Insurance Agencies
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Industry Overview
About 130,000 insurance agency and broker offices in the US generate annual revenues of $85 billion. Large companies include Marsh & McLennan, Arthur J. Gallagher, and Aon. Despite the prominence of large companies in the commercial segment, the industry remains highly fragmented: the largest 50 firms only hold 20 percent of the total market. The average office has five employees and generates less than a million dollars in annual revenue. An insurance agent works on the insurance company's behalf; an insurance broker on the customer's behalf. Many companies on the commercial side function mainly as brokers.
Competitive Landscape
Demand is related to consumer income and the volume of commercial activity. The profitability of individual agencies depends on effective marketing. Large agencies have advantages in name recognition, connections with more insurers, and the ability to craft more complex insurance packages. Small agencies can compete successfully by specializing in a product, industry, or market. Average annual revenue per employee is close to $200,000.
Products, Operations & Technology
The three broad categories of insurance are property and casualty (P/C), which generates about 60 percent of annual industry revenue; health, about 12 percent; and life, which generates 10 percent. Within the P/C segment, commercial insurance accounts for 60 percent of revenue. Because of the very different insurance issues involved in each, many agencies handle only one type of insurance. Agencies may also specialize in selling to individuals, businesses, or groups. Agencies that sell to individuals may provide highly personalized service.
P/C insurance includes auto (40 percent); homeowners'; commercial; workers' compensation; and other liability coverage. With these types, especially in the commercial segment, agencies frequently provide various fee services such as claims adjustment, risk assessment, and premium collection in addition to selling policies. Health insurance is sold primarily to companies or groups, but individual supplemental policies have become more popular in recent years as managed care providers have limited their coverage. Agencies that sell health insurance often offer administrative and consulting services in the employee benefit field.
Agencies selling life insurance essentially specialize in personal financial and retirement planning, and sell other investment products such as annuities. Annuities (fixed, variable, deferred, and payout) are an insurance product that essentially functions as a financial investment. Annuities generate more annual revenue for life insurance companies than do regular life insurance sales.
Agency agreements with insurance companies allow agents to bind insurance coverage on the company’s behalf and specify the commission the agency receives from policies. Agencies usually have agreements with multiple insurance companies, although some work exclusively with one company and are essentially franchisees. Typically, agencies receive a large percentage of the initial premium from a new policy and a smaller percentage from renewal premiums, but the compensation formula varies according to the policy premium schedule. Brokers work on behalf of their customers, soliciting bids from several insurers, and are used extensively in the commercial segment of the industry. Broker compensation is through fees from the customer, although in some cases brokers may also receive commissions from insurers.