It’s been a minute… but it has been a busy few months for our group! After a few recent interactions with agency owners, I felt this article may be helpful to those looking to start their own independent property and casualty agency. I have been fortunate in my position to observe some similarities between successful agency owners in how they position themselves for their first year in business. Here are just a few pointers that might be useful:
1. Setting Up Your Business Structure
Do this the correct way from the start and you won’t get bogged down after launch. Many agency owners come to our group from the captive channel. In the captive agent environment, Sole Proprietorship is the preferred setup. This structure is sufficient when you are under the umbrella of a large corporation but can be a roadblock when trying to open your own independent agency. For example, to obtain your agency license from the department of insurance, you are required to have a higher-level business structure beyond Sole Proprietorship.
Why does this matter? Because many insurance carriers will require an agency license to obtain an appointment! Setting up an LLC is generally inexpensive but can take some time. Try to start this process early and you can get off the ground quickly once you seek carrier appointments.
In addition to being a requirement for agency licensing, setting up a higher-level business structure can protect personal assets if legal issues happen to arise. Although this is unexpected, it deserves consideration and should be thought through as a new small business owner.
2. Writing a Business Plan
Take some time to put together a business plan. It doesn’t have to take months of sleepless nights to get this completed, but is a worthwhile process done consistently by the most successful agency owners.
Here are a few elements to think through… Put some thought into your goals for the first year and how you will measure success in obtaining those goals. Who will be your target customers and how will you market to them? What will your financial situation look like during that first year? How much business/premium do you need to write to have success? Where will your office be located and how will you line up your budget in the first months and years of your agency?
There are dozens of questions that you want to think through, but the point is that you take some time to think about your business. Here is a place to start from the SBA if you would like more specifics on how to write a successful business plan:
3. Gaining Access to Carriers
This will take time and research. As with the business plan, the point is that you take the time to think about how you want to access carrier product and if it will allow your business to grow without getting ‘stuck’ with an MGA, Group, Franchise, or Aggregator. Try to think ahead. Where do you want your agency to be in five years? Will the decisions you make today allow for growth and flexibility? I wrote an article on this a couple of years ago that goes into more detail, you can find it HERE.
Also, it will help to have the correct perspective when considering the number of carriers that can be reasonably maintained. Many agency owners think ‘the more the better!’ This is generally not the case. Remember that each carrier will be different in underwriting guidelines, appetite for business, and customer service procedures. In my experience, after five years, most agencies write 80% of their business with about five carriers and 95% with their top ten. Do some research and try your best to partner with carriers that are established in the market and have a long-term plan to stay there. Try to avoid carriers that don’t know your geographic market and might be underpriced, and therefore gone the next year.
4. Having Sufficient Capital
Make sure you think about how you will survive year one financially. It is amazing to me how many prospective agency owners don’t know how long they can pay the bills without monthly income from their new business.
Think through the business cashflow… when you write a policy, how long is the sales cycle? Once you bind the policy, does the carrier pay once funded? Most carriers pay commissions once a month, so what if you miss a new business deadline and payment is pushed back another month? Take the following example into consideration:
Your client, Marc Cuban, was referred to you by his mortgage lender (BTW, he has a pretty nice house). Marc is closing on his house next month and you just wrote his policy 20 days before closing. The policy will not be bound until then and then the mortgage company sends a check to the carrier that arrives 15 days later. This carrier does not pay until the policy is funded and, as luck would have it, you just missed the new business cutoff for the month.
In this case, you may not receive commissions for this policy until 90 days after you wrote it!
This example is a bit extreme, but it happens more often than you think. Be aware and be prepared. Cashflow is not immediate when starting a new agency. My suggestion is to have at least six months of expenses in the bank in case the agency cash flow takes longer to ramp up than expected.
5. Timing and Execution
I have mentioned this in previous articles, but the first 6-12 months are the hardest! If you know this, it is much easier to handle the tough days. Setting up the business and business processes to be operationally efficient takes time, there’s just no way around it. You can lay a lot of groundwork before day one, but there is still a ton of work to do that won’t be on your radar until you get up and running.
Part-timers don’t make it. This IS a business that can be done on the side OR as a complementary business to your full-time gig, but I have yet to see this situation last for more than a couple of years. The successful P&C agency owners are the full-timers—those that immerse themselves into the day-to-day success of their agency and take the time to build it.
If you are serious about building a successful agency, do it full-time and execute your plan. ‘Embrace the suck’ of the first 6-12 months and, after that time, you will wonder why you didn’t start your business years ago!
If you can accomplish the list above, you will have a much better shot at making year one successful as an agency owner. Stick to your plan and don’t get discouraged. If you think ahead, you will benefit from a perspective that will yield calmness in the storm of starting a new business. I wish you the best of luck with your independent agency and, as always, please reach out to me if I can help you think through the specifics of YOUR business.