There are several important factors that must be integrated into a successful plan to
establish and operate an insurance business that will increase in asset value over a period
of time.
Choose the right contract
There may ultimately be nothing to sell if “rights or
things” are not owned under the contract.
Compensation
Levelized lifetime compensation versus high-low commission
scales should be considered. Level commission contracts are more valuable to a
purchaser. High-low contracts may have little future compensation available for the
buyer.
Renewals
Renewal cash flow will probably be important to a buyer when
considering an appropriate purchase price. A higher purchase price will be paid if
renewals are for the lifetime of a particular life insurance contract. High-low commission
scales have little renewal value after an extended period of time.
Vesting
The agent’s contract should provide for the vesting of renewal
commissions after an appropriate period. The sooner vesting occurs, the more valuable
the business. If vesting is not a provision of the agent’s contract, renewals will have little
value.
Persistency
Low persistency leads to a rapid decline in cash flows that would be
generated by renewal commissions. The lower the level of persistency, the lower will be
the value of the business to a prospective purchaser. Persistency is usually discounted at
10 percent annually when considering capitalization of future renewal flow.
Mix of business
The mix of business (term, whole life, group) will be important
to a prospective purchaser in terms of future sales from term product renewals or
conversions. The prospective purchaser will look at whether client files have been
rewritten several times and whether they possess potential for future sales. Levelized
commission life products tend to stay on the books longer and an assessment of this type
of business could lead to a more favorable valuation.
Multiple lines
An important factor is whether the agency also sells general
insurance, group insurance, pension or money products. There is a synergy premium
associated with combining other lines of business with life business. Each of the
component pieces of business should be able to generate new business for the other lines
and the persistency of multiple-line clients is superior to life only clients. For example,
the average lifespan of accounts has been found to be:
Single line of business 3 years
Two lines of business 7 years
Three lines of business 11 years
If all lines of business are of high quality and there is a reasonable balance in
distribution, the combined operation would be worth more than the value of the sum of
its parts. This type of practice will be discussed in more detail in the second part of this
report.
Goodwill
Agents who place their names before the public establish an element of
goodwill which becomes attributable to their own business rather than to the company
which sponsors their license. Agents interested in building goodwill to enhance their businesses should
ask themselves:
a. Has my name been advertised publicly?
b. Do I have others working with me that the public should know about?
c. Do I have a focused clientele in an identifiable community or a specialized
market of buyers?
d. Am I a recognized specialist in a specific market?
e. How does the market perceive me?
f. Is the goodwill that I am building transferable?
Staff and Support Systems
If clients are accustomed to dealing with some staff
members, or, certain employees are aligned with certain product lines, value would be
added to the practice if these skilled staff members were to remain with the agency after
a sale to a prospective purchaser. A contractual agreement to maintain this staff might be
required.
