There may be no industry in this country experiencing consolidation at a faster pace than the insurance agency business. Since 1990, the total number of independent insurance agencies has shrunk by more than 20%, but smaller agencies have disappeared at nearly double that rate. So where have all the agencies gone and what does it mean for today’s agency owner?
As acquisitions brokers and consultants for insurance agents, we are always aware of the selling and buying activity in our industry. The trend that has emerged over the past decade or longer is that agencies making $1-2 million in annual revenue (not premium, but commission and fee income) are buying up agencies with less than $1million in revenue.
In 1990, agencies with less than $1 million in revenue represented 95% of all independent insurance agencies. They were the obvious majority. But by 2006 there were 30,000 fewer of these smaller agencies, and by 2015 another 20,000 are expected to be gone. At that point, the agencies with less than $1 million in revenue will represent only about 50% of all insurance agencies, down from 95% back in 1990.
Where did all those agencies go? They were bought, not by huge national brokers, but by slightly larger agencies with revenue between $1-2 million. In 1990 there were only about 3,000 of those slightly larger agencies, but by 2006 there were 11,000, and by 2015 there are expected to be over 20,000 agencies with revenue of $1-2 million.
But what is the effect of this consolidation on the average agency owner?
The primary lesson to learn about consolidation is perhaps that there is no such thing as “staying the same”. In the insurance agency business today, if you’re not growing you could be falling behind. This is partly because of the unfortunate reality of the consumer mindset which is often that bigger is better. You only need to look at the coffee shops with green awnings on every street corner with the line out the door to realize that the average consumer equates saturation with goodness. We see it every day in the insurance business too, where consumers happily or unknowingly pay double the premium to a large captive writer just because they see a familiar sign on the door or remember the TV commercials.
So as larger agencies grow by buying smaller agencies, they aren’t just adding new revenue, they are also proliferating their name, their branding, and their marketing materials into new neighborhoods with new clients and new prospects. Each time that happens, it becomes more difficult for the smaller agency owner to compete.
The interesting phenomenon about consolidation among insurance agencies is that both sellers and buyers are reacting to the same set of circumstances as their primary motivation for deciding to sell or buy:
- Internet competition from direct writers and lead aggregators.
- Carriers changing distribution strategies and commission rates.
- Banks, credit unions, franchises, and national brands popping up to compete for local insurance agency business.
- Regulatory changes impacting the ability to collect fees and bonuses.
- Consolidation making the large agencies get larger.
For the reasons above, some agencies who feel they are losing control of their reliable revenue stream may decide to sell, while other agencies with the same concerns may decide to buy. In this era of consolidation, every agency owner should think about whether they are a potential buyer, a potential seller, or they are just trying to stay the same.