Determining the ideal profit margin for an independent insurance agency

The insurance industry accounts for an estimated 429,187 businesses. Those businesses employ more than one million people while boasting an estimated $196 billion market size. With that much money at play and that much market competition, it would be prudent to understand what factors impact an independent insurance agency’s profit margin.

According to Investopedia, an insurance company’s profitability depends largely on four factors: the number of premiums they write, business costs, how much they pay in claims and return on investments. An insurance brokerage or independent insurance agency’s profit margin is based on commissions and fees, profit sharing, and overhead. 

For the purposes of this blog, we’ll look more closely at the three factors impacting those selling insurance, additional factors that can impact an agency’s income, how to figure profit margin and how to determine your agency’s ideal profit margin.

Factors that Determine Profit Margins

Simply stated, profit margin measures the degree to which revenue exceeds cost. Typically conveyed as a percentage, it indicates how much of each dollar of sale is profit. Let’s take a closer look at the factors that have the most impact on profit.

Commissions and Fees

Insurance premiums are paid for a variety of coverages including auto, home, life and health insurance policies. Some insurance products such as auto and home are required either by law or financing entities so there is a guaranteed market and consistent demand. 

Insurance agents also have the opportunity to increase their book of business by utilizing marketing tactics, establishing an online presence and partnering with additional insurance companies to add more products to their offerings. In adding products, you give your clients more options for coverage at varying price points which may result in cost savings for them and organic growth for your agency.

On home and auto policies, independent agents average 15 percent commission. Life and health policies are usually front-loaded paying anywhere from 40 to 100 percent the first year the policy is written, but dropping substantially with subsequent renewals.

Overhead Costs

Insurance agency owners, like any other business owners, have business or operational expenses that have to be paid. Expenses fall into two categories: fixed and variable.

Fixed expenses stay the same from month to month. For example, loan payments, rent, technology, payroll, professional fees, insurance, and licenses or permits.

Variable expenses will likely change each month. This category includes expenses such as marketing and advertising, office supplies or repairs and maintenance.

Independent agents should pay close attention to their variable expenses as everything you spend impacts your profit margin. 

Profit Sharing 

Insurance carriers often offer additional incentives to top selling agencies in the form of profit-sharing. Carriers use part of their underwriting profits to pay incentives to independent agents to sell their products. 

Often, with the higher requirements to earn profit-sharing, independent agents join forces with other trusted independent agents or an insurance cluster such as SIAA to meet requirements and share the profits.

Additional Factors that may Influence Profit Margins

There are additional factors that may have an impact on an agency’s income. For example, location is an important consideration. An area with a lot of new home construction will offer a plethora of new potential customers, but also may bring added competition. An area’s crime rate and other local statistics such as average income and cost of living will also impact an agency’s ability to generate profits in different locations.

The type of insurance an independent agency sells will impact their profit margin. Agents who sell home and auto may not make as much commission at the initial sale as life and health agents but will most likely see higher residual commission rates. Property and casualty agents will spend more time on customer retention and service but will  enjoy long-term success by adding to their book of business to increase their renewals. Agents selling life and health insurance policies typically earn higher upfront commissions with considerably lower renewal rates. This results in the need to consistently sell to new customers.

Calculating Profit Margin 

o calculate your agency’s annualized profit margin, begin with  the agency’s total revenue for the year and subtract its total annual costs. Take this amount and divide it by the total revenue then multiply by 100 to produce a percentage.

If you’re not satisfied with the outcome, you can take steps to improve the number next year. For example, you can look at reducing expenses, increase income by increasing policy sales or participate in profit sharing.

The Ideal Profit Margin

A lot of factors come into play when trying to determine the ideal profit margin for your agency. How you choose to run your agency, how much you want to pay in salaries, the products you prefer to offer, and how hard you want to push for sales will all impact the margin. 

Taking these factors into consideration, most insurance agency owners operate with an average profit margin between 2 percent and 10 percent.

Agency owners are advised to consult with an accountant or tax advisor when trying to structure your specific agency.

Download our Free Guide

If you are interested in becoming an independent insurance agent and increasing your profits, SIAA is here to help. We’ve compiled everything you need to know to transition from a captive agent to an independent insurance agent in a free ebook that you can download here.