The insurance industry’s problems may spell opportunity for enterprising young insurance agents. According to a 2016 study by The Jacobson Group, 25 percent of the industry’s workforce is expected to retire by 2018.
Terry O’Reilly, president of agency network Insurance Pro Agencies, has seen reports that the average age of insurance agents is 59, and one-quarter of them will retire in the next two years. “There is tremendous opportunity for younger agents,” he says. Marc Greene of agency mergers and acquisitions specialist General Insurance Brokerage couldn’t agree more. “I tell my 13 year-old, ‘P&C (property and casualty) is not a billion dollar business, it’s a trillion dollar business!’”
In order for agencies to seize those opportunities, they need to be ready with access to capital, sound credit profiles, and well-used technology. That does not happen without a lot of advance preparation and work. Jon Persky of consulting firm Optimum Performance Solutions believes agents need to learn their trade over 5 to 10 years before jumping into running an agency.
They also need the ability to borrow money, and that starts with good credit ratings. “Live below your means, save up cash and clean up your credit,” advises Mike Mensch, managing partner with M&A specialist Agency Brokerage Consultants. O’Reilly says that many agents have credit problems before they start. He recommends that they obtain copies of their credit reports and pay off all past debt before buying or starting an agency.
If they are already running agencies, they need to watch income and expenses. Greene finds that the compensation many agency owners are paying producers is not commensurate with their production. “If you are paying a guarantee, be sure to monitor monthly production,” he says. “Why pay a $50,000 base if they only bring in $35,000 of new business?”
Persky sees poor or non-existing budgeting as the greatest problem. Agents need personal and agency budgets built on realistic assumptions. Agents should develop a strategic plan, he says, and build the budget around that.
Even the best-run agency will likely not have enough cash on hand to buy another agency that comes up for sale. Several financing options will be available to an agency owner with a good credit history. The particular situation will dictate the appropriate type of financing. Mensch notes that U.S. Small Business Administration loans usually have the lowest interest rates and 10-year amortization schedules, but the maximum loan is $5 million. “That is likely enough capital for the average buyer,” he says, but he also has some clients who borrow more than that annually for individual acquisitions.
Greene says it is rare for a seller to provide financing. Mensch says that sellers who agree to hold the note generally want the loan to be for a short term. That could cause cash-flow problems for the purchaser trying to make debt payments. O’Reilly recommends basing seller financing arrangements on a percentage of commissions from policies that renew during the purchase period. The agreement should require the selling agency owner to help retain important accounts, and ease the transition for clients by remaining partially active in the agency. “This method will prevent the new owner from paying for accounts that they were not able to retain,” he says.
A new or newly merged agency needs to operate as efficiently as possible. That means using technology well, something agencies struggle with. Persky says that most agencies use less than 50 percent of their agency management systems’ capability. Mensch urges agencies to adopt modern marketing techniques. “I’m often surprised,” he says, “at how poorly many agencies communicate with prospects and clients.” Persky says that agencies need to use social media and mobile technologies. O’Reilly agrees. “Top agencies keep up with technology while average agencies decide not to learn new technology and get left behind.”
To prepare themselves now for future opportunities, Persky emphasizes education for agents to improve their effectiveness and reduce errors and omissions risks. Greene stresses the importance of learning how to manage people, noting that some sellers are leaving because they don’t know how to handle personnel issues. Mensch says they should be proactive about finding acquisition opportunities through networking with other agents, marketing reps and dealmakers.
Persky says a successful agency is one that sets standards for itself and meets them. He suggests setting maximum times for responding to customers, vendors and job applicants. This will make it less likely that people will feel ignored.
The number of insurance practitioners is about to decrease dramatically, but the demand for their services will not. Younger agents who watch their credit, borrow carefully, and embrace technology will reap the benefits of that demand.
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