As the independent agency channel continues to move past the historic economic disruptions of the coronavirus pandemic and into the challenges of a hard market, Best Practices agencies continue to display exceptional organic growth and profitability while heavily investing in the continued development of new business, according to the 2023 update of the Best Practices Study by the Big “I" and Reagan Consulting.

The Best Practices update is the second in its three-year cycle, examining the firms that qualified as a 2022 Best Practices agency. The annual study, conducted jointly in a longstanding partnership between the Big “I" and Reagan Consulting for the past 30 years, provides critical performance benchmarks in six agency revenue categories ranging from under $1.25 million to over $25 million.

“The independent agency channel is healthier today than ever before, even as it faces challenges such as industry consolidation, increasing consumer expectations for value-added resources, InsurTech competition, and a systemic lack of young talent," says Jennifer Becker, Big “I" senior director of agent development, research and education. “The study provides guidance on ways all agencies, not just Best Practices agencies, can continue to grow and stabilize their operations as we enter a hard market."

The Best Practices Study analyzes takeaways from nominated Best Practices firms throughout the nation that have been recognized for outstanding management and financial achievement in categories such as income and expense distribution; revenue and profitability growth; sales and service staff compensation and productivity; technology expenses; and property-casualty and life-health carrier representation.

“In the three decades Reagan Consulting and the Big 'I' have partnered on the study, we've never seen such remarkable results," says Tom Doran, a partner with Reagan Consulting. “Particularly encouraging is the fact that Best Practices agencies took to heart the study's previous indicators of the need to focus on producer recruitment and development. These investments are paying off in excellent valuations—and while there's still room for improvement, the study shows the top-performing agencies continue to demonstrate the rewards of purposeful improvement."

Key findings from the update include:

• Organic growth continues to increase. At 9.5%, organic growth levels were exceeded only by those seen during the hard market of the early 2000s. Every revenue category except the under $1.25 million group saw their organic growth rates increase. 
• Profitability remained at historically high levels. At 26.3%, Best Practices agency profitability remained steady.
• The Rule of 20 results are exceptionally healthy. The Rule of 20, calculated by adding organic growth to 50% of pro forma EBITDA (earnings before interest, taxes, depreciation and amortization), continued last year's record results at 24.3. The Rule of 20 is the best metric with which to gauge overall agency health. 
• Sales velocity decreased. While still remaining at healthy levels, sales velocity decreased in five of six revenue categories to reach an average of 14.7%, down from last year's 15.5%.
• Producer recruitment and development sees significant improvement. Net unvalidated producer payroll (NUPP), a measure of producer recruitment and development, leapt to 2.0% of net revenues compared to 1.1% in last year's study. A healthy NUPP investment is 1.5%-2.0%, an indication that Best Practices agencies have increased investments in their new business engines—a strategy that will also improve valuation and perpetuation.
• Productivity levels continue to improve. One of the best metrics to assess overall agency health is revenue-per-employee, which improved in all but the over $25 million revenue category.
• Shareholder and producer ages increase. The weighted average shareholder age (WASA) was 54.3 years, compared to 53.2 in last year's study, and the weighted average producer age (WAPA) was 49.6 years, an increase from 48.6. Agencies should manage these two metrics carefully as lower WASA and WAPA are critical to long-term agency perpetuation. 

The annual Best Practices Study began in 1993 as a joint initiative between the Big “I" and Reagan Consulting and studies leading agencies and brokers in the country to help independent agents build the value of their agencies.

For more information on the Best Practices program, visit the Big “I" Best Practices webpage.

AnneMarie McPherson Spears is IA news editor.