TLTR: This blog answers the question, “What is an agency?” and highlights the difference between insurance agencies and companies. It also explains the steps you need to take to acquire an insurance agency license and start your own insurance agency.
The difference between an insurance agency and an insurance company is a topic of confusion for many. And it’s not just consumers who mix up the two—even individuals looking to start a career in the insurance field often confuse one with the other.
So, let’s explore what each entity is.
What is an Agency?
An insurance agency (also known as an insurance brokerage, independent agency, or insurance agent) is a company or an individual who is authorized by an insurance provider to sell their insurance products on their behalf. They solicit, write, and bind policies between their clients and the insurance providers.
In return, insurance agencies receive compensation.
For example, Renegade Insurance is an independent insurance agency that employs agents and brokers to sell various insurance policies from different carriers that they are appointed with. Unlike State Farm or Farmer, who market and sell their policies using their own insurance agents, Renegade’s agents don’t work for any single insurance carrier.
Insurance agencies or agents are regulated by the state in which they operate.
Agencies can decide which insurance companies they would like to work with and represent. They can also decide whether they want to offer their clients personal or business insurance lines.
According to IBISWorld, there are 422,688 insurance brokers and agency businesses in the U.S.
There are primarily two types of insurance agents:
- A captive agent typically represents one insurance company. Furthermore, they are usually employees or independent contractors of the carrier and are provided with office space, training, and administrative support.
As captive agents, they can only sell the products and services offered by their carriers. For example, the captive agent cannot sell business lines if the carrier only sells personal lines.
Furthermore, they cannot sell the policies that are provided by another carrier even if that policy provides better coverage at a cheaper rate.
- Independent insurance agents or insurance sales agents can represent multiple carriers rather than a single entity. They act as middlemen between insurance buyers and insurance sellers to facilitate a transaction. They have legal contracts with the insurance provider called “appointments.” These contracts specify the policies they can sell and the rate of their compensation.
Unlike captive agents, independent agents receive commissions from the policies they sell and are not considered employees of any specific insurance company.
Some key roles and responsibilities of an insurance agent include:
- Soliciting new business
- Assessing their client’s insurance needs
- Assisting clients in completing applications
- Binding coverage
What Is an Insurance Company?
An insurance company (also known as an insurer) is the entity that creates and manages insurance products. They oversee the underwriting, claims, and pricing of the policies they offer, and they dictate the company’s overall direction. When an individual buys insurance, the insurance company is the entity that bears all the risks the insured might experience.
The federal government closely regulates insurance companies to ensure that they are financially adept at covering the risks.
Insurance companies can either be classified as mutual companies (holistically owned by their policyholders) or proprietary companies (owned by shareholders).
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How To Start an Insurance Agency
Starting an insurance agency is not an easy task. If you want to create the best insurance agency, you’ll need to put in the time and effort. You will also need to follow a systematic action plan.
We have listed the seven steps that can help you start your own insurance agency.
Step 1: Draw A Business Plan
The first step for anyone looking to start a new business is to draw a robust business plan. A well-made business plan is a blueprint to success.
You can use a business model canvas to create your plan. This document can help you establish your commitments to your stakeholders, and identify where your prospects are, where your growth opportunities lie, and where your revenue stream is.
A well-made business plan can also help you set your goals and values, identify risks, and determine the resources you need.
While your business plan can serve as a roadmap, it may be adjusted over time.
At the bare minimum, your plan should cover these points:
- The organizational structure.
- Who your target customers are, how you plan on getting them, and the insurance products your business will provide.
- Identify who your suppliers are.
- Who your immediate customers are.
- The budget that will cover the initial start-up costs.
- The cash-flow projections.
Step 2: Pick Your Business Structure
The business structure you opt to go with will determine the level of personal liability you’ll take on. So, When it comes to agencies, some of the business structures you can choose as a model are:
- Sole proprietorship
- S corporation
- Limited liability company (LLC)
Every business structure has its own set of advantages and drawbacks. For example, while simple to establish, going with a sole proprietorship model will mean that you may need to use your personal assets to settle any business debts that you may face. It also means that if someone sues you, your personal assets will also be at risk.
Similarly, corporations and limited liability coverage can offer a financial buffer between you and your business. But they also tend to be more expensive and complex to manage.
Step 3: Finalize and Register Your Agency’s Name
You might have already picked a name for your insurance agency. But you still have time to change it. While choosing a name, you will need to consider a few things like:
- Is the name easy to pronounce and spell?
- Does it convey your agency’s values?
- Is it easy to search online?
- Does it meet your state’s requirements?
Note: Most states prohibit the use of certain words for businesses to use. Check with your Secretary of States’ department to learn what words are restricted.
Once you have finalized the name of your agency, you will need to register it with the state’s government. So, a minimal registration fee might be charged.
Step 4: Get Your Tax ID Number
The Internal Revenue Service (IRS) has mandated all business corporations and partnerships to use a federal employer identification number (FEIN) when filing their taxes. So, if you want to open a bank account or create a business credit card, you will need to acquire this number.
Note: If your business is a sole proprietor or a single-member LLC, you can use your social security number in its place.
Step 5: Register Your Agency with Your State
After acquiring your tax ID, you will need to contact the state insurance commissioner’s office. You will need to register as a “resident business entity.”
Your state will charge a registration fee and provide a checklist to ensure that you’re well-versed on all state requirements.
Step 6: Get Your Business Documents
Even if you have an insurance agent license, you will need a general business permit to operate in your state. The exact requirements and fees can vary based on a number of factors like the location, the business activities, and the set government rules.
Note: You should check with your state’s local agencies to ensure that you’re complying with the set regulations.
Step 7: Get Insurance to Protect Your Business
Just because you have an insurance business doesn’t mean that you’ll automatically be covered. Based on the structure and assets of your agency, it will need specific coverage to keep it financially protected.
Some of the most essential insurance coverage to consider getting for your insurance agency are the following:
- General liability insurance will provide your business with coverage for a wide variety of situations. For example, if one of your clients slips on a wet surface and injures themselves while in your office, this can help pay for their medical fees. This coverage can be bundled with commercial property insurance in a business owners policy.
- Errors and omissions coverage is something that every insurance agency needs before they’re allowed to write policies. It protects insurance buyers against any form of error that you or your staff may make.
- Workers compensation insurance will pay off any claims that one of your employees makes against the company. For example, if one of your staff trips on a carpet and ends up spilling hot coffee all over herself resulting in serious burns, this coverage will pay a portion of her lost wages and medical expenses. This coverage is mandated in almost all states and will need to be implemented even if you only employ people who work part-time.
How To Get an Insurance Agency License
If you want to start your own insurance agency, you’ll first need to obtain an insurance agent license.
Here are the steps that you will need to follow.
Decide on the type of insurance agent you want to be
You need to decide whether you want to become a captive agent or an independent insurance agent. Both career paths have their pros and cons. So, you’ll need to spend some time doing a little research before setting off on your journey.
Captive agents are generally considered as employees of the insurance company. This means that they are provided with their very own office space by the companies they work for.
Decide on the type of insurance product you want to sell
Decide whether you want to sell commercial insurance or personal insurance. Agents and agencies that specialize in personal lines of insurance focus on providing coverage for individuals and families. Their coverage options include motor vehicles, homeowners insurance, and life insurance.
Commercial insurance agents provide coverage to commercial businesses with policies ranging from general liability insurance and commercial property insurance to errors and omissions insurance.
It’s vital to base your decision on what line of insurance you’d be comfortable selling. Decide based on your gut instinct and your academic background.
Review your state’s licensing requirements
Based on the line of insurance you’ve chosen to go with, you’ll need to assess the licensing requirements of the state you’re planning on operating in. Each state has its own custom requirements and you need to be aware of them before taking your next step.
Some states will also require you to attend a 20-hour pre-licensing course in a classroom or through online platforms before sitting for an exam.
Your career plan could require you to obtain multiple licenses. It’s advisable that you get the specifics from your state’s licensing department or the companies you plan on representing.
Note: Individuals who operate without a license can face penalties or legal action.
Take the insurance exam
Once you’ve fulfilled any pre-exam licensing requirements for your state, you’ll need to register for your official licensing examination. This exam is held at a testing site where you’ll be placed at a computer. The test usually lasts for two to three hours.
Note: You may need to show proof that you’ve completed the required pre-licensing classes, so remember to take all the necessary documents with you.
As with any subject, the level of difficulty will depend on how prepared you are. You should have a relatively smooth experience if you’ve completed your pre-exam requirements. The question format is typically multiple-choice and will test your knowledge of insurance terminology, numbers, and practicality-based scenarios.
You’ll need a score of over 70 to pass the exam, and you’ll find out if you’ve passed or failed the test immediately after you’ve submitted the paper. You can reschedule the exam if you fail on your first try.
Submit the required documents and complete the background check
Once you’ve passed your state licensing exam, you’ll need to submit all the necessary documents to your state licensing department. Some states also require background checks and fingerprints.
It is only once you have acquired your license that you can legally market and sell insurance to your customers.
An insurance agency is different from an insurance company. Where an insurance company creates and manages the insurance products, agencies are tasked with marketing and selling them.
If you’re looking to start your insurance agency, there are certain vital steps that you need to follow. Drawing a business plan is the first step, as it serves as a roadmap for your business moving forward. Picking a business structure should also be a priority as it will determine your level of personal liability. You will also need to choose a name that is easy to spell and search online.
Also, remember to acquire your tax ID number and register your agency with your state. After getting all your documents together, remember to ensure your business will have all the necessary policies.
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January 30th, 2023 · 16 min read
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