Buying An Insurance 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.
When buying an insurance book of business, you are buying a portion of an agency. This may include insurance books for sale that an agency may no longer target or books that a producer may be selling.
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.
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.
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.
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.
This influx of capital is a clear response to an increasing market need for convenient, affordable, and efficient business insurance. Commercial insurance buyers, especially Millennials and younger generations, increasingly want to be able to purchase insurance online and manage their policies and claims from their computers as well.
Focus Efforts on Sales Initiatives: Sales initiatives are coordinated outbound marketing efforts with the goal of acquiring a specific type of business. Initiatives can target businesses by niche, insurance needs, their current situation, or even buyer characteristics. For example, most venture-backed startups will need to secure a directors & officers policy during a specific time frame once they have closed their round of funding. A sales initiative targeting startups would allow you to focus your prospecting, cold calling, emailing, and other sales efforts around their specific needs.
This method is commonly used when acquiring a book of business as a specific asset and as compared to purchasing an entire operation. When acquiring a book of business to assimilate into an existing operation, it is often times a simpler conversation/negotiation to keep in terms of Revenue.
A multiple of Earnings, also known of EBITDA, is a method of valuation where the multiplier is based on the operating cash flow (or Earnings) of the agency or book of business. This method is commonly used when acquiring an entire operation, functioning component/division of an enterprise (i.e. the entire personal lines book of another agency), or a larger book of business that carriers with it a sizeable amount of expense and/or complexity.
Our goal is to achieve long-term relationships focused on bringing value to your risk management and insurance programs. We commit to utilizing our collective talent to support your risk management and insurance goals. We will deliver to you the highest quality property and casualty insurance programs and strategic planning consultation services in a manner that is most suitable to achieving your business goals.
Insurance books of business can be extremely profitable assets. In the property and casualty insurance industry, the agent of record for a policy receives a commission when a customer purchase the policy and each time they renew.
There is service involved; it is not a complete passive asset. You (or your staff) do need to be able to answer insurance questions, deal with claims, and take payments. You also have to be licensed and be able to meet whatever other requirements the state or the carrier requires, such as maintaining E&O insurance, paying certain fees, having a place of business, etc.While its not completely passive, it is far more passive than being in a lot of sales professions like real estate, for instance, where you get paid for a sale and there is not a continuing income stream down the road.Not everyone will renew, and there is definitely a lot of variance among carriers and the type of policy, but renewal rates in the 80-90% range are not uncommon. On top of that, insurance like many other consumer purchases, goes up over time due to inflation.
Also keep in mind that the income a book produces is going to go down each year unless you can successful cross-sell those customers or write new policies to replace the ones that people will gradually cancel over time. A building does not shrink and get smaller every year with fewer units to rent.Find the right insurance book of business lenderThere are financing options available for insurance books of business. While practically every bank and thousands of other non-bank lenders offer loans on real estate, insurance books of business generally attract a few specialty lenders.While people often buy independent books of business, the best rates are generally available for exclusive agencies. In the P&C area, this would be books of business for Allstate and Farmers. Some of the most active lenders include Oak Street Funding, PPC Loan, Capital Resources and Allstate Finance Company.For Allstate books, specifically, here is a list of the Top 10 Allstate lenders. While the lenders generally require at least 10% down, many of them will allow the seller of the book of business to carry a second note. 781b155fdc