How to Start Your Own Insurance Agency
Interested in Starting Your Own Independent Insurance Agency?
Well, I started out my own insurance agency from scratch. I never had any insurance training. Or even any experience selling or dealing with insurance.
But throughout my life, I always thought insurance was a weird thing. We're required, even if we believe otherwise, to purchase and have insurance. Every year, I easily spend over $1000 on auto insurance and another $2,000 in health insurance. And a couple thousand more in homeowners insurance, flood insurance, and life insurance. I do also own a small business, so we pay insurance on our commercial vehicle, employee health insurance, worker's comp, liability insurance, and a different set of error & omission insurances as well. It's a lot of insurance, but to date, I haven't been able to use any of them yet!
Of course, insurance in theory is a nice thing. Many of us all pitch in to cover for the few that may suffer a loss. Insurance is great when we need to use it. But for the many of us that end up never using it, it's a lot of cost to have to deal with.
Anyway, I thought it was a lucrative business to get into. So I did. And this is how I did it.
Business Model of the Insurance Agency
Like in all my Hubs, I like to talk about the business model of a given business right up at the beginning. It's always nice to know the money aspect of the business before doing anything further.
The business model of an insurance agency is all about building a book of business, or in simpler terms, building up your clients. Why? Because you get commission on the new business that you write and better yet, you continue to get commission as long as your client keeps renewing the policy with you. So it's all about client services, building up your client list, and keeping your clients happy so that they will stay with you throughout the years of your career.
As you know, insurance agents work on commissions. Here are an approximate commission amounts for each of the different insurance products you may write:
- Personal Auto: 12-15% Commission on New Business, 10-15% on Renewals
- Health Insurance: 15-20% Commission on New Business, 10-20% on Renewals
- Commercial Insurance: 12-20% Commission on New Business, 10-20% on Renewals
- Life Insurance: 80-120% Commission on New Business, 2-10% on Renewals
- Homeowners & Flood Insurance: 12-20% Commission on New Business 12-20% on Renewals
So as you can see, by building up your client list, you can have residual income as long as you service and keep your clients happy. It's really a pretty cool business model.
You can also make additional money at the time of new business in the form of a broker fee. A typical agent may charge somewhere between $50-$300 as the broker fee, and this is on top of the commission you will receive from the insurance company.
People in the industry will say that you can make more money servicing business clients because commercial insurance policies are much more compared to the personal insurance. Would you rather earn 12% on a $400 policy or a $4000 policy? Being able to service commercial clients will mean higher premium which means higher commissions for you. The problem with this is that commercial insurance will typically require additional training and experience because to be a good agent, you'll need to understand your client's business and its risks.
So this is how the business works. If you're excited enough, I hope you can read through the remaining portion of this guide so that you can set up your own insurance agency!
Little Disclosure before Going Further
This HubPage only covers insurance agencies that want to operate and get licensed in the State of California. This is where I got my license, and worked as an insurance broker. Each state has its own rules, so if you are in a State other then California, you might want to use this manual only as a guide to understand how the industry works in California, and how it may work in your state as well. For you people in California, I tried to go through each and every step to start out your own agency.
If you've been working in the industry for a while, it maybe a time to get your own insurance agency up and running. It's never fun to have to split commission with your broker.
Step Number One: Get Licensed!
The first thing is first. You need to get licensed. You need a license to sell insurance in the State of California. To get a license you'll need to contact the Department of Insurance.
The Department of Insurance's website can be found on Google right away. Be sure to go to the California Department of Insurance's site. Not New York, not North Carolina. But California. There, you can find all the requirements to become an insurance agent.
When starting out, there are only three options of licenses you can decide to get:
- Personal Lines: This allows you to sell, personal lines, or non-commercial insurance products. Mainly the biggest insurance product in this category is the Personal Auto Insurance Policies and Homeowner's Policy.
- Fire & Casualty: This license is sort of like an advanced Personal Lines license, where you can sell Personal Lines, AND Commercial insurance. Examples of Commercial insurance products are like commercial auto, business owner's insurance policy, and professional liability insurance.
Since the Fire & Casualty and Personal Lines have similar educational requirements, I would recommend getting your Fire & Casualty license instead of the Personal Lines. The benefits as to getting the Fire & Casualty license far exceed the Personal Lines. You'll just need to study a bit harder for the test.
- Life Agent: This license is completely different from the two above, and allows you to sell health and life insurance. For some reason, getting into business as a Life Agent is much easier then through a Fire and Casualty license.
With regards to becoming your own boss and operating your own insurance agency, I would recommend you to get both the Fire & Casualty license as well as the Life Agent license. By obtaining both, you become capable of selling auto insurance, commercial insurance, life insurance, and health insurance. The versatility will lead to increased business opportunities for you because you can cross-sell to your clients.
Step 2: Go to a One Week Course & Take the Test
There are several schools you can attend to satisfy the educational requirements to take the test with the Department of Insurance. Two of the most popular schools are Kaplan Financial (http://www.kaplanfinancial.com/) and AdBanker (http://www.adbanker.com/). Personally speaking, I attended both classroom sessions (one for life & the other for F&C) I thought that Kaplan Financial did a much better job teaching the class then AdBanker did. I'm sure it all depends on the teacher though.
Anyway, complete the one week course, and apply to take the licensing exam. Insurance exams have the rumor to be relatively easy, but that seems to be not the case. You better study for it, or you will likely fail. It's pretty difficult to pass.
Once you pass the exam, you'll be licensed as either a Fire & Casualty broker or a Life Agent. Preferably, you want to see both designations on your license. Regardless, after you get the license the you can start working to build your business.
Step 3: The Legal and Administrative Things to Do
Organizational License or Not
Although this is not required, you should consider forming a LLC or a corporation for your agency business in order to protect yourself from any personal liability claims that may end up costing you everything you own in your life. The decision to form a LLC or a corporation is an entirely separate issue, and I recommend you read books from Nolo.com or talk to a CPA or a lawyer to see if this is something you should do.
I do personally recommend you form some type of legal entity. And by doing so, you will need to get an organizational license with the Department of Insurance. You are able to get an organizational license as long as you or one of your officers has a valid insurance license.
An organizational license will cost you a few extra dollars but it is recommended. Rather than advertising your agency as John Smith, Insurance Agent, you can advertise it as Smith Insurance Services, which does have more credibility to your name. However, the decision is up to you.
Once you have your license(s), you will need to obtain a surety bond. A surety bond is similar to an insurance where the surety bond company may pay a consumer for the any contractual agreement or services that you fail to deliver to your customer. They are basically a guarantor that you will be taking care of business to your customers.
Surety bond for the insurance agency was relatively inexpensive. When we got our surety bond, it was good for three years, and it was less than $100 for the three years. You can find companies that sell Surety Bond for an insurance agency by using a simple Google Search or through an industry journal like Insurance Journal
One of the biggest obstacles for in starting up an insurance agency is obtaining your errors and omission insurance (E&O) for Property and Casualty. An E&O insurance protects you, the agent; from any errors or omission that you have performed that caused a significant loss to your clients. Standard policies start at $1 million of liability coverage, and insurance companies that you want to work with will expect you to have that amount of coverage.
Since new agents are a huge risk for E&O insurance companies, it will be extremely difficult to even obtain a quote with an E&O company. If you are an established agent with at least a few years of experience, it should be a little easier to get an E&O insurance. However, for new agents that are starting out of scratch, you should run into a lot of hard work, as I did.
After a rigorous search, online and through insurance related forums, I was able to find a company called Colony Insurance. After talking to them and persuading them that we will not be a significant risk for the E&O Company, I was able to get an E&O insurance from them for about $3000 a year.
On the contrary, it was much easier to obtain an E&O Insurance on the Health & Life side of the business. Generally an E&O insurance in this side of the industry will cost you approximately $500 a year, and Blue Shield had a great program that I was able to use right away. It is recommended that you start off right away selling health and life insurance to your clients, and with that experience move to the P&C side of business. E&O companies in the P&C side will like the fact that you've been selling insurance in the past, and they will be more willing to give you a quote for insurance.
CRA stands for a Commercial Requester Account with the DMV. Basically, this is something you will need to setup with the DMV if you expect to sell personal auto or commercial auto policies. It is an application process that takes roughly 2-3 weeks, and it verifies you so that you can access DMV records. You will need this account prior to setting up some software in the next section.
Step 4: The Software
As an independent insurance agency, one of the biggest advantages that you can offer to your clients is the fact that you can shop around for insurance. Ever wonder how we can shop around for insurance for our clients? Well it's very easy these days thanks to the software we have available. The following software applies to mostly personal line items, like auto insurance.
FSC Rater by Fiserv is the standard quoting system in California. (http://www.fiservfsc.com/) FSC Rater is a pretty fascinating tool, and it lets you glance at any given insurance company's rate all in one click. You simply enter the insured information, i.e. name, address, driving experience, driving record, and they coverage that they want. FSC will then come up with a quote for the companies you work with.
The amazing thing about the FSC Rater is its ability to quote any insurance company insurance company that write insurance in California. So have you seen that Progressive commercial which claims it will come up with quotes of other companies? You can basically do the exact same thing on FSC Rater, but with any company. You can even get a quote for companies that you don't do business with.
The most efficient aspect about using the FSC is a feature called "Bridging." Basically, "Bridging" means you can transfer all of the data that you entered into FSC into the insurance company's own system. You "bridge" the data into the insurance company's system. You won't need to re-enter data, and the quote information should match what you saw inside FSC Rater. All you need to do are some final approval processes and authorization to bind the insurance with the insurance company.
FSC Rater is a great tool, but it does come at a fee though. You have to expect to pay a monthly fee of about $285 a month per single license of FSC Rater. It's not cheap, but you'll need to consider it as a cost of doing business if you plan to do personal lines insurance.
You can call FISERV to setup an appointment so that they can do a demo for you. It's free for a demo, so I would recommend you get it personally so that you know exactly how FSC works and what its features are.
American Driving Record (ADR) & Motor Vehicle Report (MVR)
MVR is a commonly used report when writing auto insurance, and it stands for Motor Vehicle Report. Basically, this is a report of your driving record. It is supplied by the American Driving Record (http://www.mvrs.com/) and through the use of their software called Comprise, you are able to bring up any person's driving record as long as you have their California Driver's License Number and their last name.
This is a required tool to get to provide your clients with accurate quotes. You will need to run a MVR for each client, and enter their driving record into the FSC Rater to account for any violations or accidents that they may have been involved in.
The MVR does again have a fee associated to it, and it is about $3 per report you obtain through them. By using the "Instant" feature, you can bring up a driving record of your client immediately.
Agency Management Software or Customer Relationship Management Software
Once your agency starts to grow, and you have considerable amount of customers in your books, there may come a time where you can invest in an Agency Management Software. Basically, an Agency Management Software helps you keep track of your clients in terms of their renewals, cancellations, and any other customer service and management related issues. FISERV, the company that provides the FSC Rater also has a software called the FSC Manager that you may want to get at a later time.
Customer Relationship Management software or CRM may do similar things. Personally, I use a CRM software over an Agency Management software because of the type of business we are in. The solution we use is provided by Salesforce.com, and it's a very user friendly tool that helps us to keep track of our customers. The fact that it is an Internet based solution is extremely helpful, and it allows you to access information in and out of the office. CRM will allow you to improve your sales processes along with customer service processes, and we found it extremely useful managing our customers and keeping them happy.
Step 5: Getting Appointed with Insurance Companies
If being able to obtain the Errors and Omission insurance was the hardest thing, the next most difficult thing on you "To Do" list will be to get actual appointments with insurance companies. Here you are basically asking the marketing representative at each insurance company that you want to work with them, and it is in their best interest to do so. You'll need to convince them that you will be able to write a certain number of businesses each month so that it will be worth their time in order to appoint you to write insurance for their company.
It usually helps for you to have a business plan, and how you plan to maintain and grow the amount of business you write for them on a monthly basis. The insurance companies want to see realistic numbers so that it's worth their time. The first company will always be the most difficult to get appointed with. It helps if you have some connections or know some people within. If not, convince them through your passion and business plan that you are serious and will be good to do business with.
The first company that appointed us was AIG Auto. The company was great because AIG is always looking to expand their market, and they had a system that didn't require us to have FSC to start out with. At the initial phases of the game, forking out $280 a month for the FSC Rater with no appointment with insurance companies was a big risk to take for us. AIG accommodated us well, and we've been working with them ever since.
One thing that gave me hiccups when I was filling out the appointment application forms with the insurance companies was what they called "Loss Ratios." At the start up phase I had no idea what that was, and I didn't know what to put on the application; especially because I didn't have any business or loss ratio to refer to.
Loss ratio is basically the amount of loss your clients have versus the amount of premium you write with a given insurance company. It helps to understand what kind of market of customers you typically serve. The lower the loss ratio, the better since that means your clients are not getting in an accident and making money for the insurance company.
To give an example, say you have 10 customers, all with an annual premium of $1000. You have written $10,000 worth of business given that all of your clients stay with the insurance company until the policy expires. One of your clients gets in an accident. The accident ends up costing the insurance company $10,000 to fix the other person's car, and pay for their medical. At this point, your loss ratio will be 1 (100%), or $10,000:$10,000. You've written $10,000 but your client has cost the insurance company $10,000. They are at a break-even. You'll need to write more business to help the insurance company make money.
Insurance companies know that insurance works in the law of averages. They prefer loss ratios of 50% or lower. If for some reason you have a market that seems to get into more accident then the average, they may decide to fire you later. At the start up phase, they may decide not to appoint you.
Managing General Agents (MGA)
A managing general agent (MGA) is a person or firm authorized by an insurer to transact insurance business who may have authority to bind the insurer, issue policies, appoint producers, adjust claims and provide administrative support for the types of insurance coverage pursuant to an agency agreement.
Basically, these are middleman that can help the smaller independent agents like yourself and me. In some cases, getting appointed with a certain insurance company becomes not favorable or feasible because you know that you will not be writing enough business for them. As an example, say you have a cousin that is a plumber and that allows you to write a commercial insurance policy in this category each year. But because that's not your core business competency, it will be very difficult to find and get appointed with an insurance company that writes these kinds of business. So in cases like that there are companies like Insurance Noodle, which will allow you to be able to work with companies that write insurance in this industry.
By using a MGA like Insurance Noodle, you will need to split commission with them. However, it allows you to become more versatile in offering different product lines to your consumer base. Many agents use Insurance Noodle and other similar companies with great success.
Step 6: Market Your Business and Sell, Sell, Sell!
So at this point, you are ready to get yourself rolling and start selling insurance to everybody around town. As in any business, marketing is the single most important aspect of running your own insurance agency.
Each of these sections are a whole different post, and fortunately for you, I have posted a lot of good information for you already. Be sure to check it out.
Here's another link for a retail sales process that I posted. This post is related to a cell phone store sales, but you should be able to used it in insurance as well.
You should also check to see if owning your own business is right for you.
Step 7: Associations and Continuing Ed
Once you have everything in place, and you are selling insurance, it is time for you to start networking with other agents and representatives from insurance companies. There are several associations you can join to exchange information, learn, and network with other agents.
It is recommend that you join one or two of these associations once you have the time and resources to attend their meetings, and get the most benefit out of these associations.
Latin American Agents Association (626) 444-0999
Western Insurance Agents Association (800) 553-4221
Insurance Brokers and Agents of the West (800) 772-8998
And Many More...
Continuing education is key to making a career out of what you do. The State of California continuing education requirements that you must satisfy every couple years, and most of them can be done online. They are basically there to keep your knowledge in the insurance industry as current as possible to maintain your professionalism in the job.
If you are ambitious enough, you can also try to go get advanced insurance licenses such as:
- CLU® - Chartered Life UnderwriterTM
- ChFC® - Chartered Financial ConsultantTM
- CASLTM - Chartered Advisor for Senior LivingTM
- RHU® - Registered Health Underwriter®
- REBC® - Registered Employee Benefits SpecialistTM
- CPCU® - Chartered Property Casualty Underwriter®
- ARM® - Associate in Risk Management®
- AIC® - Associate in Claims®
It is really up to you as to how motivated you are, and how successful you want to be with your career.
Thank you for reading this far and I hope that the information contained in this HubPage was beneficial for you. I am constantly striving to improve this page so please email me for any questions, comments, clarifications, corrections, or your personal experiences in your road to making your own agency into reality.
Thank you and best wishes to you all!