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Transaction Analysis

Measurements of Success

Many agencies already have the tools in place to determine which employees and departments are profitable and which clients use more agency assets than they pay for with the commissions earned from their premiums. Very few agents are actually aware of or using these tools. This article is intended to educate agents in the presence of these measurement tools and what they need to do in order to position their agencies to use them.

Most agencies who have the big three agency management systems (Applied, AMS, Delphi) are at least aware that these systems provide transaction counts correlating to transaction log entries and physical transactions to the data base. Many agents have also progressed from relying on paper files, using only their system’s accounting modules to relying on the system data base for managing their accounts (using paper files as back-up only). Those agents who are still struggling because of the double effort of maintaining paper files as well as full policy detail data base systems should seriously consider breaking the paper chain before it chokes the agency to death.

We started measuring productivity and profitability in terms of dollars. Productivity is generally measured in terms of Revenue per Employee, Compensation per Employee and Spread (the difference between Revenue per Employee and Compensation per Employee). The Spread is the most important of the three productivity measures because it defines that part of the revenue per employee that remains available for overhead and profit. Profit is usually the straightforward difference between Total Revenue and Total Expense. This figure, too, needs to be refined to extract non-recurring revenue and expenses and to adjust for discretionary expenses used to benefit the agency owners (that would otherwise have been Profit). Productivity and Profit are real and true indicators of an agency’s financial success. However, neither will explain or analyze why an agency is NOT as successful as desired. So we will continue to measure productivity (revenue per employee, compensation per employee and spread) and profit but must also have other, more refined measures that will help us adjust operations to bring the bottom line results to desired levels.

Transaction Analysis responds to the need for refined management measures in an insurance agency. If, for example, you wished to analyze your personal lines department, you would begin by determining how many transactions were conducted through the system in the prior year for each CSR and, in summation, for the department. Next identify the number of clients managed by each CSR. Simple division provides you the average transactions/CSR and transactions/client for each CSR. If the numbers differ significantly, between CSRs, a problem probably exists because all customers in a Personal Lines department should be generally treated similarly. While this example is an over-simplification, it illustrates the utility of Transaction Analysis in its rudimentary stages.

Another desirable use for Transaction Analysis is in the analysis of profitability by CSR and profitability by account. First, you must determine the break-even point of a department (or agency). The break-even point for a department (or an agency) is, by definition, its Operating Income. Operating Income should be comprised of commissions and fees, but some agencies still find it necessary to include Contingent Income in Operating Income (otherwise they would lose money every year). If you divide the Operating Income of a department (or agency) by the number of transactions processed during a year, you determine the cost/transaction permissible under current conditions for break-even accounting. If you then run a report of transactions by customer (with earned commissions reflected, as well), you can easily determine which customers generate sufficient transactions to make them unprofitable. The most advanced agencies have shared this with unprofitable clients and have negotiated additional fees to permit each client to profit the agency based on the work effort needed to service that client.

These are only the tip of the iceberg when considering the utility of Transaction Analysis in insurance agencies. Transaction Analysis is the first step toward streamlining procedures that add redundant transactions that costs the agency time and money. One additional transaction for one client taking five minutes and costing $3.50 (example of a cost/transaction in an agency – this is not a real cost) does not sound like much in terms of time OR money. But if you generate just 1000 transactions/year (most agencies do many more), this five minute step costs the agency 83.3 man-hours of wasted time and costs $3.500. Worse yet, the time lost could have been put to more productive use selling or servicing the customers. This is just one more example of how Transaction Analysis can be used within an agency.

If you decide to pursue Transaction Analysis you will likely be criticized by your employees about all of the things that they do that are not related to the system, so don’t generate transactions, in their classical sense. The answer to this criticism is that Transaction Analysis is not meant to measure workload or work effort. It measures a significant COMMON work transaction that is at the head, in the process or at the conclusion of all other work efforts conducted in an agency. Those agencies who have successfully transitioned to Transactional Filing have required their employees to enter at least a policy note in the system each time they intervene in a client file. In this way, the CSR, producer or manager always knows the activity that has transpired for an account. When this is done, the transactions in the system are much better gauges of total activity. If this is not the case in your agency, the transactions still represent a significant sampling of all activity for your customers and the analysis should treat the counts as indicators, not as total work effort.