2018 Best Practices Study

The value of an insurance agency is ultimately driven by two factors – growth and profitability. The faster the growth and the higher the profitability, the better. For 25 years, growth and profitability have remained as the cornerstone metrics of the Best Practices Study . Agencies that focus on these two metrics, and the fundamentals that drive them, set their agencies apart from the industry, enjoy the highest possible valuations, and earn the Best Practices designation year after year. Growth and profitability metrics remain the most important benchmarks in the Best Practices Study .

Organic growth is defined as commission and fee growth (excluding contingent income), excluding the effect of acquisitions. In the 2018 Study , BPS agencies in the six revenue categories posted median organic growth rates ranging from 3.3% - 5.6%. Top quartile organic growth was consistently in the double digits.

There are four primary components that drive organic growth: exposure changes, rate changes, client retention, and new business. Exposure and rate changes are largely market-driven and outside the control of an agency. On the other hand, new business and client retention rates can be enhanced through improving operations and a continued commitment to implementing best practices. Of these two, client retention doesn’t tend to vary greatly across agencies. Best Practices agencies routinely retain 95% or more of their clients, while relatively weak agencies still retain a surprisingly high 88% - 90% of their clients. Thus, retention tends not to be the key driver for organic growth. Rather, the key driver of variation in organic growth across agencies is new business generation. It is the key differentiator between Best Practices agencies and their industry peers and is the single most important metric in consistently qualifying as a Best Practices agency. Given the importance of new business generation to organic growth, Reagan Consulting developed a more granular metric to measure it – Sales Velocity. Sales Velocity is defined as the most recent year’s new commission & fee income written expressed as a percentage of prior year baseline commission

Net Commissions & Fees Organic Growth

5.0%

>$25.0M

12.3%

5.6%

$10.0M-$25.0M

10.7%

3.3%

$5.0M-$10.0M

12.1%

5.5%

$2.5M-$5.0M

10.1%

3.6%

$1.25M-$2.5M

18.3%

4.6%

<$1.25M

12.3%

Median Top Quartile

and fees income. An agency that writes $100,000 in new business on a prior year baseline of $1 million in commissions and fees is generating a Sales Velocity of 10% ($100,000 / $1,000,000 = 10.0%). Sales Velocity is the best measure of an agency’s new business generation. In 2018, Best Practices agencies achieved Sales Velocities ranging from 11.7% to 16.6%. Top quartile Best Practices agencies generated Sales Velocities ranging from 17.5% to 32.7%. Superior Sales Velocity nearly always leads to above-industry organic growth.

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