The state of commercial agents in an age of consolidation and innovation

As the robust agency consolidation wave continues, the total number of agencies is dropping, and those that remain are getting larger — in some cases, much, much larger. As an agency grows, through acquisition or organically, producers typically see their production increase, while their average payout ratio falls.

Warning: Past performance is no guarantee of future results! The average annual sales production of commercial lines producers (commission) in the U.S., according to Insurance Producer Profile, published by The National Alliance Research Academy (5th edition), is $323,733. The median figure is $180,000. These numbers include both new business and renewal business on an annual basis. About 20% of producers earn over $500,000 per year, while 27% earn less than $100,000. The largest percentage (29%) earn between $100,000 and $200,000. Since the huge earners and the lowest earners tend to tip the scales in a substantial way, the median production figure of $180,000 is the number that holds the most weight for me.

Here’s a closer look at those numbers:

Compensation-production ratio

The compensation-production ratio takes into account the total individual producer’s production, including all lines of business, both new and renewal. The compensation part of the ratio is the summation of salary and commission from renewal and new business. The average industry compensation ratio is .36 or $130,396 in annual compensation — a great living by almost any standard.

The Alliance’s analysis does not include benefits. As I mentioned in the beginning, as an agency grows, producer payouts (ratio) tend to fall. Conversely, smaller agencies tend to pay a larger percentage of the total commission pie. Agencies that generate $1 to $2 million in annual revenue pay an average compensation-production ratio of .44. The largest agencies — those that produce over $20 million annually — pay closer to .32.

Demographics

It should come as no surprise that in smaller towns and communities, where there is still a true “local” service approach to sales, total production for a producer averages closer to $266,100 annually. In contrast, those in big cities average $364,652.

The experience factor

As producers learn their craft, their compensation-production ratio tends to be much higher. Those with 3-4 years of sales experience have built up their book on average to $152,404 in annual revenue. Their average payout ratio is .55 or $88,400. There tends to be a dip in annual production (total book size) between those with less than two years of experience and those with 3-4 years’ experience. That’s notable.

My guess is that that’s when producers start feeling the effects of that relentless headwind of business lost through attrition during this time in their career. It could also be that producers are starting to feel that their business is at a safer place, and they can breathe a little if they’re not out selling every second of the day.

Fun facts

The average age of a commercial lines producer is 52. Ouch!

Our industry has a huge gender challenge, with 82% of producers identifying as male, according to the survey. Sixty-seven percent of producers have a bachelor’s degree. An interesting finding is that those with only a high school diploma tend to average a slightly higher annual compensation than those with any college degree, including associates, bachelors, and advanced.

The top three reasons producers leave one agency for another are poorly managed agencies, inadequate dollar compensation and support staff.

Also, the average pre-tax profit for agencies is 10.66%, according to The Academy’s 2020 Growth and Performance Standards (GPS) study.

I point that out because the robust agency consolidation is largely being funded by VC firms where they tend to search for a much higher return — perhaps a warning sign to those working in the industry of large future layoffs.

An alarming trend buried within a liquidity ratio

Another interesting, and slightly unnerving, data point in the GPS study is the current ratio for large agencies (defined as agencies that have over $3 million in revenue) is at 1.02. That’s much worse than any time going back to 1988 (the last data point provided in this comprehensive resource, which is used by many to benchmark industry performance and overall health).

Liquidity ratios, such as the current ratio, measure the ability of an agency to pay its current liabilities. A ratio of close to or less than 1.0 might indicate the potential for serious cash flow problems. Two potential causes for this are 1. taking out more profits in dividends than an agency can handle and 2. not managing debt obligations prudently. Of course, tracking receivables is an important factor too.

The other alarming trend is the dramatic reduction in the average number of producers in large agencies. According to GPS, that number is down by about 18% from the late eighties and down over 30% from 2013/14.

With more acquisition growth over organic, it’s not a total shock, but a hard pill to swallow nonetheless. Labor is the largest expense for agencies and the easiest way to cut costs in the short-term, but, in the end, it’s the producers that help keep the lights on.

How the study and analysis was completed

The 5th addition of Producer Profile was released in 2016 by The National Alliance Research Academy. The book is to be used as a reference tool by industry professionals to measure performance and use as a baseline guide to fairly compensating producers. More than 620 producers responded to the survey.

Mark Rosalbo is a senior advisor at NFP in Montpelier, Vt. He has over 25 years of experience in financial services and insurance. He can be reached at Mark.Rosalbo@NFP.com or 802-489-7212. 

This piece was first published on LinkedIn and is republished here with consent. The opinions expressed are the author’s own. 

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