This article originally published on InsNerds.com
Understanding the insurance agency. Let’s break it down from beginning to end, so that you can understand it effectively.
What core value does an insurance agency provide?
The goal of each agency will vary, but ultimately, it’s to match an individual (client) with the best available product line from an associated insurance carrier. A one-call resource to take care of all the client’s insurance needs. An advocate for claims, in the event of loss or damage to the client’s valued goods.
A responsible agency will provide expertise advice for a variety of risks and help craft strategies to reduce high-cost damage and loss. Advanced agencies will provide online access, analytical solutions, employee benefit consulting, loss control services, among many other services that are meant to lower the overall total cost of risk (TCOR).
How does an agency make money?
Most insurance agency revenues come in the form of a paid commission. An agency is paid a percentage of the total cost of the policy offered. The total cost is the premium and the percentage the agency earns is typically called, agency revenue. Each percentage with the insurance company is a variable based on a number of factors. For example, the cost of premium the agency has with the insurance company (typically called a carrier book of business), and what the current loss ratio of the book of business is. Additionally, new business and overall retention also play a significant role in the percentage earned. Some percentages are variable per line of coverage. By this point, managing agency revenue is a pain in the butt, as some agencies represent 100+ insurance companies.
The other major revenue sources are contingencies per each carrier. Contingency dollars are very important for the majority of agencies. Contingency is ultimately a reward to the agency for bringing in clients with low losses. The size of the contingency has multiple factors: volume, new business growth, overall retention, and so on.
How are sales associates compensated?
Insurance is currently a very attractive profession, if sales is in your blood. Expanding on the model above, most producers are paid a percentage of agency revenue. The way each agency handles this is nuanced and can be extremely complex. On average, agencies pay 25-40% of agency revenue for new business and 10-25% for renewal business.
So, if you are a producer (a nifty title insurance salesmen will understand) and you sell a $100,000 premium policy, the agency receives $10,000, if the contract with the carrier on that line of business or coverage is 10 percent. The producer, then, would get 35% (based on agency) of that first year and 15% of each year thereafter. As you can see, it’s not hard for a good producer to accumulate a $500k-$700k book of business and walk away with a 20-25% salary, with no new business. Any additional new business would be gravy.
How does an insurance agency perpetuate?
In many cases, successful producers have excess capital from the agency compensation model and can afford to buy stock from the current owners. This is the primary way an agency internally perpetuates. Another option is to sell to a larger broker. For owners that want to internally perpetuate, they typically have a long term strategic vision that can sometimes start 10-15 years prior to their actual exit. Depending on the size of the agency and the number of owners, it can take a long time to transfer ownership. One of the first questions to ask agency principles is to lay out their perpetuation strategy. Many of the larger firms are ESOP or some form of distributed ownership, but many of the under 100 million agencies are still owned by a few individuals.
Hopefully, this has shed some light on how an insurance agency thrives. Next, we will drill into key expenses and problem areas that insurance agencies currently face. Thanks for reading!