What Goes Into Determining an Insurance Agency Valuation

By Team INEX |

Every business has a net worth representing the value of its assets and revenue minus its costs and liabilities. Naturally, your insurance agency is also a business, so it too will have a specific value. Performing an insurance agency valuation can effectively identify risks and establish goals, but many agents don’t know how to determine their agency’s worth. Consider this guide if you’re wondering how to establish an insurance agency valuation.

Understanding the Valuation Process

An insurance agency valuation is hypothetically like any other business valuation. In practice, though, the calculation for an insurer is generally more complex because of the liabilities that an agency must handle. Rather than simply calculating the worth of assets and the expense of risks, an insurance agency valuation must also account for the risks of the agency’s clients. As such, it isn’t easy to pinpoint a single fair market price or average agency value. There are too many variables and risk factors unique to each agency.

Why an Agency’s Value Is Important

If calculating an agency’s value is so complex, why is it necessary to attempt to do so? You may be well-served to invest in a professional valuation for several reasons, including preparation for a potential acquisition. Reports indicate that in 2022, Q3 saw three mergers and acquisitions in the insurance industry that exceeded $1 billion in value. Although deals of this magnitude are rare, this figure reveals the potential profits such an agreement may offer if an agency’s value is accurately assessed.

Factors That May Influence an Agency’s Value

The importance of accurate insurance agency valuations is clear, but many insurance agents still do not understand the factors that impact their agency’s worth. There is no single answer, and a wide range of issues can influence the calculation. Generally, some of the most critical determinants include the agency’s gross annual revenue, tax liability, potential appreciation or depreciation of assets, and account amortization rates. Insurance agency valuation consultants will generally prioritize these factors in their assessment.

Calculating Profitability From Fair Market Value

In addition to the aforementioned factors, insurance agency valuations will consider the overall profitability of an agency. Rather than simply referring to the profits stated on tax documents or other financial statements, an insurance agency’s profitability is typically calculated based on fair market valuation. It involves adjusting profit projections to account for potential increases or decreases in the agency’s expenses and revenue. Incorporating details and assumptions within these categories allows for a more accurate assessment.

Investing in Insurance Agency Valuations

There are many reasons why insurance agencies should invest in professional valuation services. A business valuation of an insurance agency can reveal crucial insights and give agencies a big picture of their financial well-being. Most importantly, insurance agency valuations enable insurers to bargain confidently in potential mergers and pursue deals that reflect their agency’s true worth. If you are considering investing in a formal valuation, trust a professional service provider who can accurately calculate your agency’s value.

About INEX

INEX serves clients by providing industry-leading management consultancy services to insurers throughout the U.S. Reach out to us by emailing info@omd.707.mytemp.website or calling (603) 665-6000.