Insurance Agencies In High Demand
Insurance agencies are well known in the business community for having the benefits of recurring revenue along with a high degree of visibility for future revenues and profits because of its consistent and stable business characteristics. Many business buyers are interested in insurance agencies because they value stability and appreciate the benefits of compounding value over time by increasing an insurance agency’s book of business. Owners of insurance agencies should know that they possess very valuable assets, and should only sell their agency for the highest price possible. Let’s explore how insurance agencies are valued and the characteristics of insurance agencies that factor into their valuation.
What is An Insurance Agency?
- An insurance agency sells insurance policies to the pubic and is compensated (via commission at varying rates depending on the carrier) by the insurance carrier that actually underwrites the policy.
- Some insurance agencies only sell policies for one carrier (such as State Farm) and are referred to as captive or exclusive agencies.
- Insurance agencies are heavily regulated by the state in which they sell policies, and the owners of agencies and its agents must be properly licensed.
- It is important to remember that insurance agencies may focus on a single type of insurance (such as automobile insurance) or a range of different types of policies (such as health insurance, homeowners insurance, life insurance, and more).
- The insurance agency normally handles customer relationships which include finding the right quote for the customer, answering the customer’s questions after the policy is sold, and renewing the customer’s policy on an annual basis.
- Sometimes the insurance agency’s parent corporation or franchisor (such as Goosehead Insurance) handles the customer relationship after the policy is sold.
- This will reduce the agency’s income (as the parent company or franchisor receives a bigger percentage of the agency’s commissions) but alleviates many headaches and overhead expenses for the agency.
Valuing the Book of Business for a South Florida Insurance Agency
An insurance agency’s book of business refers to the annual earned commissions generated from the current policies of the agency’s current customers. So if an agency’s current roster of customers produces $100K of earned commissions (which are a percentage of the customer’s premiums paid to the agency by the carrier) then its book of business is $100K. Buyers primarily look to the insurance agency’s book of business as a measure of valuing the worth of the agency. Generally speaking, buyers may pay anywhere from 2-7 times the book of business.
Many Factors Affect the Valuation of Book of Business
Factors affecting the valuation of a book of business include the degree to which the earned commissions are residual, the agency’s relationships with the insurance carriers, the retention rate of the book of business, the growth rate of the book of business, and whether the insurance agency is protected by non-compete agreements with its employees. Of course, the expenses and overhead of the insurance agency itself also affects its value. An agency that has to spend a large percentage of commissions on advertising to attract customers, carries high rent, or has an office that is not being run efficiently and profitably will not receive the same valuation as a well run and efficient agency.
Residual income refers to recurring income. Commissions on sold insurance policies are generally residual because the agency will still get a commission when the customer renews its policy through the agency. Some insurance agencies sell certain types of policies – such as annuity policies – that do not give residual income to the agencies. The insurance agency only earns its commission when the annuity is sold. Buyers of insurance agencies will give a higher valuation to an agency’s book of business if the commissions are residual.
Relationship with Insurance Carriers
The insurance agency’s relationship with insurance carriers will greatly affect the ability of the insurance agency to earn commissions from selling the carrier’s policies. It is not easy for less established insurance agencies to sell policies for many carriers in Florida. Many carriers have preferred agencies they wish to work with, or may give differing commissions to different agencies. If an insurance agency has favorable contracts and has cultivated established relationships with popular insurance carriers, then the valuation of the agency’s book of business will reflect this added value.
The retention rate of an insurance agency refers to the percentage of the agency’s book of business that is renewed annually. On average, insurance agencies have an 84 percent retention rate, but strive for at least 90%. This key metric informs a buyer as to the quality of the book of business. If the agency has customers who are not being treated well by the agency or for whatever reason are not renewing their policies through the agency, then the agency will have a lower retention rate. A high retention rate increases the buyer’s trust in the future residual income, and will increase the valuation of this book of business.
As with a high retention rate, a high growth rate will greatly increase the value of the book of business for an insurance agency. A high growth rate signals that the agency itself is being well run, has a good reputation, has a favorable location that is not saturated with competition, and is selling policies in conjunction with the carrier for a good value that customers desire. Many buyers of insurance agencies prefer paying a high premium for a growing book of business rather than a paying a discounted price for a book of business that is stagnating or declining.
Non-Competes with Employees
If an insurance agency has employees who work in the agency and sell policies to the public, the owner of the agency always faces the possibility that an employee may start their own agency and effectively steal the agency’s customers and book of business. If the employee has strong relationships with the agency’s customers, then there is a distinct possibility of this happening. Consequently, many insurance agency owners make their employees sign non-compete agreements, which contractually prevents the employees from interfering with the agency’s operations or current customers.
Insurance agency owners should know that their business is in high demand by many buyers when it comes to sell. The wonderful aspects of residual income can compound the value of a quality book of business very rapidly. Be sure to know what your insurance agency is truly worth before deciding to sell.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.