How to Start an Insurance Agency

Part 1 - How to start an Insurance Agency business - Background

As the owner of an insurance agency, your job is to guide customers through the buying process and assist them in determining what policy most closely fits their needs. In addition to the initial sale of an insurance policy, brokers regularly meet with clients to ensure the policy is still the best fit. Many agents also act as the first point of contact should a claim arise. Due to the nature of the business, many insurance agents are their clients’ most trusted advisors.

Our guide is in 3 parts:

• Part 1 - How to start an Insurance Agency business - Background
• Part 2 - Our planner tool to see if this idea is the right fit for you
• Part 3 - Action plan to get started

Captive Agency vs Independent Agency

When considering opening an insurance brokerage, you’ll have two options: independent or captive. Both options can be very profitable and each comes with their own set of pros and cons.

As an independent agent, you can freely sell insurance products offered by many different carriers. You are, in essence, the pre-underwriter. It’s your job to analyze the information you’ve collected to determine which companies will write the policy. You then figure quotes based on this information and offer the cheapest quotes to the customer. Policies vary from company to company, so it’s your job to explain any differences their new policy might have over their current one. Many agents prefer writing and servicing one line of business over another. As an independent, you have the advantage of focusing on the lines of business that fulfill you the most.

Captive agencies sign a contract to represent and write insurance for one company (e.g. State Farm Agent or Farm Bureau). You are still the pre-underwriter, but you only have one set of underwriting guidelines to memorize and adhere to. Most captive insurance carriers offer multiple lines of business (e.g. business, personal, life, health, and annuities), making it easier to write a household’s entire book of business. This offers a wonderful opportunity to build lasting connections with your clients. They often become like family, as you’re there to help them through some of their most difficult times. If you decide to be a captive agent, be sure you fully understand the terms of the contract, that you’re familiar with the carrier’s mission, and that you stand by their line of products.

What are the costs involved in opening an insurance agency?

If you’re considering opening an agency, you’ve hopefully already completed the first step, which is obtaining the necessary insurance licenses. Your next step is to purchase or lease office space.

If you’ve decided to partner with a captive company, like State Farm, you’ll likely have guidelines that must be followed when determining a location. As an independent agent, you won’t face these same restrictions. Do your research and choose an area that isn’t already flooded with agencies. Try to find a location that is easy to get to, has ample parking, and a steady flow of foot traffic. While almost all policies can be written online nowadays, many customers still feel most comfortable with face-to-face meetings when it comes to insurance.

Once you’ve found a location, it’s time to start purchasing your office equipment. Since you’ll be storing personal information on all your clients, it’s important to have a computer system complete with all the necessary firewalls. Captive agents have the advantage of utilizing the computer management system the company they represent uses. If you’re opening up an independent agency, invest in an insurance management software solution that can handle all your agency’s needs. Many systems allow you to work quotes, issue policies, track commissions, and handle your accounting needs, all in one system. For a list of all available software solutions, and their ratings, click here. These systems range anywhere from $5,000 to $20,000, depending upon the number of users and the capabilities you desire.

Once you have an office space set up, you’ll want to hire your staff. They’ll need to become familiar with the new software, the insurance products you plan to sell, and must be trained accordingly. Given the role they’ll have in the success of the business, it’s critical that you offer your staff the training and support they need.

If you’ve decided to take the independent agency route, you’ll spend a great deal of time and money setting up agency appointments. This is the agreement between the insurance company and the agency. It defines what types of policies you’re allowed to write, any underwriting restrictions that might be enforced, and your rate of commission. Most companies will send a representative out to survey the office and meet with you and your staff. Each appointment costs between $125 and $250, depending upon the company.

To establish yourself as a professional in the industry, a website is critical. While it doesn’t have to have all the bells and whistles, it should educate on the basics of insurance, explain the types of policies you write, and reflect the brand you’re trying to build. Many websites now allow customers to review their policies, make necessary changes, and obtain quotes. The more intuitive and informative your site is, the more likely you are to land new clients. Many captive agents are provided a website through the company they represent. An independent agent should budget anywhere from $4,000 to $15,000, depending upon how advanced they want their website to be.

What are the ongoing expenses for an insurance agency?

There are a number of items you’ll need to budget for, in addition to the standard overhead costs of running an office space. Payroll and incentive packages for your staff members will be your greatest expense. As the business grows, this expenses will grow, as well.

You should also encourage and support your workforce to expand their knowledge. Many states have different levels of insurance licensing. If your staff members come to you with only a customer service license, they’ll be limited in both knowledge and the amount of insurance business they’re legally allowed to do. If you send them back to school to obtain additional licensing, it’s a win-win – you’re investing in their future, as well as your own. Every licensed agent is also required to regularly attend a number of continuing education classes. This is another opportunity to show your employees you support them and recognize the value of a well-educated staff.

As a captive agent, you’ll represent just one company throughout your career. However, if you’re an independent, you’ll need to consistently add new companies to your business. Remain educated on the latest insurance companies, their underwriting guidelines, and how they could benefit the individual members in your book of business. This means setting aside a portion of your monthly budget for additional insurance appointment fees.

As mentioned previously, a consistent marketing strategy is what will attract new customers to your agency. Both time and money should be budgeted every month for this most valuable aspect of your business.

Your initial investment in a computer management system will prove to be a valuable asset to the company. Once installed, many software companies charge a monthly fee based on the number of users. While it can get quite expensive, this system is what connects you to your customers and is critical to the agency’s success.

Who is the target market?

Many independent agents build a successful agency by focusing on one target niche. Some are more knowledgeable in commercial lines and enjoy the high commissions that come with higher premiums. Others focus their attention more on personal line products such as teen drivers, art collectors, or RV’s. If you do decide to focus on writing one type of business, be sure you know your product well, as your marketing efforts will need to align with those goals.

While their knowledge might be stronger in one, most captive agents write all lines of business. Thus, their ideal customer is someone looking to keep as many lines of business in one agency as possible. This is beneficial to you, as you’re able to get to know the client and their insurance needs on a deeper level.

Loyalty and trust is built, which helps ensure a long-standing relationship. This can still be done successfully in an independent agency, but it requires a great deal more work and partnering with the best companies in the industry.

How does an insurance agency make money?

Your agency brings in money for each policy that is written. Upon policy issuance and renewal, commission is paid to the agency. Commission is paid at a higher percentage upon policy inception, with a lower percentage for renewals, which occur semi-annually or annually, depending upon the policy.

How much can you charge customers?

Premiums and commission are set by the insurance company and vary by policy and line of business. Commissions are paid off the total premium. Most are set at 12%-15% for new policies and 5%-10% for renewal business.

How much profit can an insurance agency make?

The BLS projects 22% growth in the insurance industry over the next decade, more than 10% higher than all other occupations. Building a book of business, however, takes time. The first few years are the hardest and will take a great deal of work.

Your profits are directly tied to how you decide to set up your agency and what types of policies you focus on. Independent agents whose core business is personal lines report an average of $85,5000 plus bonuses. Some agents have reported even higher earnings by writing only high-end commercial lines policies. Captive agents report an average of $79,700 plus bonuses. Independents realized higher year-end bonuses.

How can you make your business more profitable?

Successful insurance agency owners have reported the following strategies for expanding their business’ profits:

• Outsource departments that aren’t mission critical to the company’s core business. This includes accounting, marketing, and IT.

• If an independent agency, consider buying another agent’s book of business.

• Focus on cross-selling multiple lines to your current book of business

• Sell lines of insurance that have higher premiums or offer a larger commission, such as business insurance and life insurance

• Spend time keeping up with the latest in insurance trends and carriers. Only represent the carriers whose products you stand behind and would be willing to write for your own family.

• Allow your employees to work from home from time to time. This helps cut down on overhead expenses and sends a message to your staff that you trust them.

Day-to-Day and Growth

What happens during a typical day at an insurance agency?

Whether it’s assisting clients in making insurance decisions, filling out the paperwork to write a policy, or working to gain appointments with new insurance companies, agents spend much of their day in sales-mode.

Insurance is a very volatile business, so caring for your current book of business is just as important as gaining new clients. Insurance illustrations for prospective clients must be prepared and customer questions and concerns should be addressed, in order to keep both new and existing customers satisfied.

When policies come up for renewal, premiums generally change. If you’re an independent agent, you’ll want to review their policy and determine if a policy with a new company is a viable option. Each independent carrier has their own claims department and way of processing a claim. As their agent, you’re there to take down the initial loss information and provide them the details of what will happen next. At that point, most adjusters ask that you exit the process and allow them to handle any questions or concerns.

If you’re a captive agent, you’ll want to review their policy so you can explain any rate changes, should the customer inquire. As a captive agent, you’ll also often be the first person a client sees or talks to after a loss. You’re there to take the claim and will often be the middle man between the client and the claims department. Your day is, simply put, about building and maintaining relationships with both customers and insurance companies.

Without a marketing plan in place, however, you won’t have a customer base to care for. Therefore, a good portion of your day should be spent working to reach your target audience. This is particularly true of an independent agent, who doesn’t have the support of one particular carrier’s name and resources.

What are some skills and experiences that will help you build a successful insurance agency?

As an insurance agent, you must have a fine balance of skills. While you spend your day selling policies, it’s important to genuinely care about your clients. You should possess a thirst for knowledge, as you’ll need to consistently stay on top of the latest changes and trends. Strong verbal and written skills are critical in building relationships with insurance carriers, underwriters, and customers.

As with everything in life, knowledge is power. The insurance industry is dynamic. While underwriting and claims processes change all the time, the basic principles remain the same. Before opening your own agency, it’s important to gain real-world experience. Most agents start out as an employee for another agent. This is an opportunity to gain a clear understanding of each element of the business and achieve the licenses needed to successfully run your own agency. The National Alliance for Insurance Education and Research has a curriculum to cover every aspect of the business and offers both self-directed and instructor-led classes.

The knowledge you gain will not only help you build a successful agency, it’s also what ensures you’re able to open your doors. To sign a contract with most captive carriers, you’re required to have a certain level of experience with their company. As an independent, there’s an appointment process. Most carriers won’t appoint an agent without several years of experience.

As previously mentioned, if you plan to write commercial policies, you’ll need to gain as much knowledge as possible about each industry. Start out learning everything you can about one or two. Become a member of the organizations that are important to them. Join trade groups, unions, and chambers. The more you know, the better you’ll be able to serve them.

Remember, your prospective clients are looking to you for guidance. Many of them don’t understand anything about insurance. How you treat them and conduct business is directly tied to your success.

What is the growth potential for an insurance agency?

Your agency’s growth potential is directly tied to the lines of business you choose to write. Many captive and independent agencies sell personal and business insurance, as well as life, health, and annuities. This ensures you’re able to care for all of your customer’s needs, further strengthening that relationship. As a captive agent, you will have guidelines regarding what you can write and when. Independent agencies are allowed a little more flexibility and franchising is a viable option once you’ve made a name for yourself in the insurance community.

What are some insider tips for jump starting an insurance agency?

When starting out, it’s critical to have a game plan for establishing an initial book of business. Many who are new to this business simply assume customers will find their agency once they open up shop. Few are ever so lucky. A realistic and solid customer acquisition plan is an absolute must when starting out. Before investing your first dime into your business, spend networking and learning from others who have successfully grown their insurance agency. You might even consider establishing relationships with insurance agencies selling different types of insurance products. Initially, they can help refer you new business, and you can return the favor as you grow.

How and when to build a team

Like most business owners, you’ll probably feel tempted to start out running your business solo. Unless you’ve decided to start out partnering with another agency, don’t give in to this temptation.

Remember, you’ll spend much of your time marketing to your target audience and meeting with various insurance companies. You’ll be building important connections within the industry. While it’s also important to build connections with your prospective customers, your staff is who will, ultimately, be handling the day-to-day interactions with customers. An experienced and knowledgeable employee will be your lifeline. Recruit, train, and incentivize early and you’ll build a staff that is loyal to both you and your book of business.

According to the Bureau of Labor Statistics, the median annual salary for an insurance agency’s staff is $48, 200. The top 10 percent earned more than $122,590 and the lowest 10 percent earned approximately $26,330. Most agencies pay their employees a base salary with a bonus, based on performance.

Read our insurance agency hiring guide to learn about the different roles an insurance agency typically fills, how much to budget for employee salaries, and how to build your team exactly how you want it.

Part 2 - Is an Insurance Agency business the right fit for you?

Part 3 - Action plan to launch your Insurance Agency business in 90 days