Even as they look back on several years of steady growth and success, many owners of independent insurance agencies now find themselves at a crossroad where they are pressed to make critical strategic decisions about the future of their firms.
Ongoing consolidation, intensifying competition from direct writers, large brokerages aggressively pursuing middle market accounts as well as their experienced producers, and the imperative to invest in new technology are among the developments that have created an increasingly challenging landscape for independent agencies.
Shifting Realities for Agencies
It wasn’t too long ago that independent agencies got their business locally and were able to grow from walk-ins, yellow page ads and mailings for auto, home and small business.
Commissions in those days were adequate, and premiums increased fairly regularly at 5 percent to 10 percent a year, as insureds needed greater protection and carriers raised rates. Renewals could be counted on to sustain the business and the agency ownership would typically be passed within the family. Competition came primarily from other independent agencies and captive agents.
Then, the internet came along, and changes began to occur. While most agency business historically took place face-to-face, a growing number of insurers are opting to circumvent the agency distribution system by selling directly to consumers using online platforms and by phone.
More small and mid-sized agencies are finding success by joining an aggregator.
Today, auto, homeowners and small commercial insurance policies are being sold over the internet as more companies are offering individual and small business insurance policies online and customers are becoming more comfortable making purchases this way.
Of course, many agencies and brokers are still getting their share of the business, but it’s less profitable as insurers lower rates and reduce agency compensation. Even though midsize and large agencies and brokers increased their premium growth by approximately 4.5 percent in the past year (from 4.2 percent in 2016), EBITDA (earnings before interest, taxes, depreciation and amortization) grew by only 0.4 percent, according to the Reagan Consulting Group’s Organic Growth and Profitability Survey.
Someone Moved Their ‘Cheese’
Today as they look for the best way forward, owners of many independent agencies must weigh the pain against the potential gain associated with each of the following four options.
1.Go It Alone.
This route often calls for making what can be substantial investments to recruit and train personnel as well as for technology upgrades and ramped up sales and marketing efforts. Often, this can be an uphill battle when as many as 50 percent of the sales people recruited in the insurance industry fail to meet their validation (i.e.: commission vs. draw). That makes it expensive to bring in sales people, train and manage them and have them be profitable over the long-term. Firms will need significant financial and human capital resources to pursue this strategy.
2. Sell the Business.
As reported by investment banker Optis Partners in its Agent & Broker 2017 Merger & Acquisition Update, a record 600 independent U.S. property/casualty insurance agencies were sold or merged into other firms in 2017. Even though the trend reportedly has slowed this year, it remains a popular option for agency owners.
Those facing this option must answer a difficult question: Are they selling because they want to or because they have to? While the payoff of cashing out may seem appealing, it doesn’t come without a cost. Sellers typically lose control of the direction of their business and status of their personnel, and they are often required to remain in place for a defined transition period that can be several years.
For entrepreneurs used to being owner/operators, it can be a difficult adjustment to become another firm’s employee. Sellers also may face the challenges of living on a limited budget and declining income stream as they enter their later years, especially if they retire too early. Ultimately, potential income shortfalls may mean lifestyle compromises as they enter retirement and grow older. Notably, 40 percent of those retiring at age 65 have gone back to work, according to a 2017 study by RAND Corporation.
3. Managed Decline.
This strategy calls for accepting the fact that without making necessary investments in the agency, it will lose business and shrink in size. As sales decline, agencies going this route reduce expenses and maintain margins until the firm sells what’s left over or closes its doors. In the early stages of this strategy, an agency may be able to maintain its income. As the company’s revenue stream declines, it’s reducing overhead. By saving and investing some of the profits, the owner can prepare for retirement and remain self-employed. The longer the owner works, the longer he/she can delay living off of retirement savings.
4. Pursue Growth with Assistance.
More small and mid-sized agencies are finding success by joining an aggregator, which enables them to remain independent while achieving stability and growth. The larger aggregators offer additional markets, ongoing staff training and higher commissions. This concept works well in conjunction with options one and three above.
Today, 25-to-30 percent of independent agencies in the U.S. are part of a network. As agency leaders revisit their business strategies to address the realities of the current environment, they might explore how working with an aggregator can help them reach their goals.
This article was originally published in the June 18, 2018 issue of Insurance Journal magazine.
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