Loss ratio acquisition
Loss ratio acquisition

One of the main orders of business for an agency that’s just purchased a counterpart is how to transfer the accounts that the latter has with various insurers.

While it’s easier to roll them over if both agencies have appointments with the same carrier, it’s more difficult for accounts covered by insurers with which the purchaser lacks a broker of record agreement. If the selling agency has a significant part of its book of business with an insurer that refuses to appoint the buying agency as a broker, the purchase could go up in smoke.

That’s why it’s vitally important that if your brokerage is buying another agency you take a measured approach, plan ahead and have options for accounts that may be hard to retain if an insurer doesn’t want to play ball.


Various scenarios

Same carrier appointments – This is the easiest scenario, particularly if the two agencies are in the same group. If both parties have agency appointments with the same insurer, transferring the broker of record for accounts can sometimes be as easy as filling out some forms. Insurers will often accept broker of record transfer requests signed by both agencies.

Amenable insurers – In this scenario there may be one or more insurers with which only the seller has appointments. In these cases, the buying agency will need to apply to get an agency appointment. Both agencies may need to be involved in the process and supply documentation of the sale. This can get quite involved, particularly if the insurer is a stickler and has certain standards for appointing new agencies.

The process can also be time-consuming and gets tricky when direct-billed accounts need to be transferred to the buyer, a process that can be slow. During the waiting period the funds will continue being paid into the seller’s account.

Both sides may want to agree to a transparency clause that will allow the buyer to view the seller’s bank accounts during this period to ensure that direct-billed proceeds are transferred to the buyer.

Another issue that may arise is that the carrier requires all of the transferred accounts be underwritten again. This creates unpredictability, and those accounts may end up paying higher rates.

Insurers reject the buyer – This of course is the worst-case scenario. Deals can evaporate if a deal can’t be done due to an insurer’s decision to not accept the new agency, particularly if the company has a significant share of the seller’s overall book of business.

The problem is that often an insurer’s approval or rejection comes after the two parties have entered into a contract or after the purchase closes.


What you can do

One of the first steps after entering into a letter of intent is for the parties to inform the seller’s carriers of the transaction and to apply for an agency appointment. Start this process early, especially if the buyer is hoping to be appointed after the transaction closes.

When writing up the letter of intent, one option is to include language allowing the buyer to drop the deal if specific insurers refuse to appoint the buying agency.

However, it all depends on the selling agency if the owners want to accept those terms. They may not. One way to appease both parties is through a “retention clause,” which reduces the purchase price if policy retention is lower than anticipated.

Also, if an insurer that rejects the buyer’s application is a smaller or niche player, the buying agency may want to move its accounts to a larger insurer with which it already has a relationship. That helps bolster its book with the carrier and boost the potential for bonus commissions and preferred status. The decision is made easier if the seller’s insurer has better rates and/or terms.

Finally, regardless of whether an insurer is or isn’t interested in accepting a new appointment, the buying agency may also want to move accounts it acquires to other carriers if the legacy insurer has a higher price, poor service or a limited underwriting appetite.

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