Transitioning from a Captive to Independent Agency

Transitioning from a Captive to Independent Agency

Moving from captive to independent agency status.

As a captive agent, you enjoy a secure and supportive environment. Your parent company provides office support including HR, marketing, administrative functions and a range of other services. Captive status works well for many agencies but you may be looking for other options.

If you are an entrepreneurial agent who wants more freedom, flexibility and money, transitioning to independent status may be a good choice. But independence involves a whole set of new challenges to consider.

Here are 5 questions you should contemplate before going independent:

1. Are you up for the challenge of running your entire agency?

You’ve managed your captive agency for a long time. Will you be comfortable taking on all the tasks your parent company has managed for you? For example, are you ready to:

  • secure a professional office space;
  • contract phone systems, agency management systems and software;
  • oversee your website, marketing, accounting, licensing, and insurances;
  • manage staffing, HR, benefits and payroll;
  • hire the right vendors and producers;
  • build an infrastructure that results in smooth and efficient operations.

2. What is the status of your current book of business?

As you know, a captive agent does not own their book of business. If you declare independence, will your parent company let you buy your current book? If not, you need to determine how you will build a new client base. Are you in a position to buy a book from another independent agency?

To solicit the clients that have been in your captive book of business, you must fully understand the restrictions of your noncompete agreement and/or your non-piracy clause. Either can make or break your new agency. Can you market to your existing captive clients or do you need to wait a specified period of time before you can do so? How long do you need to wait? Familiarity with your noncompete agreement and due diligence are critical for any agent considering a transition to independence.

3. Have you developed a business plan?

As an independent agent, you are not restricted to a geographic territory or a specific suite of products. You can market your agency, products and services freely. But first you’ll have to define and understand:

  • your legal business structure (LLC, S-Corp, or other entity),
  • the services you plan to offer,
  • the target market you plan to serve,
  • your unique selling position,
  • how your agency will be organized,
  • how your agency will be funded,
  • basic financial projections,
  • sales and marketing strategies.

Writing a business plan will force you to be specific about your business goals and how you will achieve them. It will force you to assess your industry — what is affecting it today and what the future will hold. The plan will put into words what differentiates you from your competition. It will define how you will sell, distribute and support your business.

For advice creating your plan, consider developing a mentorship with other independent agents. They can answer questions and provide advice. Don’t have such relationships? The SBA can match you with experienced consultants to guide you through the planning process. Their SCORE program offers free access to mentors, counselors and advisors who can help navigate the challenges of independence.

4. What funding do you have and how much will you need?

Establishing an independent agency requires start-up capital. Many transitioning agencies start with no capital and work to build income up within two to three years. The early years are about survival – having enough cash to cover expenses until your agency is self-sustaining. This can require more than $50,000 annually, although capital requirements vary with geography and operating strategy.

It takes time to generate enough commissions to cover expenses, so financial reserves are critical. Transitioning agencies should allocate at least two months cash reserves as part of startup planning. Before declaring independence, research your expenses and determine how much cash reserves are required. Do you have enough savings to cover the business transition and your personal financial needs?

Part of your funding may likely come from loans. While many lenders will help bridge your financial gaps, you will need to have substantial cash available upfront. You can achieve this by borrowing from friends and relatives, or by securing seller financing. Having funds dedicated for rent, salaries, and other expenses will reduce your stress and minimize concerns about survival.

5. Should you contract directly with carriers or affiliate with an agency service provider, network or aggregator?

As an independent agent, you can contract with multiple insurance carriers to offer your clients a variety of coverage and pricing. However, some carriers will require agencies to maintain high sales volumes of $250,000 to one million dollars to keep an appointment. Some larger carriers, particularly in health insurance, won’t contract with agencies whose books are “too small.” Those things take time to establish and, for a new agency without a solid track record, it can be impossible to produce them.

Joining a group, network, aggregator or cluster can allow new agencies to gain entree to large carriers. Agency networks contract directly with carriers and then appoint agents they’ve vetted to write business with those carriers. If you work with good networks, you may have no reason to pursue your own carrier appointments.

In exchange for the benefits, though, networks may charge initiation fees, monthly fixed fees, a percentage of your commissions, and/or exit fees. They may also require you to give up a small stake in the value of the book of business that they help you to build. It’s obviously important to carefully read and understand the contractual relationship that you would enter into with any network or group.

Finding the right resources

If you decide to declare independence, you will have many more questions as you move through the process. Many resources are available to help the newly independent, from underwriters to carrier marketing representatives to trade groups like the Big I and Professional Insurance Agents (PIA). Seminars, webinars and industry events can also be helpful. The Big I and PIA offer programs in many states, as do industry organizations like ACORD, the Society of Chartered Property Casualty Underwriters, and the Insurance Services Office.

If you are considering a move from a captive to independent agency, let our experienced Lending Advisors share their knowledge of the process and accompanying financial requirements with you. We’ll get to know your agency, your plans and your particular needs so we can make suggestions for how you can make a move to independence possible. Contact us by filling out the form below or calling 855.514.1189 for a complementary 30-minute consult.

It may also be helpful for you to think through the expenses of starting up an independent agency, as well as your sources of working capital and collateral. To help with that process, download our Agency Startup Budget Spreadsheet.

Talk to a Lending Advisor

Or fill out this form and we’ll be in touch with you within 24 hours. No risk, no obligation.

Call (855) 514-1189


21 Critical Questions to Ask a Lender When Considering an Insurance Agency Business Loan

When you need an insurance agency business loan, finding the right lender is important. Ask these questions to help determine if a particular lender is right for your agency, its financial situation, and your business goals.

Learn More.

Agency Funding Success: Multiple Acquisitions

CASE STUDY For 60 years, our client – a small town agency – had offered a mix of home, auto …

Learn More.

Top 20 Business Books for Insurance Agency Owners

As we approach summer, we thought we’d share some of our favorite business books with you so you can add …

Learn More.