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Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015

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INSURANCE TERMINOLOGY

Big I and PIA -- The two largest national associations of insurance agents in the United States are the Independent Insurance Agents and Brokers of America (IIABA, also known as the “Big I” because of its logo), and the Professional Insurance Agents of America (“PIA”). Each association acts as the umbrella association for its affiliated state and local associations.

Book of Business -- Unless otherwise categorized, this phrase generally refers to all of the policies written by an agency. Book of Business may also refer to a subset of policies written by an agency, often classified by an insurance company’s name (e.g., “the Hartford book of business”), by line (e.g., “the commercial lines book of business”) or by class (e.g., “the automobile book of business”).

Book of Business Value vs. Agency Value -- When an appraisal of an insurance agency is performed, it can be calculated for either a "Book of Business” or for the “Agency”.

When an appraiser has been engaged by a client to perform an appraisal, the appraiser often appraises only the intangible asset referred to as a Book of Business (i.e. the income stream received from the commissions related to customers that make up the “book of business”).

On the other hand, if an appraiser is hired to appraise “the Agency”, this generally refers to the determination of the entire value of the business enterprise, which includes intangible assets (e.g., the policies written by the agency), tangible assets (such as furniture, fixtures and equipment) and real assets (such as cash and receivables, buildings and land).

Unless the appraiser is qualified, the balance sheet value of tangible and real assets should be based on CPA prepared balance sheets whenever possible or on a valuation of these assets by an appraiser who is experienced and qualified to do so.

Commissions vs. Revenue & Income -- Commissions are paid by insurance companies to insurance agencies for the sale of policies. The terms “revenue” and “income” refer to all commissions, fees and contingency income (i.e., bonuses and profit sharing paid by insurance companies) plus all other monetary receipts of the agency or brokerage being appraised. Other monetary receipts may include interest income, sale of assets, risk management income and fee income (from customer fees as well as from administrative fees (like late fees), among other things. Commissions will equal revenues or income only when there are no other sources of income.

Commission Expense -- The commissions ceded back to producers of an agency who own the Expiration Rights associated with the clients that are placed through the agency being valued. The clients included in this category may not be “sold” by the agency being valued, since those clients are not legitimately owned or controlled by the agency being valued. Commission Expense also includes the commissions ceded back to brokers who own their clients and place them through the host agency. The balance of the commissions retained by the agency are justifiable operating income as servicing and administrative revenues for managing accounts placed through the agency.

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