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As the owner of an insurance agency, our operating income is based entirely on commissions made from the sale of insurance products. Because we are a predominantly property and casualty insurance agency, our renewals tend to go up year over year and our income grows or remains constant. We create an annual static budget based on historical commissions with an expected level of growth based on inflationary increases in premium. We investigate variances in monthly budget reports over 3%. In many instances, it is just a matter of payments coming in later than the prior year or years. In some cases, it is the result of a policy cancellation, some of which can be reinstated with a payment being applied. We investigate those variances as an attempt to salvage the sales whenever possible. Most of our premiums comprise a small percentage of our overall operating income and our retention of policies is around 97%. Because of this, large variances are abnormal and not something that we devote a large percentage of our efforts to investigating.
Insurance agencies that write predominantly large commercial accounts must devote a tremendous amount of time to investigating their renewals and preventing large variances in their operating income due to the high level of commissions involved with these types of accounts. When I started my agency, it was intentional to select markets that offered smaller premiums and understood that it would be a volume game with less volatility over time. This has turned out to be a wise decision as my business model has sustained a growing level of income over the last fifteen years.
Davis C. E., & Davis E. (2020). Managerial Accounting, Enhanced eText (4th ed.). John Wiley & Sons. ISBN-13: 9781119577669
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