Buying An Insurance Agency Book Of Business
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Before buying any insurance agency book of business, make sure to do your due diligence and research the product, the company, their underwriting process (how strict it is, etc.), and the local market. Here are a few questions you should ask:
If you are a potential buyer of an agency, you need to keep in mind a set of challenges and risks that are specific to this process. The first will be the regulatory considerations that are essential in the whole framework. You'll need an Insurance Producer License to sell insurance products. Moreover, the license must mention the correct lines of business and should not be expired.
Furthermore, you must ensure whether the business model fits within the purview of your working framework. Buy an agency from retired agents rather than failed ones, and if you wish to promote the agency abroad, it needs to meet the foreign qualification standards set by any state governmental agency.
In many cases, insurance agencies have contractual agreements with their partner insurance carriers that grant them the right to renew customer accounts when they expire. Essentially, this prevents the corporate carrier from cutting the agency out of the deal by swooping in and selling a new policy to the customer directly.
There are probably a lot of other good reasons to consider buying a book of business or an entire agency, these are just a few to get your mind working. Now you have your reason for buying, but is it really a good idea for you?
As I said, this is an excellent time for agents to grow their business through acquisition. The pace of buying and selling is already feverish for agents with $1 million of revenue and greater. I think the pace will pick up for smaller agencies soon.
So, today we're going to help you figure out what your book of business is worth. I'm going to share a bit about some books we have bought, the variables that go into a book's valuation, and what you can do to increase the value of your book.
A book of business in the senior insurance world is going to be valued based on your annual gross commission. So, when someone says "My book was valued at 1.5x," they mean that their book is valued at 1.5x their annualized gross commission.
Be careful of offers like that. People that don't want to service the clients will offer a really low valuation. One gal I was chatting with recently had a mostly Medicare Advantage book of business. One organization offered her 90% commission in the first year, 10% in the second year, and nothing after that. That was it. That's a really low valuation.
The cost of a book of business is usually 1.5-2.5x the annualized gross commission. For example, a hypothetical book of all Medicare Supplement business that produces $100,000 in income per year would cost between $150,000-$250,000.
When we look at the income, we want to know how much the book of business produced for you over the last year, but also how it's been doing over the last several years.
The Medicare Supplement book of business has recurring income, while the annuity book of business doesn't. Does the annuity business still have value? Absolutely! But does it have as much value as a Medicare Supplement business? No, it doesn't.
The final way to do this is as-earned. This relieves a lot of the risk for the buyer, because if the book doesn't make any money, the buyer doesn't pay. But if that business grows and it sticks, it earns more.
That first book we purchased has grown. It's been way better than what we thought. Our staff has done a ton of cross-selling, which has added a ton of value. We've written a lot of big annuity business out of there which has been a huge gift.
The first book of business we bought happened in the middle to end of 2017. We got a really tough call from an agent of ours who found out he had terminal cancer. He was given 24 months to live and asked us if we'd consider buying his book.
Having a CRM is also a big one. One of the first things we did when we bought that first book of business was to input all those paper files into a CRM. When that work is already done, it saves the person buying your book a lot of time and manpower.
Income and product mix are the big ones, but nothing is off the table for us. We're interested in acquiring all kinds of insurance businesses, and there's no downside to starting a discussion.
A book of business, in the context of insurance, is a database or "book" that lists all of the insurance policies the insurance company has written. As a client relations management tool, it helps insurers keep track of all of their policyholders, their subsequent coverage obligations, and make relevant business decisions.
Books of business also help insurance companies identify what areas are generating the most sales. With this information, the company can organize its top products and clients to determine whom it may want to market to in the future and what types of policies it may want to offer.
Look at market trends in the insurance business next, to see what major changes may take place soon in the area the book of business covers (is there major construction or new businesses cropping up in the area?) How about new rules of the road or anything that may affect the insurance product you sell in any way? If speed limits go down, speeding tickets go up, making it a higher risk book for an agency.
Obviously, do not buy an independent broker's business if you are a captive insurance agent and vice versa. You must be able to service each client based on their carrier. No one said shopping for an insurance book of business would be easy, but it may be worth it if you find the right business with the right agreement.
The calculations for these types of books of business may make your hairs stand on ends depending on how much you employ math into the operations of your business. All three methods should value the book about the same.
As a complement to a book of business, buying insurance leads works extremely well in growing an agency; you'll still need to make fresh sales while servicing each existing account. Growth depends on new business.
Specialty lenders usually sell insurance books of business but the best rates are available through exclusive agencies, like an Allstate, State Farm or Farmers, which have their own finance companies.
The purchase and sale of insurance agencies, brokerages and producer firms pose unique risks and challenges not necessarily applicable to other industries, or even other types of insurance entities. While insurance agencies are not subject to all of the same standards applicable to the acquisition of control of insurance companies, there are nevertheless many important diligence, drafting and even regulatory challenges to consider when contemplating the purchase of an insurance agency. This article will summarize a few of the many wrinkles that should be considered when consummating an insurance agency acquisition.
Finally, what if the agency has affiliates that also are being purchased, such as claims adjuster firms and third-party administrators? Depending on the jurisdiction, these entities may be subject to their own licensing requirements and must be reviewed independently to determine compliance with the laws of the states where they do business.
The task of confirming that an agency and its applicable employee insurance producers hold all required appointments is time-consuming when compared to confirming that an agency holds its required licenses. This is why many due diligence investigations will confirm a sampling of insurance carrier appointments, usually based on insurance carriers for which the agency has its highest annual insurance sales and/or commission payments. This may also require that the seller affirmatively represent in the purchase agreement that all required appointments are held.
In addition, an insurance agency may not be in compliance with the corporate laws of a particular state if it has not properly obtained its foreign qualification to do business from the applicable secretary of state or equivalent state governmental agency. Simply holding a non-resident agency license in a state is not always sufficient, and we have on occasion seen states impose back-taxes and fines in connection with the failure of an agency to have properly obtained its foreign qualification.
Insurance agencies face dual competition concerns. They must be able to obtain and maintain relationships in the face of competition with other agencies, but they also must combat the potential of losing customers directly to the insurance companies and/or wholesale general agencies with which they do business.
While it is the norm for an agency to retain the right to its customer accounts and expirations, if an agency agreement grants account ownership rights to any other entity, the results can severely impact a potential purchaser. Even if the principals of the selling agency are bound by non-solicit and non-competition provisions under the purchase agreement, insurance customers are not widgets, but rather people who can choose to work with whomever they would like. Insurance companies and their agents are not going to be bound by the non-compete. Therefore, if the agency does not have the right to its account expirations, attrition to other agents or directly to insurance carriers may skyrocket.
At the extreme, it is possible that an agency is bound by an exclusivity obligation to produce business only for particular insurance companies or general agencies, which could substantially restrict future business opportunities. Thus, it is crucial to carefully diligence any carrier agreements in order to identify such provisions.
When an agency has violated its fiduciary duties with respect to a premium trust account, the headaches for a buyer can turn into full-blown migraines. As an initial matter, a buyer may have insurance consumers as well as insurance companies demanding premium (or return premium) owed to them when the seller has absconded with trust funds. The purchase agreement will need to carefully consider successor liability concerns as states often differ as to what parties will be responsible. 781b155fdc