Financing for Insurance Agents
Becoming a licensed insurance agent means you have endured rigorous and lengthy training and successfully passed your state-mandated exams. Congratulations! It's a significant milestone, but like other professional occupations, this is just the start of your journey. If you choose to work independently, you will need to stay current, competitive, and active. You will also need to finance your insurance agency effectively.
There are many challenges for the independent insurance broker. You'll need to: acquire new clients; maintain your annual, state-mandated continuing educational requirements; recruit new producers; manage relationships with your carriers; and manage your network or cluster affiliations.
The insurance industry is strong and growing. The number of professionals in the field is growing as well. The historical performance of growth and stability make giving you a business loan for your insurance agency an attractive risk for a lender. People may not think of the insurance industry as the most glamorous opportunity for employment, but employment levels are steadily rising.
The number of the U.S. insurance brokers (including independent and captive) agents and service employees remained stable during the 2008 recession and its recovery. Some might even consider the insurance industry recession-proof.
Understanding risk metrics and evolving risk-management technology has allowed insurance companies to mitigate losses and drive record profits. And considering that insurance is something most people must have, even in weak economic cycles, the industry is likely to continue to expand.
A benefit that allows insurance companies a relatively high level of independence is the fact that they are generally mutual insurance companies, which answer to policy holders rather than to Wall Street. Not having to answer to shareholders (who may not have an interest in the long-term fidelity of the company) allows companies to focus on making good long-term decisions instead of relentlessly trying to meet quarterly profit goals and ongoing stock prices. Choosing a mutual benefit insurance carrier is a big decision as an independent broker, one that you should consider carefully.
Loans for Insurance Brokers: The Difference Between Mutual and Stock Insurance Companies
Mutual Insurance Companies
These companies are owned by the policy holders. The policy holders pay monthly premiums, which are held and invested by management, and the policy holders share in the profits and losses. Each policy holder has a vote in the operations and management of the company, although most policy holders are unaware of their rights and status under this corporate structure and never participate in company voting.
A mutual insurance company is established to fulfill the mutual insurance needs of a particular group for a specific purpose. In 1752, Benjamin Franklin founded the first mutual insurance company in the United States, called the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. The company is still in business today.
Other examples of mutual insurance companies include Liberty Mutual and Mass Mutual. These companies provide a wide range of insurance and investment products and advertise extensively, which can be a great benefit to the broker selling to the end client. As an insurance broker you should consider your carrier's financial strength when choosing to represent their products and services.
Stock Insurance Company
This is a corporate structure where the company is owned by shareholders or stockholders. Usually the largest shareholders in these companies are larger institutions as opposed to individual investors. Policy holders do not share directly in the profits or losses of the companies. Some examples of stock insurance companies include MetLife and Prudential.
Insurance Broker Financing: Industry Background and Overview
U.S. insurance industry net premiums written totaled $1.2 trillion in 2017, with premiums recorded by life/health (L/H) insurers accounting for 52%, and premiums by property/casualty (P/C) insurers accounting for 48%, according to S&P Global Market Intelligence.
P/C insurance consists primarily of auto, home, and commercial insurance. Net premiums written for the sector totaled $558.2 billion in 2017.
Health insurance is considered separately. This sector includes private health insurance companies as well as government programs. P/C and L/H insurers also write some health insurance.
There were 5,977 insurance companies in 2016 in the United States (including territories), including P/C (2,538), life/annuities (872), health (858), fraternal (85), title (55), risk retention groups (247) and other companies (1,314), according to the National Association of Insurance Commissioners.
Insurance carriers and related activities contributed $507.7 billion, or 2.7%, of U.S. gross domestic product in 2016, according to the U.S. Bureau of Economic Analysis.
The U.S. insurance industry employed 2.6 million people in 2016, according to the U.S. Department of Labor. Of those, 1.5 million worked for insurance companies, including L/H insurers (811,900 workers), P/C insurers (648,200 workers) and reinsurers (25,000 workers). The remaining 1.1 million people worked for insurance agencies, brokers, and other insurance-related enterprises.
Total P/C cash and invested assets were $1.59 trillion in 2016, according to S&P Global Market Intelligence. L/H cash and invested assets totaled $3.89 trillion in 2016. The total of cash and invested assets for both sectors was $5.48 trillion. The majority of these assets were in bonds (61% of P/C assets and 74% of L/H assets).
P/C and L/H insurance companies paid $20.5 billion in premium taxes in 2016, or $63 for every person living in the United States, according to the U.S. Department of Commerce.
P/C insurers paid out $21.7 billion in property losses related to catastrophes in 2016, compared with $15.2 billion in 2015, according to the Property Claims Services division of Verisk Analytics. There were 42 catastrophes in 2016, compared with 39 in 2015.
Considering the profound impact of insurance on virtually all aspects of individual and business life, it is clear why insurance is seen as so recession-proof. Bottom line, financing an insurance agency is a relatively good risk for a lender. In the section ahead we'll provide some broad industry data to help you understand the size of the insurance marketplace and identify the service area segmentation.
Financing the Insurance Brokerage - Industry Risks
This is not to say that the industry is completely immune to or unaffected by economic fluctuations. Let's take a look at some macro-economic trends that may affect the normal cycle of the insurance business.
If gas prices rise, for example, consumers may decide not to buy the second car they had been thinking about, or the house extension they had been planning. This, in turn, means fewer policies sold by the insurance companies.
Interest rates can also have an impact on insurance premiums. Insurance carriers rely on the time value of money. That means specifically that they are incentivized to hold money (delay paying claims) for as long as reasonably possible. That's because insurance carriers earn massive amounts of profits by earning interest or appreciation on the aggregate premium amounts they collect from policy holders. When interest rates are low, insurance companies cannot earn as much and may need to increase premiums to stay profitable.
As a broker, the amount your client pays in premiums and the efficiency with which their claims are paid can mean the difference in retaining your client or them finding another broker .
The economic situation and the insurance industry are reliant on one another, and both require each other in one way or another for prosperity and stability.
Insurance Broker Financing: Client Acquisition, Client Retention, and Profitability
Insurance brokerage is a highly competitive field. You may find that you can spend a lot of money, time, and effort on acquiring new clients, only to see them jump ship to another brokerage. Client acquisition is vitally important but client retention is equally, if not more, important to your insurance agency practice.
Consider that industry reports are almost unanimous when it comes to customer retention best practices. According to Insurance Journal:
Retention rates average 95% among customers who bundle home and auto policies with the same insurance carrier and 92% among those who bundle auto and rental policies. Conversely, retention averages only 83% among mono-line auto customers and only 85% among policyholders who do not bundle their auto and homeowners insurance.
The message here is that as an insurance agent, you must offer multiple lines of coverage that are competitive and show value to the client. Investing in promotion, education, and other informative media will greatly expand your insurance agency's earning potential.
Be sure to spend time to read and research best practices and get to know your market intimately. This way you will have a better understanding of your capital needs and requirements for funding your insurance agency.
Loans for Insurance Agents:
4 Top Loan Types for Insurance Brokers
Like any new professional practice, your insurance agency may require some additional capital. Hiring staff, licensing, continuing education, securing an office and providing furnishings, utilities, and infrastructure can add up to one big expense.
Small Business Administration (SBA) Loans for Insurance Brokers
SBA loans are commonly understood to be the most desirable financing option for a small business. They offer the most favorable rates and terms for insurance agencies seeking term loan financing facilities. The SBA is not a direct lender; rather, it partners with qualified lenders and provides guarantees to lenders against default. The SBA can guarantee up to 85% of a loan, allowing the bank or other lender to offer the borrower higher loan amounts on more favorable terms.
Be advised, SBA loans are relatively difficult to qualify for and may need you to submit a lot of paperwork. However, considering the low risk associated with the insurance industry, you can anticipate a high approval rate from the SBA loan program.
In particular, you will want to pay close attention to the SBA 7(a) loan program. This program has features that align well with the needs of the insurance professional, including its maximum loan amounts, repayment horizons, interest rate, and the flexibility in the use of funds.
What to expect:
Loan Amount: $5,000 to $5 million
Repayment Term: 5 to 25 years
Interest Rates: Starting at 6.75%
Time for Approval: Approximately 6 weeks
Traditional Bank Loans For Insurance Brokers
Traditional banks are still the leading source of small business loans. Most businesses will find that they are able to secure some level of funding through the bank where they already conduct their business banking.
The larger national and regional banks usually have loan programs especially designed for insurance professionals. Once again, the high success rate of insurance agency practices makes loans for insurance brokers an attractive proposition for banks. So they will generally offer insurance agencies favorable financing rates.
Bank terms are not generally as favorable as SBA-backed loan terms, but here is what you may expect from a bank loan:
Loan Amount: $30,000 to $5 million
Repayment Term: Up to 10 years
Interest Rates: Starting at 7%
Time for Approval: Average 4 weeks
Non-Bank Lenders and Insurance Brokers
Non-bank lenders such as Biz2Credit, Kabbage, and OnDeck provide business loans for insurance brokers on an accelerated approval basis. These lenders tend to have shorter approval cycles, lower credit standards, and less paperwork than the other kinds of funders mentioned above.
However, insurance professionals should expect that there can be higher interest rates and fees associated with the convenience of quicker approvals and lower credit standards. If you require a fast solution to your insurance agency practice financing needs, an alternative lender or non-bank source may be the right solution. Always be aware that non-bank lenders are not subject to the same regulations as bank, and therefore you should read your loan documentation carefully before agreeing to the terms.
What to expect from non-bank lenders:
Loan Amount: $2,500 to $250,000
Repayment Term: Three to 18 months
Interest Rates: Starting at 10%
Time for Approval: As fast as one business day
Business Line of Credit for Insurance Brokers
A business line of credit is ready cash that you may draw upon up to a pre-set limit. It acts like a hybrid between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides business financing that can be used for general business expenses. Like a credit card, there is no lump-sum disbursement; a business owner borrows only what is needed and only pays interest on the amounts borrowed. You can get a business line of credit through a bank or an alternative lender.
A business line of credit can be an expensive proposition for marginal credit risk. However, if you have a strong credit profile you can negotiate rates and terms. The best advice is to shop around, since rates can fluctuate greatly.
Loan Amount: $10,000 to $1 million
Repayment Term: Six months to 5 years
Interest Rates: 7% to 25%
Time for Approval: As fast as one business day
As with any borrowing decision, understand your marketplace to get a sense of how much you can and should borrow. If that's unclear, that's when products like a business line of credit may be most advisable.