*This article is part of a continuing series about how to maintain and grow the value of your insurance agency so it will hopefully be worth more tomorrow than it was yesterday. In this entry we cover the importance of having multiple and varied Sources of Income to create more value in your agency.
You can’t judge a book by its cover. Or can you? When it comes to the value of your agency, one of the most important considerations is assessing the quality of your book of business. And even though assumptions based on one factor are never wise, in the insurance agency marketplace there are many judgments made simply by looking at the “cover” of your book of business.
In this case, the cover is the names of the carriers and the lines of business you write.
Insurance agency value is always determined by numerous factors about the way an agency operates, many that we have already covered in this series. But if there is one common indicator that everyone goes to first, it is the type of carriers and the lines of business being written. It’s the “gut check” that everything else is measured against.
But you already know this. I spoke to an agency owner last week who proudly proclaimed the climb and struggle she had in starting her agency. First she wrote business through some regional aggregators who gave her access to markets, then she got appointed with a non-standard auto carrier, then a few more non-standard carriers and one of them had a tier for more standard and preferred risks, then she got Infinity, Unitrin and Progressive, which led to Hillstar, then she convinced Fidelity and Met Life Auto to give her a try, and the day she got her Travelers appointment she knew she must be doing something right. And now she’s chasing Mercury.
This is a typical pyramid of quality that is considered when looking at the value of your agency. Is it fair? Probably not. Should the agency that has 90% of their book in non-standard auto immediately be considered to have less value than the agency writing nothing but Hartford and Safeco small commercial lines? Probably not. But that is the reality of the marketplace. The explanation of why is based on perceptions about clientele and risk.
Remember, after considering all other factors, the value of your agency does come down to math and perception. The math is the amount of income you have coming in and the expenses required to generate that income.
The perception is whether or not that income will remain as is, shrink, or possibly grow. The perception of non-standard business is that it’s going to fall off the books. The perception of preferred business is that it’s sticky and isn’t going anywhere. Non-standard requires constantly writing enough new business to replace the business that’s lost. Preferred requires keeping existing clients happy so they won’t leave, which is easier than finding new clients. Non-standard clientele require more service, hurt your loss ratios, miss more payments, and would be with preferred companies if they could, so they continuously shop your rate and can’t wait to leave. Preferred clientele aren’t as demanding, have fewer claims, pay their bills on time, and aren’t likely to shop and move over a few dollars difference in premium.
Are these fair perceptions? Maybe not. But these are the perceptions of quality that determine how your book of business is viewed and how it is valued. And there are many of these perceptions out there:
- Preferred companies are higher quality than non-standard companies.
- Homeowners business is perceived as higher quality than auto business.
- Small commercial (under $25K premium) is viewed as slightly higher quality than preferred personal lines.
- Depending on the type of industry that is predominantly served, middle market and large commercial lines can be viewed as highly volatile and more likely to fall off the book than main street small commercial lines business.
Again, all of these quality judgments are based on common perceptions about the clientele and the risk involved.
But other factors also play an important part in the quality of your book of business. If you have 1,000 clients and 1,500 policies in your book that means you are averaging 1.5 policies per client, which adds to the quality and value of the book.
The average revenue per client is also an important measure in assessing the quality of your book. If you have 1,000 clients and $100,000 in annual income, that $100 of revenue per client doesn’t look nearly as good as the book that has 250 clients and $100,000 in annual income, which equals $400 revenue per client.
The value of your insurance agency is going to depend on many various aspects of how you operate your agency, but the quality of your book of business, meaning how the clientele and risk of fall-off is perceived, is one of the most important aspects of value that is universally considered. And while we always warn, “don’t judge a book by its cover”, in reality the cover of your book of business will weigh heavily on the value of your agency.
About the Author: Jerry Pickett is VP of Mergers & Acquisitions/Client Consulting with Agency Acquisitions – an Astonish Results Company (www.AgencyAcquisitions.com). Agency Acquisitions works with agency owners to help maximize the value of their agency, perform agency valuation analysis, and handle all aspects of acquisition transactions for sellers and buyers of insurance agencies. Contact Jerry @ 614.859.9606 or email: jpickett@astonishresults.com
