Going Independent: Is Owning an Insurance Agency Profitable?

Many Liberty Mutual independent agents consider themselves to be business owners. Yet, they aren’t allowed to make all of their own business decisions or own their book of business. With the option to step out on their own and become fully independent insurance agents who continue to offer Liberty Mutual insurance products, many of these agents have questions about moving forward.

• How easy is it to start an insurance business, especially since you have experience as an agent?
• What about the startup costs involved for new insurance agency owners?
• Is owning an insurance agency profitable, especially in this economy?
• Is there a “normal” profit margin for new insurance agency owners?

Even though you have insurance experience, truly moving on to the independent insurance agency ownership experience as a Liberty Mutual agent is different. We’re excited that you’re interested in learning more because while it is a profitable venture, it is also easy to fail. So, before you do anything else, we invite you to download our free guide that explains how to transition to a fully independent agent. 

Being a Business Owner Isn’t the Same as Being a Liberty Mutual Independent Agent

There are several differences between sole proprietorship as an independent insurance agency owner and remaining a Liberty Mutual independent agent. With the Liberty Mutual program, you do have the power of a household name that backs your agency. However, you do not have the ability to make many of your own business decisions. You also do not own your book of business. So, unlike an independent insurance agency owner, you would lack the ability to sell your book of business if you wanted to do so. On the other hand, there’s less risk involved since running an independent agency backed by Liberty Mutual provides you with an overall game plan. It’s more like running a captive agency.

Starting an actual independent insurance agency means acting, usually, as a sole proprietor. Although you have previous insurance experience, that doesn’t make you exempt from the potential issues that come with starting an independent insurance agency, let alone the issues that often plague small businesses for the first few years of business. In fact, according to the Bureau of Labor, nearly one in five businesses fail during the first year. That’s 20%. Note that it doesn’t mention whether these business owners have any previous experience in their industries. Yet, in 2021 the SBA revealed that 80% of new businesses survived their first year, but after their fifth year, the failure rate increased to almost half. The failure rate increases to 65% by the tenth year.

So, is there any guarantee that you’ll run a profitable business if you start an insurance agency? No. There’s never a guarantee in business, regardless of if you’re in the insurance business or if you start some sort of retail establishment. The “secret sauce” includes a business plan, experience, and risk tolerance. And, again, if you lack the risk tolerance needed to be involved in the long-game of running a business or you don’t want the responsibility of running a business, remaining in the Liberty Mutual independent agent program is the better option for you.

If you’re considering putting your insurance experience to work for you and starting an independent insurance agency, here are some things you should consider.

Startup Costs for Your Sole Proprietorship

One thing to consider when thinking about starting a sole proprietorship as an independent insurance agency owner is what it will cost. Yes, you’re already licensed in insurance sales. That’s one thing you don’t need to worry about. You do need to consider what the overall cost will be to start the agency and maybe even what you can do to reduce the cost to start your new career as an insurance agency owner.

Starting a successful insurance business costs between $5,000 and $50,000, depending on how you plan to outfit it.

For example, if you plan to be an agency owner who keeps the startup costs on the lower end, you could:

• Opt out of acquiring large office space and consider a smaller space, using a co-working space, or working from home.
• Consider hiring only the staff you actually need, such as just one producer or one assistant, instead of hiring multiple people.
• Create a full yet simple business plan that covers all of your marketing and managing needs while also keeping your profit margin reasonable and your costs low.

Keeping these costs low can be a crucial part of becoming a successful insurance business owner, even if you get a loan, because it can help with cash flow over the long run if you continue to make smart moves as a business owner.

Want a Great Profit Margin? Don’t Treat It Like a Lifestyle Business

If you’ve spent more than five minutes on social media, you know that most people are interested in passive income and what’s known as a “lifestyle business.” Of course, selling insurance products as an insurance agent can be great for passive income as a long term business plan. But what’s a lifestyle business? Should you start an independent insurance agency and treat it like one?

A lifestyle business is a business that supports a person’s chosen lifestyle. So, how do you see your future? Unfortunately, most business owners take too much money out of their businesses to support their lifestyles, especially when they consider themselves the owners of a lifestyle business.

Generally, a lifestyle business model shouldn’t be adopted until a business is stable and quite well-off. It most certainly shouldn’t be adopted when a business is brand new. Any sort of money within the business, especially if there is recurring revenue (such as incoming premiums or commissions from insurance sales) can create an issue in the future. Consider the fact that many services that an insurance business used to pay one time to receive, such as an agency management system, are now a subscription service. Consider the finance charges you may incur from loans. You most likely have payments now. Taking more money out of your insurance business as the business owner creates a liability and takes away from the profit margin of your insurance agency.

Understand the Commission Structure for Insurance Products You Offer

As a Liberty Mutual independent agent, you know that insurance sales are the bread and butter of your pay. When you switch to a fully independent agent status, the commission structure for the insurance products you offer from the insurance companies you are appointed to represent continues to generate your pay.

The commission can come from new policies, upsells, and cross-selling. While the percentage of commission for each insurance product you sell will depend on your agreement with the insurance carrier (so read it carefully), insure.com reports that the average commission for the first year’s premium for independent insurance agents is around 15% per insurance carrier. Now, imagine that rate with more market access, more opportunities for cross-selling or upselling, and more insurance products to offer to existing clients and prospects. What could your future look like as a business owner?

Be Smart as an Agency Owner to Increase Your Profit Margin

As a new agency owner, what can you do to increase your profit margin while you’re just starting out? Of course, the first answer is more insurance sales. But is there anything else you can do immediately? Yes. You can start with examining your business plan to decrease costs. Some easy things to implement include:

• Less office space. Is there truly a need for large office space when you start an insurance business? We recognize that not everyone enjoys working from home, and that’s fine. However, we do encourage new business owners to explore smaller office space or other options, such as office sharing or even a co-working space.
• Part-time employees or fewer employees. One of the biggest expenses when starting an insurance business is in both hiring and keeping employees. It’s crucial to truly consider your needs. When you first start out, consider whether you truly need someone full-time to answer the phone or help produce insurance sales. Will someone part-time do for now? Can you handle the insurance sales on your own and use only an assistant to handle the phones?

Consider low cost and free marketing ideas. Selling insurance to your target market is crucial to your success. Marketing is important, yes, but it’s also important to keep your costs down. The internet is full of great ideas for low cost and free ways to reach your target market.

Keep your operations small and your costs under control for your first few years so that your profit margins remain where you want them. Manage your financial growth wisely so that you can maximize your chances of success over the next decade.

Increase Your Profit Margin by Cross-Selling Insurance Products

If you’re part of the Liberty Mutual independent agents program, of course you know a bit about cross-selling insurance products. Perhaps you have a client with a property insurance policy (pick one) and as you do a yearly review of their account, you talk with them about adding a general liability or umbrella policy to cover any additional claims that might not be covered by their existing policy.

Now, imagine if you were the agency owner of a fully independent agency with multiple insurance carriers. You’d have more opportunities for cross-selling various types of insurance products to your current clients and prospects.

Frequently Asked Questions about Starting a Truly Independent Insurance Agency

We recognize that it can be difficult and intimidating to decide to step out on your own and start a truly independent insurance agency. That’s why we’ve created this short list of frequently asked questions that may impact profitability.

I have the option to start an independent insurance agency or stick with an insurance carrier’s “independent program.” Are these concepts the same? 

No, they are not the same concepts. There are several differences between them, but we will highlight two of the major ones.

1. With the insurance carrier’s “independent program,” you do not own your book of business. While you get to use it and build your insurance sales from it, it’s never actually yours. With your own independent insurance agency, the book of business that you build is 100% yours. In the future, you could decide to sell the book of business or the entire agency.
2. With the insurance carrier’s “independent program,” you may feel like you get to make business decisions, but they must be made within the guidelines of the parent company. So, who really owns the agency: you or the insurance company you represent? If you start an insurance agency that is fully independent, you are in charge of all of your own business decisions, good, bad, or indifferent. Of course, all of your decisions should be in line with applicable federal and state laws!

Is there a normal profit margin for new independent insurance agencies?

Overall, it depends on the types of insurance coverage that you offer. As of 2021 in the second quarter, life insurance companies had a profit margin around 4.1%. Insurance brokers had a profit margin around 8.7%. Accident and health insurance companies had a profit of around 5.5%. Yet, it’s important to note that these profit margins don’t state that they are for new independent insurance agencies. If you’re switching from Liberty Mutual’s independent agency program, you’ll be starting over since you don’t own your book of business.

Is it still profitable to own an insurance agency in this economy?

Yes, it is still profitable to own an insurance agency even in the current economy. Although there is market uncertainty, independent insurance agencies can still make insurance sales. The key is to carefully position yourself as offering the right insurance products for your target market with the right prices and as the agency owner who can educate your clients and prospective clients while also doing the shopping for them.

One of the unique things about being a successful agency owner in the independent insurance business is that you have multiple insurance products to offer. You have multiple cross-selling opportunities, bundling opportunities, discount opportunities, and, in short, different ways that you can help people bring down prices when they need it the most. Your agency improves the insurance experience.

Improve Your Insurance Experience: Start Your Independent Agency Now

If you’re ready to improve your insurance experience and to operate a truly independent agency, then we have something for you. This blog was just the beginning. Click here to download our free ebook and learn how you can transition to a fully independent agent now!