Every independent insurance agency owner wants to improve the value of their agency. Here are the top five opportunities to improve your agency value for 2024 and beyond:

1) Revenue growth. Year-over-year revenue growth is one of the leading indicators of the health and success of any business. In the independent agency system, there are two primary ways to increase revenue growth: organic growth and acquisition. Both methods should be considered, with a plan and goals for how they are going to be executed.

As of the third quarter of 2023, independent insurance agencies on average saw organic growth grow by 8.5%, according to the “2023 Quarterly Market Share Report" from Real Insurance Consulting—and 2023 Best Practices Study agencies experienced an organic growth rate increase by an average of 9.5%. Given the increase in premiums throughout last year that's expected to continue in 2024, your agency should experience positive growth by just retaining your existing business and minimal new business growth efforts.

In addition to the organic growth experienced in 2023, there were nearly 800 mergers & acquisition transactions reported in the independent agency system. While acquiring an agency is a significant undertaking, it is a proven method of growing agency revenue. If done successfully, acquisition could be your quickest way to increase agency revenue. It has certainly been embraced in over the past 10 years, with over 6,000 M&A transactions taking place during that time.

2) Retention. An agency's retention rate is another leading indicator of health. The independent agency industry benchmark is a 90% retention rate, according to IA Valuations internal data. If your retention rate is lower than that, it is a red flag to any prospective buyer.

Focusing on how you can retain as many of your current clients as possible will help preserve the value of your agency and provide a solid foundation to grow its value. Reviewing your current renewal policies and procedures, communicating with clients proactively and consistently, conducting audits and spot checks with your team, and participating in focused training with your staff and carrier partners may help improve retention rates.

3) Carrier concentration and loyalty. In the current hard market, carriers are making difficult decisions to stabilize the financial strain they are experiencing from triple-digit loss ratios. Those business decisions include restricting new business, significant rate increases, changing their appetite on certain lines of business, reducing commission and, in some instances, terminating agency relationships.

While some agent-carrier relationships are also getting stronger during this hard market as both are learning who their true partners are, many agent-carrier relationships are changing for the worse.

Assessing your current carriers, ensuring that your book of business is properly balanced with your carrier lineup, and working on solidifying your carrier relationships during this time is critically important. It is easy to say the carrier never visits or reaches out to us, but you have to ask yourself about how often you are proactively reaching out to your carriers. Every relationship goes two ways.

 4) Profit margin and writing profitable business. The focus on profitability is twofold—improving your net operating profit and writing profitable business. First, we will review the agency's annual operating profit margin. The average profitability margin for independent insurance agencies is approximately 25%, according to IA Valuations data. If your agency is operating at a higher margin, that is great; focus on how you can possibly enhance it by one or two more percentage points.

However, if your agency is operating at a lower margin than that, seriously consider what is impacting your profitability—particularly if you are preparing for an ownership transition in the next three years. In this instance, 2024 is the perfect time to focus on cleaning up your profit and loss statement and removing unnecessary business expenses. Agency value increases as the profit margin does.

Aside from growing the revenue side of the business, an agency owner can review staffing levels, travel and entertainment expenses, technology, marketing, subscriptions, facilities and other expenses to improve profitability.

Further, focusing on writing profitable business, particularly with key carriers where you qualify for profit sharing, can add to profitability. While much of the profit-sharing equation is outside of your control, you can implement policies and procedures in the office to ensure that your producers are prospecting businesses that fit the agency's appetite, are mindful of where they are placing new business, and are performing appropriate field underwriting to know where a risk belongs. Agencies average between 6%–10% of their annual revenue from profit-sharing, according to IA Valuations data. The profit-sharing models have become increasingly more complex and weighted toward growth.

Subscribing to the theory of "growth at all costs" could prove detrimental to the agency if the expansion is unprofitable, burns your best carrier relationships, and costs you a portion or all of your profit-sharing bonus. Agencies looking to enhance value should consider the “growth with integrity" approach, being mindful of hunting prospects that would be considered good risks for your favorite carriers.

 5) Perpetuation plan and development of next-generation talent and leaders. One of the biggest risk factors negatively impacting agency value is the lack of a viable perpetuation plan and the failure to develop the next generation of talent. It is a major red flag to have an aging owner and lead producer in the agency looking to sell with a short window before retirement. These exits need to be planned years in advance to maximize value.

Hiring and developing the next generation is an activity that needs careful consideration and planning before executing, but it can start as simply as hiring a summer intern, proactively recruiting for talent even when you are not looking, and being intentional with identifying and developing the talent currently in your agency.

Agencies with perpetuation plans and next-generation talent can be worth as much as 25% more than those without.

Jeff Smith is chief executive officer of the Ohio Insurance Agents Association and IA Valuations. 

The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please email contact@iavaluations.com to discuss your personal situation. 

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