simply ask: what is my revenue per employee? What are my salaries per employee? And what is the ratio?
The ratio of total revenue and total expenses in payroll is what we call spread, and it's a measure of gross profitability.
Spread is critical because people are the biggest expense that we have in an insurance agency. When you compare your spread against similar agencies you learn a lot: if your spread’s too high, that tells you perhaps you're not investing in your business as much as you should, and your gross profit maybe is a little stronger than you want it to be. But the real thing you're looking for is to make sure that it's not too low.
Spread is a great measure to look at on a monthly basis. If you don't have time to check it monthly, I suggest you do it at least quarterly.
There is so much more to this topic of how to look at your financials and the data in your agency! I want to invite you to download my short and easy-to-read book: The Future of Insurance is Data-driven, which is packed full of advice for independent insurance agents to generate profitability and sell more insurance products.
Always keen on helping others make their dreams come true, Tony and his team have helped independent agents grow into more than 250 independent agencies. This has made OAA the number one ranked Strategic Master Agency of SIAA for the last 5 years, and one of Oklahoma's 25 Best Companies to Work for.
Tony loves to share his knowledge, insight and wisdom through his bestselling books as well as in free mediums including podcasts and blogs.
Tony and his family are members of Crossings Community Church, and he is very active in community initiatives: he’s chairman of It’s My Community Initiative, Inc., a nonprofit working with disadvantaged people in Oklahoma City; and chairman of the Oklahoma Board of Juvenile Affairs., and he has served through many other organizations including the Salvation Army, Last Frontier Council of the Boy Scouts of America, and the Rotary Club.
In his spare time, Tony enjoys time with his family. He’s also an active outdoorsman and instrument-rated commercial pilot.