A New Kind of Startup

By | March 22, 2021

It is estimated that entrepreneurs created between 6,000 and 8,000 new independent insurance agencies over the last decade. Each of these entrepreneurs sought to create their own unique vision of the future. But their start-ups, while they may offer some twists, have been just new versions of a traditional business model.

COVID-19 is going to change all of that. It is providing the impetus to bring together innovations like Zoom (and other video conference technologies), work fractionalization and online communities to create new business models. I predict that in the next several years, there will be an explosion of newly created independent agencies that look much different than those of the last decade. They will be a hybrid of virtual and physical models, with many opting to have no physical aspects to their organization or management.

Lower Expenses

Virtualization offers the new agency owner incredible opportunities. The first is lower expenses. Obviously, without rent and associated occupancy expenses, agencies will be able to trim as much as 5% to 6% off of their expense ratios. This is a huge number that offers small agencies the opportunity to essentially increase bottom line profit by as much as 50%. For agency founders who live in high-cost areas, the savings may be even greater.

Another opportunity for savings is in employee expenses. Any casual glance at benchmarking surveys shows a wide disparity in salary expense based on geographic location. Virtual agencies can opt to hire employees in lower cost areas or take advantage of outsourcing. One outsourcing opportunity that can save new agencies a tremendous amount of money is the utilization of carrier service centers. These service centers cost an average of about 11% of revenue, compared with a traditional agency’s average customer service expense of between 20% and 25% (plus related costs like errors and omissions insurance, occupancy expenses, supervision costs and training). If a new agency owner only cuts service costs by half, they will double their potential bottom line compared to a typical agency founder of the past.

Another advantage these virtual agency founders will realize is converting fixed costs into variable expenses by outsourcing services like accounting. This fractionalization of overhead costs not only reduces overall expenses but makes agency management simpler, thereby allowing founders to focus on creating revenue. Another benefit of outsourcing and fractionalization is the flexibility to scale rapidly without a commensurate need for capital.

More Competitive

Virtual startups will have a built-in advantage in competing for commercial and personal lines with highly targeted and focused marketing and sales spread across unlimited geography.

While the typical agency may offer a number of niche markets, they can do so only in their local area. Virtual startups, on the other hand, are unrestrained by a physical location. They can hire producers anywhere and grow their niche markets in an unlimited fashion. Because producers no longer have to see clients in physical space, opting instead for meeting virtually, they will cover broader areas and be much more time efficient, resulting in potentially higher average book sizes. The producers themselves can be located anywhere in the country, creating a big opportunity for virtual agencies to secure top talent.

This kind of flexibility will prove to be important to a new generation of potential employees who, surveys typically show, want employment flexibility. Being able to employ producers located anywhere in the country also gives the new virtual founder additional and potent cost advantages with compensation.

Virtual agents will gain a similar advantage in personal and small commercial lines, which have become increasingly competitive for the local agent due to the increasing market share of direct sellers and other online vendors who are focused on price as a primary offering. Now, virtual agents will be able to turn their electronic capabilities into new ways to develop relationships with niche personal insurance markets located anywhere.

These new virtual startups will also enjoy lower marketing expenses by utilizing content marketing. Content can be created for highly specific groups of targeted customers, and, unlike traditional advertising, the agent does not have to find the prospects. The prospects will find the agent if content is relevant and compelling. Rather than spending to market to a few hundred or a few thousand prospects, content marketing can potentially expose the virtual agency to millions of prospects for the same amount of money.

Overcoming Challenges

While these tremendous advantages that are coming to the fore are attractive, there are challenges that virtual agency founders will face. One unique challenge is developing a cohesive culture and sense of teamwork. In response to the pandemic, many businesses are learning to use tools like Microsoft Teams and Slack (teamwork software) to foster communication, teamwork and culture at a distance. Still, most people would agree that face-to-face and in-person communication and teamwork is not 100% replaceable by digital tools. Founders will have to work harder to build employees, who are scattered about the country or even the world, into a highly cohesive team.

‘When the unique advantages of the virtual start-up are put in the hands of a new generation of agency owners who are comfortable and adept at not only using digital tools but also managing digital relationships, the result will change the face of the independent insurance agency.’

Another challenge virtual agency founders may experience is regulatory, especially if they will need to be licensed in a number of jurisdictions. The good news is that the management of licensure is easily contracted to a third party. For some agents, insurance carriers will represent an even bigger challenge. Insurance is a highly regionalized product market and competitiveness depends in some degree on being contracted with regional carriers who have specialized geographical knowledge and experience. As founders spread their wings across the continental U.S., they will need to work harder than a typical agency to develop these relationships.

Finally, future carrier compensation practices pose a potential challenge for all agencies. As insurance companies continue to grapple with expense control, this is likely going to result in pressure on agency compensation. The good news for the virtual founder is that their highly efficient business model will allow profitability even with lower agency compensation.

The New Independent Agent

When the unique advantages of the virtual start-up are put in the hands of a new generation of agency owners who are comfortable and adept at not only using digital tools but also managing digital relationships, the result will change the face of the independent insurance agency. These trends will also challenge what it means to be a community agency, as communities become virtual as well as physical.

Creating a new independent agency from the ground up has become increasingly easy to do over the last two decades largely due to the rise of market access providers and changing carrier appointment criteria. These new competitors have in turn caused existing agencies to change and improve. In the next few years, as virtual agency start-ups proliferate, they will not only create a new generation of independent agency success, but also teach and challenge the industry in ways that will cause all of us to be even better.

Topics InsurTech Startups

About Tony Caldwell

Caldwell is an author, speaker and CEO of One Agents Alliance, an alliance of 185 independent insurance agents in Oklahoma, Arkansas, Kansas and California. More from Tony Caldwell

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