These same questions are asked on many E & O survey applications.  Most, if not all agency principals can accurately answer only two of these questions, the number of years in business and number of employees.  I am not asking for complex profit to earning ratios, or cash flow percentages, just good basic business information that is need to make intelligent decisions and run a profitable business.

If you don't have a business plan, your road map for the future, how are you ever going to get there?  In the past, most independent insurance agencies have been operating by what they see and hear.  Most have been reactive instead of proactive in their business decisions. Some have been just plain lucky, but most have just worked extremely hard for their success.

I had a phone call from a very successful business entrepreneur recently about the state of the independent insurance agency business.  He had never been in the insurance business before, but had recently become interested in starting a new independent insurance agency chain in several states.  Somehow, he had been exposed to an article that I wrote entitled "Automate or Evaporate," and was interested in my input.  His comment to me was, "I have seen how insurance agencies operate in two states so far and I am amazed that they are still in business."  I asked him if he had looked at any profit and loss statements of independent insurance agencies.  He had seen several from agencies that were for sale, and that had convinced him not to buy those agencies but start from scratch and do it right.

He wanted to know if and how automation could help him avoid the pitfalls that he had observed.  I assured him that it could and provided him with the information in the rest of this article.

Insurance agency automation should offer a method of entering an electronic file on the computer system, which is accessible by everyone on a local or wide area network.  This entry of the customer and his insurance policies should trigger the beginning of the accounting cycle, which is so seamless that the user completing the entry doesn't even realize the effect that has begun.  What I mean is, when the user establishes the type of transaction that has just taken place, it is recording that entry for several purposes.  It is automatically recording the sale and the type of transaction that just occurred (new, renewal, endorsement, cancellation, or reinstatement).

While those things are taking place, automatically a suspense file is set up pending the receipt of the declaration page.  Commissions for the agency and the writing agent are recorded for production reports.  (Detailed analysis of premiums and commissions for any time period is available with a few clicks of the mouse).

Issuing computer generated customer receipts for payments will automatically create a deposit listing and generate a listing of checks that need to be written to the company and detail all of the electronic fund transfers that will be swept from the account.  When checks are written by the computer system it will generate a transmittal letter to the insurance company and make an automatic entry into the agency checkbook.

When the declaration page is received, the user verifies that all entries in the system agree with what was issued by the company.  Once verified and marked received, the system automatically removes the suspense entry on the open binder report.  While this process of verifying and correcting any errors is being completed the agency is actually reconciling their monthly statement automatically as they proceed on a daily basis. 

There are many other advantages of agency management software such as document imaging, transactional filing, and interfacing with rating software to save time of duplication of entry work, but I want to concentrate on agency accounting at this point.  The real point and principles of good agency accounting is management's ability to review, compare, and analyze the results and develop strategies concerning trends.

Many large agencies will say they write 300 new policies per month.  But my question is how many are retained and more importantly, what is the percentage of commissions retained.  How does that compare to previous time periods?  What is average commission earned on all personal lines policies for the agency?  What is the percentage of policies written compared to the number of policies renewed for any specified time period.  I would want to see comparison reports of new and renewal business for all companies and the commissions earned for each.  I would want a report of net business and commissions written for each company.  This report would help you spot trends that might be developing.  I would want the ability to view, at any time, the net business on the books of the agency. 

Someone decided a long time ago, that insurance agencies were worth one and a half times their written commission as a valuation.  It was probably Benjamin Franklin, and that remained the rule for value for centuries.  Now business brokers and CPA's will tell you, your business is no different than any other type business.  The net worth of your agency is the bottom line numbers of any business.  Your profit and loss statement and your net worth of the business speak volumes as to the actual value.  Sure the name, location, employees, and phone number are calculated into the formula, but goodwill is not paying very much these days.

Remember the best business plan in the world is meaningless unless you know where your business stands.  Good insurance agency accounting using automation is the solution and your road map to the future.  You have to understand where you are today and how you got here in order to plan for the future.  If you are in the dark on any of these critical measurements, automated agency accounting methods will turn on the lights and help you prepare to move forward.  Using a proactive approach to business planning instead of a reactive approach will solve most of your problems and help you overcome the hurdles of everyday business life.

If you want to discuss agency accounting or any other subject relating to automation in insurance agencies, please call me.

Until next month, keep automating those agencies; I really believe it is the only way that you are going to survive in the 21^st Century.

Remember, the bottom line is "Automation equals Productivity and Profitability."