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Three Elevated Risks When Buying an Agency in a Hard Market


Going through the process of buying an agency can require a high amount of effort in a stable market, so trying to make an offer now can change how you perform due diligence. Many agencies are trying to manage threats to their operations such as client retention, staff retention, and even carrier retention. Although these risks are a normal part of evaluating the agency many agency owners are struggling to manage one, if not multiple, of these important factors of their business. This article will dive into each of these risk factors in more detail while also providing some questions you should consider when performing due diligence on an agency acquisition.

Client and Revenue Retention

Insurance routinely goes through hard market cycles where carriers adjust rates as they try to balance between competing for business and adjusting for market conditions. Because independent agents are paid commission on written premiums agency income is directly affected by these cycles.

A soft market can present opportunities for agencies to increase their client count as the market competition is high for carriers. The primary way to increase written premiums is by earning new policyholders. As rates decrease and carriers are more competitive agencies must thrive on writing new clients to increase revenue, and agency commission on renewals can decrease correlated to rate decreasing on renewal policies.

A hard market often will require agencies to pivot their strategy to defense to retain clients. This is influenced by less competition among carriers to write new clients to increase premiums, and clients change behavior to procure quotes because their rates are increasing. Many carriers routinely try to adjust rate with the consumer pricing index (CPI) to keep up with economic factors of claims, but if the CPI and cost factors that contribute to claims continue to inflate it can present market conditions difficult for agents.

How does this affect retention? Retention has three major measurements. Client Retention, Policies in Force (PIF), and Revenue Retention. Client and policies in force is often the common way that carriers represent retention on a production report, but we would propose the most important for the agency to track is revenue retention. Why? Because commission revenue is what shows up on the agency’s profit and loss and is the largest factor for valuing an agency.

The current hard market poses a unique situation in that many agencies are experiencing decreased client retention and PIF, but if they are maintaining enough then revenue retention is the same if not higher than normal. For some agencies we have performed valuations we found their PIF or client count retention in the mid 80%, but their premium retention was 95% or greater because the rate increases on retained clients have outrun lost business.

Questions to ask about retention:

  • How is the agency measuring and presenting retention?

  • In due diligence are you able to analyze client retention, PIF, and revenue retention?

  • Are there any current retention issues with the agency’s top markets? If yes, what is causing business to be moved or lost?

  • Does your agency have comparable alternatives to offer clients that would boost retention?

  • What communications or efforts are planned to maintain client retention through a transition?

Having a strategy to secure client and revenue retention is oftentimes an oversight for many new buyers. If available, seek to work with the current owner on a formal plan to communicate with the clients and ensure their confidence.

Employee Retention

The Great Resignation has been widespread, and although the wave of job turnover has slowed agency owners across the country still say one of the top issues they face is recruiting and retaining talent. Another factor that contributes to an agency’s value is the staff. Good people attract and retain clients. Wages and employment terms have shifted more in favor of employees which also means employers have become more selective of who and when they hire.

The other side of this situation is many employees are expressing their sentiment of wanting more and openness to consider other employment opportunities. Gallop’s State of The Global Workplace 2023 report found that nearly 6 in 10 employees feel disconnected from coworkers, their supervisor, or the company they work for.

Couple this feeling with the uncertainty that can be present through an acquisition escalates the risk that employees would consider leaving the agency. If employees are already considering other employment opportunities, then the news of an acquisition could trigger them to pursue them further or become more disengaged if there is little to no communication for a transition plan.

Most negotiations include confidentiality and non-disclosure terms until a certain stage is achieved, however, it’s important to understand employee sentiment to assist with staff planning for the new owner.

Questions to ask that can assist with staff planning:
  • What has the current owner shared with staff about their plans to sell the agency?
  • At what stage of negotiations could the potential buyer meet and interview staff?
  • Does the agency utilize employment agreements? If so, what are the terms?
  • Are there employment terms in this agency that are considerably different from your current staffing model? Remote work, flexible hours, PTO schedule, etc.
  • Other than salary, what benefits are employees offered and utilizing? Will the agency incur or offer different benefits than your current program?
  • If a staffing change is planned, are you planning a severance benefit or support resources for those affected?

Navigating this process can often be challenging because there are a lot of unknowns to be solved in a short period. If you can make efforts to have a staffing plan on how to communicate and support employees through the transition process. Carey and Lindsay have a great podcast episode with Ryan Reynolds of Grimes Insurance on the steps he took to gain employee trust and collaborate on the future vision of their agency.

Carrier Retention

Another top value driver or risk factor for an agency is the list of carriers from which they earn commission. A general guide is any carrier that the agency earns more revenue than its profitability is an elevated risk. If one carrier changes their underwriting appetite or contract status the agency’s financial performance could be jeopardized. This is a realized risk for many agencies during this hard market with carriers ceasing new business, or in some cases canceling contracts.

I recently spoke with an agency owner who was losing their largest personal lines carrier. They were one of the first appointments they received when starting their agency 7 years ago. Years of success and this carrier represented 25% of their agency revenue! Through the last few months, their retention plummeted as this carrier’s rate increases were not proportionate with the local market. They were losing business to competitors and re-writing customer policies with their other carriers that were open to new business. The first call with their carrier rep was empathetic and they quickly moved to a retention program to escalate underwriting requests to maintain policies. However, within one month those efforts were unsuccessful and the carrier notified the agency their appointment was terminated, they were to move all policies at expiration.

All carrier contracts typically contain terms that the carrier is to be notified of a major change in ownership by the agency. This is usually with the intention for the carrier to plan for book consolidations if the new owner is already appointed with them, or to build rapport and develop a relationship with the new owner. In some cases, there could be reasons the carrier would not extend a contract to the new owner and terminate the appointment. This is why purchase terms often include contingencies for carrier contracts to be maintained to preserve the value of the agency.

In this hard market, these risks have shifted. Carriers are actively reassessing agency appointments to optimize their distribution strategy. So while purchasing a book of business it’s crucial to understand the current appointment status and the carrier’s relationship with the agency. Great risks can also pose opportunities to benefit if that agency’s appointment is threatened and you maintain a good relationship with the carrier.

This is another area that is typically covered under confidentiality, but have a plan to perform due diligence around carrier relationships effectively to help you formulate a transition plan.

Questions to ask that can assist with carrier contracts:

  • What are the terms of ownership change contained in the carrier contracts?
  • What is the current appointment status of the agency’s top markets?
  • Is the agency on a performance or retention plan with any carriers?
  • Does the agency maintain a current list of carrier representative contacts?
  • What carriers on the list have ceased writing new business in the area?
  • Have any carriers significantly changed their underwriting appetite within the agency’s book of business that would cause non-renewals or remarketing efforts?


Although top-line revenue is the primary driver of agency value it’s important to understand the operational components that support the revenue. Hard market conditions coupled with dramatic shifts in the labor market pose elevated risks for anyone who is trying to acquire an insurance agency. It’s important to ask valuable questions to understand these risks during the due diligence process and how they could impact the agency’s performance during and after the transition.