Acquiring an established agency may be a challenge for a new agency, since existing agencies are better candidates to acquire. The better option for a startup agency is to purchase a smaller agency with a revenue volume of less than 150k. These agencies have less competition and may be good launching pads for a new independent agency. However, even if you plan to acquire an agency, you should always start and build your independent agency while you are searching for an agency to purchase. This will give you a competitive advantage because you will have some carrier appointments in place, which sellers often prefer, since it may prevent issues when the deal closes.
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How to Acquire Insurance Books of Business
One option is to consider asking larger agencies if they want to sell certain accounts, particularly those that may no longer meet their target market, such as accounts with commission revenues below a certain threshold. Acquiring these accounts can be a way to get your foot into many doors. Chances are, many of these accounts are not rounded, which can give you the opportunity to sell other lines of business and grow your agency. Start by sending a letter to all of the medium and larger agencies in your area. Introduce yourself and express your interest in acquiring accounts that no longer meet their target markets. You might want to make follow-up calls as well.
Insurance Agency Partnerships
Many small agencies consist of partnerships, often because the partners have worked together before and find it to be cost-efficient. This may be a good option with the right combination of individuals.
Here are the advantages of a partnership:
- Many fixed costs are spread out among 2 or more principals.
- Diversity of expertise and skills, i.e., one partner is good at selling and another partner is good at operations, or one partner handles personal lines while the other partner handles commercial.
- Each partner has a chance to take a vacation without having to worry about the business.
Here are some disadvantages of a partnership:
- Decisions must be collaborative; you will not be able to make unilateral decisions. If you like making all the decisions, then a partnership probably is not for you.
- Because it takes a consensus, decisions will take longer to make.
- Possibilities of dispute may arise between partners.
A system must be put in place to track the accounts and commissions of each partner. While it does take some time and management, most agency management systems can handle this. The agency can also be a pure partnership in which each partner owns an equal percentage, and all commissions go to the house. In this case, profits are shared equally between partners and not paid based on individual production. This is good, if partners work as a team on account, or each partner has a different role in the agency (such as one being a producer and one managing operations).
Partnerships can be in the form of a partnership agreement, an LLC or a corporation. You should consult an attorney and/or a CPA about what would be the right entity type for your agency. There are many possible ways to structure a partnership, and hiring the right professionals can set the foundation from the very start to prevent issues from arising later on.
Insurance Agency E&O Coverage
The cost of E&O Insurance for a start-up agency can approximately range from $2,000 to $5,000 a year for a $1 million policy. Some carriers will not underwrite a start-up agency, so it’s best to check around before you open your doors. The premium, for the most part, is going to be based on the type of business you write, your expected volume, and the county in which your office is located. Some carriers may want proof that you have some prior experience. They will want to know if you previously owned a captive agency with an E&O track record and loss runs. You should investigate your options and choices, including the possibility of increasing your limit to $2 million or more — especially if you are a sole proprietor with personal assets, or if you plan to write larger policies. Another option to consider is getting defense costs outside of the limits. That is, any defense costs will not be subtracted from the total coverage amount. If possible, you should consider getting a retroactive coverage date as far back as they will let you go. This will help cover your previous activities as a captive agency or producer with a previous organization. You can also do this by purchasing an extended reporting form endorsement (known as a tail policy) with your current E&O carrier. However, if available, it will probably be more cost-efficient to get retroactive coverage that goes back to the date you started selling insurance. You can find a list of E&O providers on this site.
Guide to Starting an Insurance Agency Table of Contents
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