Questions You Must Ask Yourself
Insurance Experience Is Required
Being Successful Requires Being or Becoming a Businessperson
Staying Alive Long Enough to Thrive
I believe that the coronavirus, and related economic crisis, have created the best time in the history of the world for starting an independent insurance agency! You may think I’m crazy, but before you write me off as a nut please consider that I’ve started and operated my own successful insurance agencies several times, and my company has helped over 250 other entrepreneurs create successful businesses. We have a track record from which I make this incredible claim.
In addition to that, consider that recessions always create unique opportunities for any business startup, including lower costs, increased availability of talent, and lower risk.
Let’s look at those in turn.
In recessions, all costs go down. Office space and real estate become cheaper as vacancies rise due to business contraction and failure. Equipment is available often for pennies on the dollar. Virtually everything a new small business needs to get started is cheaper, including talent.
While recessions result in higher unemployment, savvy business creators use the opportunities to hire people, often with lower (or creative) compensation. But even without lower labor rates, it is much easier to hire people for a start-up (which potential employees often view as a career risk) when unemployment is high. Sometimes the founders themselves are unemployed, which is the ultimate availability and opportunity.
It’s also easier for successful agents to get appointed during a recession because carriers need revenue as they experience top-line declines. Plus, carriers tend to moderate price increases (despite the fundamentals in their books) to retain business and market share. As a result, businesses like insurance agencies, which have distribution limited by the maker (in this case, the carrier), also find it’s easier to get access to great insurance products to sell.
The COVID-19 crisis represents other unique opportunities for the agency entrepreneur:
Insurance carriers need for organic growth to offset premium losses
Universal personal and corporate need for cost-cutting
Opportunity to leverage technology to broaden the market
Opportunity to leverage technology to attract high-quality talent
Coincidental hard market
Adoption of low-cost service strategies to create the budget for marketing and sales
It’s become easier over the last decade for start-up agencies to obtain the right to represent top quality insurance companies. That ease is enabled by agency alliances, which help high-quality agents start their businesses with a solid carrier set. But in an economic environment in which many companies will experience 10 to 20 percent top-line revenue decreases, they will be more willing to appoint new agencies with solid new business capability, for professional liability insurance, life, health, auto, and all other types of insurance.
With a 10% or greater contraction in the economy during 2020, along with massive unemployment and widespread uncertainty, clearly everyone will be trying to reduce expenses. This could effectively put every insurance policy in the country up for grabs, meaning that existing insurance agencies have to focus time and attention on playing defense. Besides, experience shows that many agencies will not make the necessary efforts at retention, which adds to this unique, perhaps once-in-a-lifetime opportunity for new agencies to grow revenue rapidly selling insurance to other agency’s customers right under their noses.
Agencies have moved increasingly to digital tools, to increase speed and efficiency while lowering expenses. New agents can create their business from the ground up with this technology, giving them an advantage in the marketplace against incumbents who use more traditional, slower methods.
One of the ways aggressive agents are building books now is through the use of Zoom and other remote technologies for prospecting, insurance sales, and building relationships. This technology, which was widely and suddenly adopted by businesses and consumers alike, dramatically expands the market for a new agency. It is easy today to sell and service insurance anywhere in the country. The new entrepreneur can and will approach technology creatively to increase opportunity while many older agencies play catch up.
While recessions always grow the talent pool, this one is unique because the same technology that is now widely adopted for prospecting and selling (Zoom, etc.) can be used to recruit and manage employees located anywhere. This is a huge opportunity for new agencies, particularly those located in remote areas with a small employment base. Other technologies like Slack and Microsoft Teams allow agencies built for distributed employment to create and reinforce culture and teamwork as if they were all in the same office. They also widen your market, since employees based in different states are licensed to sell in other areas, thus adding to your potential customer pool while keeping the insurance commissioner happy.
The new entrepreneur can and will approach technology and social media creatively to increase opportunity while many older agencies play catch up.
COVID-19 is creating a crisis of confidence in the agency system among young employees who believe they work for agencies who can’t or won’t keep up with the times and provide appropriate mentoring and training. In a recent survey of 400 independent agents conducted for Nationwide Insurance, 62 percent of agents aged 18 to 39 said the virus has them questioning whether to exit the industry. This is a huge opportunity for talent recruitment by entrepreneurial start-up agencies.
The industry entered 2020 with a growing hard market in commercial property and continuing hardening in commercial and personal auto. The premium rebates and other carrier actions have masked the impact to customers of those market conditions. Plus, COVID-19 itself is creating a lack of availability and price increases for some market segments and lines of business.
These price and availability issues are just now being recognized at a time when businesses try to figure out how to either stay in business or avoid losses. Hard markets are always a great opportunity for new agencies; this one is unique in magnifying the other issues we’re discussing, making its impact that much greater.
Finally, a terrific way to control servicing costs is to use carrier service centers at a cost of about 11% of revenue, compared to agency employment expense which typically runs closer to 25%. Many existing agencies have resisted these tools, so new agencies with enlightened thinking can turn this into a cost advantage, allowing them to deploy saved dollars into sales compensation or greater marketing investments, both of which allow faster growth.
Some of the advantages I’ve discussed are typically available during any recession. Some are unique to the current environment. It’s the combination that creates such amazing, and unique, leverage for a start-up agency. Rahm Emmanuel, the former Mayor of Chicago, said, “Never let a crisis go to waste.” That may be true in politics but it is undoubtedly true in business.
Having helped hundreds of entrepreneurs start their own agencies, in good times and bad, and having started and operated several successful agencies myself, I recognized that the number one thing that stops talented people from pursuing their dreams of business ownership is not knowing “how.” It is the biggest cause of procrastination and the greatest killer of dreams that I know.
That’s why I wrote The UnCaptive Agent. In the book, I describe in detail “how” to start a successful agency, including all the details that must be attended to. I also ask the questions that every entrepreneur needs to answer on their way to building a successful agency.
While the current economic environment is creating many challenges, I see enormous opportunity, too. My book is intended to help those with the desire and mindset to improve their lives by creating their own future, avoiding common pitfalls that will slow them down, and showing them “how” to take advantage of the many opportunities available to them.
The next several years are truly the best time in the history of the world to create a new independent insurance agency.
Now, let’s look at whether starting an agency is right for you.
As you embark on the process of building your insurance agency, you have two important hurdles to overcome. The first one is, are you good enough in the insurance profession? How many years of experience do you have as an insurance agent? Our company has helped over 250 entrepreneurs began their insurance business. Not all of them have been successful.
We have seen that the risk of failure increases dramatically when an insurance agent has less than three years’ experience in the business. Insurance is complex. And even at the relatively simple end of the business, represented by personal insurance (as compared to middle-market commercial lines), it takes time to learn how these contracts work. It takes time to understand how to manage a book of business. It takes time to learn the best processes for handling client claims, and so on. Three years, in our experience, is a minimum level of experience. If you haven't been in the business for at least three years, I would suggest strongly that you put off the launch of your business until you have more experience.
In general, we find that the risk of failure decreases as the founder approaches five years’ total experience in the insurance industry. I recommend that you consider somewhere between three and five years of experience as a minimum.
Everyone is different, and you may have had the opportunity to learn the business more rapidly than somebody else. Or, to use an insurance term, you may have a unique way of mitigating your personal risk.
Perhaps you have a key employee joining you at the beginning of your business who is experienced in insurance policies, is experienced in business operations, or has experience that in some way mitigates your risk. Or, perhaps you're beginning your business with a partner who has more experience than you do.
Unless you can give an honest answer to yourself that you're very knowledgeable as an insurance agent, you should wait until you are.
Another question to ask yourself is how proficient you are in all areas of the business you seek to sell, including personal lines, commercial lines, and employee benefits. Many exclusive agents and captive agents have made the transition to being independent agency owners in the last decade with the assistance of firms like mine.
We regularly see personal insurance agents who want to sell commercial insurance. While this is an excellent way to broaden any agency, and one that we highly recommend, it's clear that commercial insurance is more complex than personal lines.
The cycles of the business are very different. For example, the way prospecting and proposals work as a part of the sales process for commercial lines is different. If you don't have that experience, you can certainly build it over time. However, it’s important not to create your agency with the expectation that you're going to sell a lot of commercial insurance until you build that experience.
Do you plan to sell employee benefits, like group health insurance? If you do, are you an expert in that area? With the advent of The Affordable Care Act, the barriers to entry (and certainly the barriers to success) in employee benefits rose tremendously. Many smaller employee benefits agencies sold, merged, or went out of business because the complexity in that part of our industry was more than they could keep up with.
Many independent agents indeed include employee benefits in their product lines. Still, you need to think carefully about how you will offer those products and required services on a competitive basis if that is a part of your business plan.
Another question to ask yourself is whether you have the requisite skills as a businessperson to be successful.
This begs several follow-up questions:
Have you ever owned or operated a business before?
How did that go? Were you successful? Did you fail?
What did you learn from your failure, if that's what happened?
Do you have a business degree or other relevant formal education in business?
And if you don't have either experience or education, where will you learn how to run the business that you intend to create?
At One Agents Alliance, we recognized early that this was the number-one thing that prevents successful insurance agents from becoming successful insurance agency owners. To help them over this hurdle, we have developed many programs to coach our member agents on operations and best business practices to help them become successful. Get the education, training, and experience for operating a business anywhere you can - you're going to need it.
Asking yourself how good you are as a businessperson isn't something that should stop you from starting your agency. But it should be something you think carefully about. The insurance commissions you earn as a great salesperson can expand into the profits of a great business.
You should assess your ambition as well as your drive while understanding they are not the same thing:
Ambition includes the things you want out of your career and your life.
Drive is the insatiable desire to get them.
I’ve known many ambitious people in my life. But not all of them were driven. Perhaps you know someone who wants the finer things like plenty of time off, money for a big house, the capability to travel, private schools and college educations for their children, and so on.
But how many of those people are up before everyone else studying to improve their education, saving every penny to start a business, and working late to pile up cash to fund their eventual opportunity? Not very many, I’ll bet! That right there is the difference between ambition and drive.
While not an insurance industry example, one of the most driven people I know is a former governor of Oklahoma. Many people told me over the years that she was ambitious but not driven. I knew they were mistaken, because I had spent a summer knocking on doors campaigning with her in the Oklahoma heat.
It was a physically miserable experience for me, but she was nine months pregnant at the time. In July, during the hottest part of the summer, she gave birth to her son and was back knocking doors with me two days later. That’s being driven! She wanted to win and was driven to do all she could to be successful. Are you driven?
It takes both ambition and drive to be successful as a business founder. You should carefully assess yourself on both points. You may be interested in starting your business so that you can eventually work less. You’d like to find yourself someday on easy street, perhaps. That’s perfectly normal. But the question you must ask yourself is the one Sean Connery’s character asked Eliot Ness in the movie The Untouchables: “What are you prepared to do?”
I’ve seen people with ambition and no drive, and I think that must be a miserable experience and also something that will doom a business owner. As you think about the pot of gold at the end of the rainbow, and view the rutted and potholed road to get there, how do you feel about it? Be sure you understand what you are prepared to do.
The last gut-check question that I think every founder must ask themselves is what their plan is to stay alive long enough to succeed. While it's possible to make enough income as a new insurance agency owner in the first year, it's not possible to do it in the first month. It takes a while to get the cash flow to move. From my experience, it generally takes about three years to get the flywheel of any business moving well enough to guarantee that you have the income you need to pay the business’s bill as well as your own.
How will you fund the expenses of the business until it pays for itself? There's a concept called “working capital”, which is simply how much money you need to pay bills for the business if there is an interruption in cash flow. When the cash isn't there, how many months can you survive on your working capital before you go under? This is a question you need to think through very carefully.
My advice would be that you need three to six months of working capital. How much working capital you need depends on how many expenses you have and, of course, every founder conserves cash by minimizing expenses. As you build your business plan, this is a critical issue to think about.
The other money plan you need to have is knowing how you will pay your personal bills for the first two or three years until you can take enough money out of the business to live on. In the beginning, you may be fortunate to generate income to pay the business bills fairly quickly.
But how do you pay the rent or mortgage? Your own health insurance? How do you fund food, car payments, and all the other expenses of modern life? Are you married, and does your spouse have a job whose income can cover your expenses while you're getting started? This is the way many businesspeople got their start.
Or, have you been planning to create your business for a long time, and saving your money against that day? Can you work another part- or full-time job while getting started? One of the founders of one of our largest agencies did just that.
There are many ways to create a plan for staying alive. But you really need to have that plan well in mind before you start. Finally, do you have the mental toughness - and the guts, frankly - to stick it out long enough to succeed? No one has become successful as a businessperson without having to go through tough times. Often, failure comes just before success would have arrived, but the founder just didn't have the guts to stick it out long enough to make it. Do you?