May 6, 2022
Agata Kaczmarek
Despite the toll the pandemic had on many businesses, according to IBISWorld the Insurance brokers and agencies industry grew a steady 2.7% in 2020. For 2021 the estimated growth was another 2.0% in response to the need for home, auto, and commercial insurance policies. Overall, the industry has a $186 billion market size with an estimated number of 436,073 businesses employing over a million people.
Average Insurance Agency Size
The average insurance agency employs just over 2 people.
Based on the fact that the industry employs just over 1 million people, but there are 436,000 individual businesses, we can determine that the average agency is quite small, many are independent individual insurance agents.
So in this article we are focused on walking you through what it takes to start your own insurance agency and particularly the key financial numbers you need to know. The plan is to walk through the following:
- The Steps to Open an Insurance Agency
- Startup Costs for an Insurance Agency
- Revenue Forecast for an Insurance Agency
- Operating Expenses for an Insurance Agency
- Profit Potential for an Insurance Agency
You can grab our insurance agency financial projection spreadsheet and follow along to create your agency’s projections as we go. You can get a quick look at some of the summary reports from our template below:
With that as a direction, let’s dive in!
Common Steps to Starting an Insurance Agency
- Complete any required training, if that is not already completed
- Write a business plan and create financial projections and decide whether you will form a captive or independent agency
- Set up the business as a legal entity and determine the appropriate legal structure
- Register the agency name, especially for tax purposes
- Obtain the necessary licenses and permits
- Sign the appropriate contracts as a captive or independent agency
- Open a business account and credit cards if necessary
- Set up accounting for the business
- Obtain insurance agency insurance
- Set up brand and website
- Move forward with marketing and advertising
How Much Does It Cost to Start an Insurance Agency?
The average startup cost for an insurance agency is $50,000.
We estimated this insurance agency startup cost based on three sources (UpCounsel, AgencyEquity, TheStreet) to provide us with an estimated cost for starting an insurance agency.
- Minimum startup cost for an insurance agency = $5,000
- Maximum startup cost for an insurance agency = $100,000
- Average startup costs for an insurance agency = $50,000
Some of the startup costs associated with an insurance agency fall into the following categories:
- Computers
- Agency Network Memberships
- Agency Management System
- Legal fees
- Office supplies
- Rent
How Much Can an Insurance Agency Make in Sales?
The majority of insurance agencies in the US will generate less than $500,000 in annual revenue.
We were able to provide this ranges based on the following breakdown from InsuranceBee:
- 32% of US insurance agencies generate less than $150,000 in annual revenue.
- 27% of US insurance agencies generate between $150,000 and $500,000 in annual revenue.
- 24% of US insurance agencies generate between $500,000 and $1.25 million in annual revenue.
- 17% of US insurance agencies generate more than $1.25 million in annual revenue.
An agency and the owner can make quite a bit in sales, though the amount varies greatly. The beauty of the industry is that a majority of adults, and even some teens, will need some type of insurance throughout their life. Whether it’s for a car, dwelling, or life insurance, most adults reach out to an insurance agency more than once in their life.
Let’s take a quick look at how these sales happen and would have an impact on the sales of the insurance company.
How to set prices?
Setting prices for an insurance agency is out of the hands of the owner to some degree. Insurance companies use a method called ratemaking to determine the best premium to charge for each type of insurance package depending on certain objectives. Not everyone gets the same price for their insurance package because of their specific situation.
This means that in some way, the insurance agency can’t control how much they’ll make solely by setting the price of the product. The agency cannot change the price of the product up to maximize their revenue, nor can they lower it if potential customers complain over the price.
Whether the agency you are planning on running will be captive or independent, the price is set by the company the agency will represent. Independent insurance agencies have the benefit of working with different insurance companies and sort through different potential prices and packages available to their client. Those who opened a captive agency will only offer the packages from the insurance company they signed a contract with, which might not diversify the product enough for some clients.
Keep in mind potential prices and options available to those in the area and complete some research on how the prices are holding up in the area you hope to open your business.
How many customers does the average insurance agent have?
We estimate that one insurance agent working with individuals can support 800 to 1,000 clients based on feedback on Insurance Forums.
This will vary depending on whether you are working with personal or business clients. Business policies will be larger and more time consuming, so you will likely have fewer clients per agent.
This is something that insurance agencies will have control over to some extent. Ensuring an adequate marketing campaign and insurance package options will help drive people toward the business.
Even individuals who already have insurance are a target market as most people will take some time to shop around for a lower price if they think one is out there. Getting clients into the door is something the agency will have to work hard at, so double check effective marketing strategies and place your business in an area with a higher population.
Insurance Agency Revenue Potential
The revenue potential for an insurance agency will vary greatly. Some of the best can make into the millions, though they’re usually in the perfect spot and found the perfect customers to work with work. In other words, those are few and far between.
Those who are making the millions, are also making a comfortable revenue stream. Various factors such as type of insurance getting sold and through which companies will have a direct impact on the total revenue an insurance agency sees throughout the year.
Insurance Agency Annual Revenue
We estimate the average revenue for an insurance agency is $100,000 per year based on the following three sources (ICTSD, InsurGrid, TheStreet)
- Minimum revenue for an insurance agency = $50,000
- Maximum revenue for an insurance agency = $1 Million
- Average revenue for an insurance agency = $100,000
What Are Common Expenses for an Insurance Agency?
Expenses are an unavoidable part of running a business. These operating expenses, which come every month, or at the very least every year, fall into two categories: fixed and variable. A fixed expense is one that doesn’t change from month to month no matter the amount of work completed. An operating expense will change each month within a certain range depending on how the business ran that month.
Insurance agencies are no exception when it comes to paying operational expenses. Any new business owner needs to keep them in mind when opening a new business since these will have to be paid no matter the earnings.
Variable Expenses for an Insurance Agency
- Supplies for the office
- Advertising and marketing
- Miscellaneous expenses – such as potential repairs to office space and technology
Fixed Expenses for an Insurance Agency
- Loans and interest if any
- Liability insurance
- Accounting and legal fees
- Licenses and permits
- Rent
- Payroll
- Technology
How much profit can an insurance agency generate?
The profit generated by an insurance agency will vary, much like the revenue. It’s important to keep in mind that insurance agencies are mostly commission based – where they receive a commission from the company(ies) they signed contracts with. Most of the time for captive agents, the commission ranges from 5% to 10% and for independent contracts it stays around 15%.
Insurance Business Profit Margin
We estimate that the average profit margin for an insurance agency is between 2% and 10%.
The profit margin lets us know the profitability of a business after all expenses are taken care of. The higher the profit margin percentage the more cash there is left at the end of the year.
Three different sources (Investopedia, OneAgentsAlliance, Decoalert) give us an insight into the tough profit margins which insurance agencies can expect.
- Minimum profit margin for an insurance agency = 2%
- Maximum profit margin for an insurance agency = 10%
- Average profit margin for an insurance agency = 3%
In conclusion, insurance agencies continue to be a viable business model, but it is very important to have a good plan established before getting started. One very important item to create is your insurance agency financial projections so you can know how much it will cost to start your insurance agency, when you can expect to break even, and more. You can see our template in action here:
Photo by Kampus Production
