The old adage “it takes money to make money” has never been truer – or more challenging! This is especially true for insurance agents: given the current economic environment, agents say access to capital is necessary to grow but extremely difficult to come by.
Robert Hall, president of Francis Hall Insurance and Risk Management Services in West Chester, Pennsylvania, shared his views of accessing capital in the September 2009 issue of Independent Agent Magazine.
“Insurance agencies aren’t being viewed as an area that banks openly want to give a loan to because of the uncertainty of the insurance marketplace,” says Hall. “They think that the value of agencies has gone down.”
This perception of banks is creating tighter capital constraints. With limited access to capital, coupled with a tougher insurance market, unique financial solutions have become essential for insurance agents.
Using Insurance Commissions as an Asset
Creative financing is key during a recession in order to gain advantage over competitors. Selling commissions for immediate capital is a debt-free finance option available exclusively for insurance agents.
By using their commissions, Long-Term Care agents are able to get cash today to grow their business or use part of their book to secure a commercial loan or purchase an agency. Often, depending on the carriers, Long Term Care commission streams are the most valuable and provide the most deployable cash at closing. (Books with John Hancock, Genworth and others can bring three to four times their annual commission.)
How to Evaluate Your Long Term Care Book
In order for an agent to sell a book of business, the commissions must be paid directly to you or your agency by the carrier with no third party intermediary, such as a broker, MGA, etc.
Several factors are used when determining the value of an agent’s book of business.
- Number of policies in book
The more policies a book contains, the greater the diversification and less risk for individual lapse. For instance, if a book contains ten policies and one of them lapses, that is a 10% lapse rate, compared to a book of 50 policies and one lapse, yielding a 2% lapse rate. Also, if there is a large concentration of commissions in only a few policies (e.g., three policies accounting for 95% of the commissions), this increases the risk of the book.
- Policy type and plan code
Many times, different types of policies have different mortality, morbidity, and voluntary lapse rates, or different steps determining the commission amount that is paid.
- Carrier type
In order for an agent to sell a book of business, the carrier must consent to an assignment of the commissions. This consent cannot legally be withheld - it's your compensation - but some carriers attempt this (notwithstanding the increased production that typically results from reinvesting in your business!).
- Policy issue date
If a policy has been effective less than 90 days, it is normally too early to determine its value. Policy age is an important factor in determining price and cash flow.
- Policy paid-to-date
This is used to determine if a policy is current, on waiver of premium, or lapsed.
- Policy payment mode
The mode determines how often the policy pays commissions during the year. It can be monthly, quarterly, semi-annual, or annual, and all carry distinctly different lapse and risk profiles.
- Premium amount, commission rate, and commission amount
These factors are all used when calculating the annual commission of a policy, and differing commission rates can lead to significantly different persistency rates.
- Commission Rate Schedule
The Commission Rate Schedule is normally included in the agent’s contract and verifies the policy type as well as any steps that may be included. If policies include step-downs, service fees, and the like, this will affect the annual commission amount.
Access to capital isn’t just a concern of Long-Term Care agents – this problem occurs for all types of insurance agents, MGAs, and carriers. By knowing what your book is worth and understanding what others are looking for when determining its value, this can help you determine if selling is the right option for you.
For a free, no obligation valuation, go to http://www.twgcapital.com/eform_free_valuation.aspx or contact TWG Capital immediately at sales@TWGCapital.com or 877.894.2785.
Read how other agents have sold their books of business in order to grow.