The independent agency distribution channel is the most valuable part of the property & casualty personal and small commercial lines value chain. For this reason, owners of independent agencies have done extremely well over the last several decades from a financial perspective.
These independent agency principals are often pillars of their communities, earn significant annual cash compensation, and have built tremendously valuable assets for themselves and their heirs. These individuals have found great career success and deserve to be proud of their achievements.
As a result of the great success most of these independent agency principals have experienced, their business is almost certainly the most valuable asset they and their families own – and it will be the source of a very comfortable retirement or the basis of a great future for their children and grandchildren.
Unfortunately, many of these businesses are underperforming relative to their potential – and delivering wealth creation that is substantially below the opportunity that these owners and families have before them.
Consider a year in which the stock market increases by only 2 to 3%. We generally consider that to be a bad year for our investment portfolios. Consider a 401(k) plan that is growing at 2 to 3%. We would all be unhappy with that performance. Consider a meeting with your investment advisor in which she presents another 2.5% return on the portfolio for the fourth year in a row.
These are all very unhappy circumstances – and yet, the average growth rate of an independent property & casualty insurance agency in the U.S. is about 3% per year. This has been going on for decades.
For most independent insurance agency principals, their business is essentially the largest stock in their investment portfolio. If that insurance agency principal would be uncomfortable owning a stock in their portfolio for 10 years if it was growing by a mere 3%, why are so many comfortable with their largest personal asset growing at that rate, or less? For virtually all of these independent insurance agency principals, they can recall the first 10 years in which they built their agency and they remember growing at 15% to 25% a year for most of that. That is exactly how they built this tremendous asset. So, why are they now comfortable with 2% to 3% growth?
The good news? The ability to grow at 6% to 10% annually is no secret recipe unknown to the industry. Every independent agency principal understands the key levers. These levers are quite straightforward:
- Retain all your business. Be laser focused on increasing your annual business retention.
- Sell more policies to your existing customers. Maximize the share of wallet the agency has with its existing customer base.
- Increase the agency close ratios and its existing flow of new business opportunities. If an agency currently closes 40 of every 100 opportunities, try to close 43 of every 100 opportunities.
- Develop more and better leads. Create more opportunities for new business because there are more swings at the plate and ensure the opportunities are more likely to close.
There is no rocket science or “secret sauce” here. Agency principals know and understand this menu of straightforward drivers of growth. Unfortunately, these straightforward drivers, which allowed an agency to grow dramatically in its first decade of existence, have now become areas of secondary focus. The same agency principal that was spending 80% to 85% of her time building her business now spends 70% to 80% of her time managing the business, leaving little time for growth-focused initiatives.
This occurrence is a very commonly seen business cycle in the evolution of small entrepreneurial organizations. The limitations on growth are a function of scale, skill, and capital constraints. Anyone studying small businesses recognizes this common phenomenon.
More good news! Getting out of this typical cycle of low annual growth and slower value creation in your business is a matter of addressing issues of scale, skill, and capital. Some organizations resolve this by giving up their independence and selling to a bigger organization. There’s nothing wrong with that, but it’s not necessary to achieve growth.
Principals that want to maintain independence need a partner that can provide scale, skill and capital that will allow the independent agency principal and her staff to go back to focusing on the growth levers. Not only will this produce outsized growth but it will also bring lots of fun and enjoyment back into the organization. It will allow the agency principal to get back to doing the things she loves and enjoyed in those early growth years.
Plus, having the biggest asset in your portfolio grow at 7% to 10% a year in value will also be a very happy circumstance.