Independent insurance agencies – what's changing the landscape?

PIA CEO explains why planning is absolutely critical

Independent insurance agencies – what's changing the landscape?

Mergers & Acquisitions

By Bethan Moorcraft

A sharp increase in mergers and acquisitions (M&A) is challenging the traditional internal perpetuation model in the independent insurance agency (IA) channel. The days of IAs looking solely to family members or close founding partners for perpetuation have come to an end.

In recent years, there’s been a huge surge of interest in the IA channel from private equity (PE) investors, who are driving the majority of M&A activity in the space. PE-backed buyers are attracted to IAs because they’ve proven to be profitable and resilient, even as the world has grappled with the COVID-19 pandemic and related economic challenges.

A simple case of supply and demand, there are now more prospective IA buyers than there are sellers, which means that sellers can get top dollar for their assets. This is influencing IAs’ shift away from traditional internal perpetuation towards M&A.

It’s not just PE-backed firms that are interested in IA deals, according to Mike Becker, CEO of the National Association of Professional Insurance Agents (PIA) – one of the largest national trade organizations serving independent agents. Insurance carriers that have traditionally been in different distribution channels are also looking to acquire firms with strong IA distribution.

“There’s significant confidence in this distribution channel. I think part of that relies on what we do well, which is personal relationships,” said Becker. “But with the changing customer expectations and business landscape that we operate within now, there’s a lot of opportunity that’s perceived to be in this space by improving digital capabilities at the agency, and providing better tools to meet customer expectations, build out personal relationships, and to continue the evolution towards better customer experience.”

IA owners face the difficult decision of whether to invest in the development of digital capabilities or to sell to a group that will fund and support their digital evolution. When contemplating digitalizing alone, questions arise such as: Where do I begin? What are the financial needs of this project? Should we hire a technology expert? What’s the return on investment (ROI) and is it guaranteed? When faced with such challenges, many IA owners are attracted to the prospect of joining a group that will fund the transformation and bring new efficiencies and resources into their agencies.

“The bottom line is that there is significant competence in this channel – and we’re seeing that across the publicly-owned agencies that are expanding in the space, the privately-owned firms, the hybrid models, the PE-backed firms, and we’re seeing it on the carrier side as they enter the space,” Becker told Insurance Business. “After years and years of people saying independent agents are going to disappear in the future – that could not be further from the truth, and these M&A trends point to that.”  

PIA has been the premier association for professional independent insurance agents for 90 years. It serves members in all 50 states.

“Our role in the industry, and particularly with our members, is providing tools and resources to help our independent agent members take on the daily challenges and become more successful and more profitable,” said Becker. “Our role in this bigger picture of M&A activity is to keep up with the evolution of the IA channel. As our members’ needs are changing and evolving, so are we, so that we can provide the right tools and resources to help them take advantage of the opportunity in front of them.”

To help IAs think about perpetuation, PIA provides a tool called Agency Journey Mapping that includes educational seminars and resources to guide agency owners towards developing a business continuity plan.

“In successful perpetuation planning, an agency needs to define their objectives,” Becker stressed. “What do they want to accomplish? Does the principal want to retire? Do they want to remain part of that agency in the future, and if so, for how long? Is there a family member that has an interest in the future of that agency? What are your objectives as an agency principle?

“The second part is understanding your options. Is it going to be an internal perpetuation? Is there going to be a buy-in? Are there M&A opportunities? What sort of data and information do you have on really understanding your agency and your own valuation? And it’s taking all of this information, your objectives and all your options in front of you, and then the most critical part of this is the third step, which is developing a plan.

“I don’t know an IA owner that’s going to sit here and tell you that a plan for successful perpetuation is their number one priority today. But it is one of the most important things for them to think about. Often, when people think about perpetuation, they’re thinking about the day they want to sell or retire. But the reality is - we work in risk assessment – and unexpected events [like illness or death] can happen, so an actual plan is one of the most critical components.”

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