Does personal lines business have an important role in your agency's future growth? Most midsize and large agencies don't have a clear picture of the strategic role personal lines should play. Part of the problem is their inability to measure the value of investing in new producers.

Since it is an afterthought to their core commercial property-casualty and benefits business, we've watched agency owners vacillate over what to do. Should personal lines be grown aggressively? Divested? Simply be milked for profits?

In today's environment, growing personal lines business is difficult. Agencies don't typically have dedicated personal lines producers, and competing head-to-head with direct writers is daunting.

However, despite its typical low growth rate, personal lines is often steady, extremely profitable business. A well-run personal lines department can generate margins that are 10-to-20 percent higher than on commercial business.

Many of the industry's top performers are reinvesting the excess profits from their personal lines department to fund growth in commercial p-c and benefits. For some agencies, their entire investment in future growth is being funded by that strategic stepchild--personal lines!

In today's soft commercial market, investing in organic growth is critical. The most important investment is in your production team--hiring and developing new producers. Some agencies are wary because of the cost, as new producers don't typically cover their expenses--or "validate"--until two-to-four years after being hired.

However, foregoing this investment can significantly limit an agency's capacity to grow organically. With current market conditions, agencies have to write new accounts to grow revenues, and increasing the number of accounts typically means adding more producers.

Agencies that aspire to grow are increasingly asking how much they should invest in new producers. They need a benchmark!

Reagan Consulting recently developed a statistic called the NUPP--Net investment in Unvalidated Producer Pay. Expressed as a percentage of revenue, the NUPP provides a way to benchmark the amount of direct investment an agency is making in its future production force--which is typically made of one or several producers who are not yet "validated" (that is, producers whose payroll expense is greater than what they would generate if paid according to the agency's normal producer commission schedule).

The "net investment" of an agency should not be confused with the gross amount of pay and/or other expenses being invested in new producers. The net investment in an unvalidated producer is the difference between what the agency pays a producer and what they would earn under the normal commission schedule.

For example, if an agency that pays a 35 percent commission rate has a new producer with a $100,000 book earning a $50,000 salary, the agency is making a $15,000 net investment in that unvalidated producer ($50,000 salary less $100,000 times 35 percent in producer commissions).

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The accompanying table provides an illustration of an agency's NUPP. The NUPP is then expressed as a percentage of revenues to allow a comparison with other agencies. We've found successful agencies often have an NUPP of 1.5 percent of revenues or more. This means, for example, that an agency with $20 million in revenues should be investing--on a net basis--at least $300,000 in unvalidated producers.

In other words, the agency is paying those producers $300,000 more than they would earn under the agency's normal producer commission schedule.

In our view, an NUPP of 1.5 percent or higher is a healthy level of investment in an agency's growth. If an agency is investing below that figure, it may not be doing enough to ensure future revenue growth and value creation.

Keep in mind the NUPP is only intended to measure the pure payroll investment in unvalidated producers. As a benchmark, to make it comparable against other firms, it is intended to be simplistic. It is not designed to measure all of the other ancillary expenses that accompany new producers--such as overhead expenses and support costs, etc.

So when these other costs are accounted for, the actual investment being made in new producers at any given time might be more than twice the NUPP.

What does the NUPP--which is typically invested in commercial and benefits producers--have to do with personal lines? Unfortunately, many agencies skimp on their NUPP because their commercial P&C and benefits divisions alone can't support the necessary investment.

But, amazingly, a typical agency's entire NUPP can be funded by a well-managed personal lines department.

How? A personal lines department is, on average, 10 percent of a large agency's overall revenue (according to the "2007 Best Practices Study.") Assuming the personal lines department creates margins that are, on average, 15 percent higher than the agency's other departments, the firm is generating 1.5 percent of total agency revenues in excess profits from its personal lines business.

These excess profits can be reinvested to fund its entire investment in unvalidated commercial and benefits producers.

The lesson is that the strategic value of the personal lines department for many agencies is the investment fuel it provides for funding future growth in other departments. Personal lines divisions shouldn't be taken for granted--they should be run with a keen eye for profitability.

In today's competitive market, investing in growth and developing producers is more important than ever. Manage your personal lines business effectively, and you'll have the cash you need to make this investment and to drive agency value in the future.

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