How do you evaluate growth?
Do you pull your commission statements each month, total all your companies, compare against last year, and rejoice if flat or positive? Are you more financially savvy and throw in expenses into the mix and look at net revenue and compare?
These are not bad strategies and do provide a barometer for how your agency is performing, but do they give you the full story and lull you into a fall sense of security?There are really three measures that should be considered when measuring agency growth:
1. Revenue (gross & net),
2. Written premium,
3. Customer count.
Revenue: For the vast majority of agent’s this is the factor that trumps all others. This is what pays the staff, keeps the lights on, and helps pay your mortgage. But why could revenue be a deceptive indicator? Currently in many personal lines markets, the industry is seeing a hardening of rate in property lines. As a result premiums are much higher and thus commission dollars are usually up (if you maintain significant retention). In a soft market, such as we are seeing in commercial, an agency could be growing customers, but continue to lose revenue because of decreasing premiums. Perhaps one of your companies increases commissions for the short term resulting in more dollars, but not necessarily more growth. Customers could be flowing out the back end of the agency, but by looking merely at revenue you might feel safe and happy.
Written Premium: Similar pressures affects written premium as they do revenue, because they are so directly connected. However, can you think of times where written premium could be increasing and customer count or revenue be down? Currently, we are seeing carriers making moves that result in this very scenario. In order to contain loss pressures, they are not only taking large property increases, but decreasing commission at the same time. In this case, an agency could see premium growth but revenue decreasing by a third due to commission drop. Rate increases can often mask retention issues, if owner’s are just looking premium growth.
Customer Count: This is the final measure in our triumvirate. Yet in working with agents over the years it is very rarely considered. Revenue and Premium are king and queen, and customer count is kept outside the castle. Yet, it can give a quick indication of what is happening in an agency. There are times such as a soft market that customer count could increase dramatically but written premium and revenue would not keep pace unless company incentives kicked again. More often rate pressure could drive customers away but written premium increases would indicate growth. An agency that merely stayed flat in customers, could look like a growing agency due to rate. Revenue could increase for much the same reason, and yet customers would be moving down the street.
The Bottom Line: If you were forced to pick one, we think customer count is the safest, because it is able to weather the storms of market swings, and when things get hard pay increases may follow. The safest way to manage growth is to consider all three factors and make sure that they all are positive. The owner/manager can then develop strategies for each factor. Perhaps this is a topic for another day.
How do you measure growth?