Learning From Your Insurance Profitability Analysis

Learning From Your Insurance Profitability Analysis

You may know that your insurance agency is making money, but do you really understand your profitability or what you need to do to make your business more profitable? How can a profitability analysis help your insurance agency? 

What Is a Profitability Analysis? 

A profitability analysis is a hard look at what makes your insurance business profitable or unprofitable.  This helps you examine changes that have occurred and changes that you might make at your insurance agency.

What You Need to Begin 

Before you start looking at your profitability, you need an income statement or profit and loss statement. According to Edward Lowe, these are some numbers that you should consider on a regular basis: 

  • Gross Profit: the sales minus the cost of goods sold 

  • Operating Profit: gross profit minus sales and administrative expenses

  • Net Profit: operating profit minus anything else you need to consider, such as other expenses or taxes 

These different layers allow you to understand where your business is changing and where you might be facing specific challenges that you could respond to or change. The more detail you can get about the different types of revenue and expenses, the better. For instance, you might discover that while your sales staffing costs have not changed much, your administration costs have gone up a little too much since you hired a new administrator. This can help you determine areas that could change.

Reviewing Your Overall Profitability 

As you look at your income statements, ask yourself these questions: 

  • What are the most significant line items on your list, and why? 

  • What items on your list are fixed expenses? For instance, if you rent a building, that is a fixed expense. It doesn't change no matter how many clients you have. 

  • What items are variable? For instance, you spend time working with each client. You don't spend that time if you don't have the client.

  • What's changing? Are certain parts of the income statement different from last year? Why? 

  • How much room do you have to change? For instance, your company may make lots of money right now, but how much room do you have cashflow-wise in case of a downturn? 

Loss Ratio and Combined Ratio 

For insurance agencies, another financial element comes into play: loss ratios. Investopedia defines this, saying: "The loss ratio measures the total incurred losses in relation to the total collected insurance premiums, while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums." 

The lower the ratio, the better your insurance company is doing. Examining the loss ratio of your different client relationships or categories of clients can help you determine what areas of work you may be able to support in the future. For instance, if a single area results in huge and numerous claims, you might choose not to work in this area as it is too financially dangerous for your business. Keeping an eye on your loss ratio helps you make those informed decisions.

Get your insurance agency ready for another year of success with an insurance profitability analysis. At American Agents Alliance, we offer numerous resources to help our members' businesses grow and thrive. Contact us today to learn more about our membership benefits.

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