Three key factors that many insurance brokerages fail to keep a close eye on is sales velocity, organic growth and leakage. Understanding these three gauges of sales can help you identify any shortcomings in your new business production as well as client retention.
Looking at these factors can also help determine the amount of new business growth compared to organic growth your agency will need to break even.
First, we should define what these three parameters are:
Sales velocity: This is your new business commissions and fees as a percentage of your commissions and fees in the year before.
Organic growth: This is growth from existing accounts and could be the result of increased premiums and fee income for existing clients as well as adding your current client purchasing more policies and/or services.
Leakage: Leakage is sales velocity minus organic growth.
Here’s an example:
Sales velocity: In 2020 you had an increase of 18% in new business commissions and fees from the year prior.
Organic growth: Fees and commissions from existing clients increased 8%.
Leakage: This leaves you with 10% leakage (18%-8% = 10%).
This means that the average firm would have to add 10% of the prior year’s total business in new business to break even for the year.
Organic growth paradox
This is not always a perfect structure for looking at leakage because it’s not always possible for an agency to control all of the factors that affect organic growth, such as a hardening or softening market or losing a client because they go out of business or are purchased by another company.
Many agencies saw a significant loss of control of their organic growth in 2020 when so many companies either reduced operations and payrolls or closed their doors for good. There is obviously nothing an insurance broker can do about that.
Transversely, when companies are adding staff or equipment, their premium base also increases, which would benefit an agency’s organic growth but is completely out of the hands of the broker.
A few aspects of organic growth that brokers can control include:
- Lost business to another broker,
- Upselling existing clients to other policies or products, and
- Renewals for existing clients.
In 2020, the average U.S. insurance brokerage’s leakage rate was 8.5%, according to MarshBerry, an insurance agency consulting firm. Leakage rates have stayed fairly steady for the past five years and it looks, based on MarshBerry’s preliminary analysis that the pandemic had no discernable effect on it.
However, a closer look at their number shows that new brokerage industry business production in 2020 fell to an average of 13.1%, compared with 14.7% in 2019. But with leakage staying steady, that means that most agencies saw lower organic growth in 2020 compared to the year prior.
With all that in mind, it’s clear that brokers need to focus their energies on boosting new business growth but not lose sight of client retention and keeping existing clients satisfied. New business is really the key to also boosting organic growth as the more clients you have the greater chance you’ll have for that business to grow through increased premium rates and your clients own growth and expansions which will translate into commission income for your agency.
MarshBerry recommends that brokerages try to increase their new business by at least 15% a year in order to produce predictable and profitable organic growth.
If you are interested in an exploratory conversation, please contact Rob Oates at 916-609-8304 or firstname.lastname@example.org.