How to Start an Insurance Company
The title of this post is; How to Start an Insurance Company. This term “Insurance Company” is often used by those looking to start their own insurance agency. As a result, this blog will focus on starting an insurance agency. The words Insurance Company, actually refer to a business that provides the insured with insurance coverage. The information we will provide you with here will give you some help in starting an insurance brokerage. This means we will provide details on how to start two types of insurance agencies. The first is an agency that focuses on production transacting business with clients. (Selling insurance policies of some type) The other type of agency is an agency that primarily recruits agents to work with them.
How to start an Insurance Company: You may decide to start your agency either on your own, with one other agent or broker, or as a partnership between many brokers.
However you decide to start your business it can be a great business to be in. The fact that insurance commissions generate residual income is one reason to consider this. Many insurance policies are paid continually over time. This means the broker and agency may receive payments every time the client makes either a monthly, quarterly or annual premium payment. Most policies do not need to be renewed on an annual basis. They will normally just auto renew every year if nothing is done. In the initial stages, it may help your cash flow to also sell products that have a front loaded or “advanced commission”. Selling advanced comp products will not help as much with recurring revenue but it will keep the lights on while you build up a book of renewal based business.
How to start an Insurance Company – Before you start your agency you need to decide what type of insurance your company will offer it’s clients.
Many independent insurance agencies opt to sell related types of insurance. If you decide to specialize in Health products you might also want to sell life products. Other companies may decide to sell Auto and Home policies. There are a number of combinations that go well together. Some agencies will offer all lines of business. While doing so is the ideal scenario, it can be difficult to stay up to date on rules, procedures and most competitive companies in all lines at the same time. Some combinations to consider are…
- Auto and Home, Medicare and life
- Investments (variable, RIA and Broker Dealer) and fixed interest insurance products such as annuities
- Health insurance (group and individual) and Medicare
- Medicare and Annuities
- Group health insurance/Sole Prop health insurance and disability insurance
There combinations above are just examples as there are endless combinations of products that can piggy back off of each other.
How to start an insurance company – Getting your license
The first step is to get an insurance license if you plan to sell insurance based products. The standard life and health license will allow you to offer Medicare, life, dental, health, fixed and indexed annuities, DI, LTC and all indemnity based products. If you plan to sell home and auto you will need a P & C license. Those planning to offer investments (Mutual funds, stocks, bonds, variable annuities or any other market based product) will need one of a number of securities licenses such as a Series 66,65, Series 7 or any of a number of other security based licenses.
Call your state insurance commissioner’s office or visit its website to obtain the checklist for a “resident business entity”. If you will be doing business in a state outside of your home residence, you need to go to that state’s insurance commissioner to obtain a “nonresident business entity” checklist. You can obtain a complete list of insurance commissioners, with contact information, at the National Association of Insurance Commissioners’ website (see Resource).
Consider making your business entity a limited liability company (LLC). The checklist from Step 2 should tell you if one business entity is preferred by the state over another. An LLC will reduce owner liabilities and is therefore preferred over other business entities.
Obtain errors and omissions (E&O) insurance. State requirements may increase the minimum coverage amount based on the number of licensed agents or brokers offering professional services. In California, for example, the minimum requirement is $500,000 plus an additional $100,000 minimum per license, up to a maximum of $5 million in coverage.
Complete the state forms required to make the LLC an insurance agency. These forms include a certificate of coverage for limited liability companies, appointment of a licensed producer and the resident business entity application.
Pay the applicable fees. Each state and insurance type is different, so review your state’s fee schedule on the insurance commissioner’s website.
Check with your state business tax boards to obtain all required business permits and licenses.
How to start an insurance company note on compensation paying to an agency:
If you plan to have all commissions paid to your agency, the agency will need to be licensed. Comp for insurance products cannot be paid to an entity that is not licensed. Getting a license for your agency is easy. Simply go to the NIPR website and apply for one.
- Owners of an insurance agency must be at least 18 with a clean criminal record. To obtain written consent to engage in business activities, any felony or misdemeanor charges must be explained in a letter to the insurance commissioner. All practicing agents or brokers must have a valid insurance license for the state where they are soliciting business and selling insurance products. Each state requires classroom instruction, passage of a state-administered exam and a clean criminal history as part of the license application process.
How to start an insurance company – Producing agency
If you and or producers in your agency want to write business, there are a number of steps you need to take before you start.
- Determine which product types you will offer
- Get contracted to offer the products – We offer contracting for agents and agencies – CLICK HERE FOR CONTRACTING KIT 2019
- Get a quote system in order to quote and compare plans – We offer a quote system to agents and agencies at no cost – CLICK HERE FOR RECORDED WEBINAR ON OUR QUOTE SITE
- How will you generate sales? The hardest part of insurance sales is getting in front of enough prospects.
- What type of lead generation will you use to get in front of prospects? CLICK HERE FOR PROSPECTING FOR MEDICARE SALES
Cash flow is one of the biggest issues for new agencies. Make sure you offer a mix of products that create recurring revenue (pays renewal commissions every year) and products that pay commission on an advance. Recurring revenue products and as earned revenue products are great for future earnings but they do not pay enough commission up front to support an operation in its early stages.
How to start an insurance company – Recruiting agency
Some agencies recruit other brokers to sell products through the agency. They rely on broker commission overrides in order to generate revenue. This model is a good one but it does have some drawbacks. There are a number of things to think about before starting a sub agent based agency.
- How do you plan to recruit agents? What are you going to offer them that other agencies do not offer?
- It takes a long time to build up meaningful revenue based purely off agent production overrides. How will you keep the lights on while you build up the agent base?
- What will the agents your recruit sell?
- You may want to give them access to leads, quote engines or other types of value added services
- You will need to secure general agent (GA) level or better contracts in order to get started. CLICK TO LEARN MORE ABOUT GENERAL AGENCIES
Crowe and Associates offers a number of the above services to our general agents. CLICK HERE TO LEARN MORE ABOUT THE SERVICES WE OFFER
How to start and insurance company – In closing
It is always easier to start an insurance agency if the person who owns the agency has experience writing the products they offer. Of course, you can do it without actual field experience but there are more challenges when that is the case. If the person starting the agency has their own book of business or some other reliable revenue source, it will buy them time to get the agency on its feet. However, you can use a business loan or other type of loan for start up cash in lieu of that.
The road to profitability is usually longer for recruiting agencies vs. producing agencies. Both models have their advantages and disadvantages. The biggest mistake with starting an agency is a lack of sound planning. A solid thought out business model/plan is essential when starting an agency. Those that start one up on a whim will almost always fail. An agency also requires a good deal of attention to detail. Someone who is a very sales oriented and does not like getting bogged down in detail may struggle with all the minutia of running an agency. When that is the case, it is a good to have someone at the agency that can handle the details.