Top 5 considerations for starting an insurance brokerage in 2024

(1) Costs

Many of us dream of starting our own business. The opportunity to be your own boss, work flexibly and earn more money is very appealing. However, the risks of building something from scratch holds many people back. The initial startup costs and downside of limited early income make starting a business a daunting process. Starting an insurance brokerage is no different but the cost of getting approved by the regulator (FCA) and qualified by the Chartered Insurance Institute (CII) is lower than you might think.

Recorder estimates the initial cost of setting up an insurance brokerage in the UK is around £5,000. This includes company incorporation, regulatory approvals, CII qualifications, IT hardware, website hosting and insurance broker software. It doesn't include initial salary cost or insurer relationship building costs in order to get terms of business agreements (TOBAs) in place with insurers - as many insurance brokers startup operators will already have these relationships in place.

Regulation and qualification often feel like the main barrier to entry for new insurance brokers. Our research indicates the cheapest membership and qualification option for CII is the digital only choice which, for members, will reach £687.06 in annual costs. In order to get regulated directly by the FCA, rather than becoming an appointed representative (AR), you have to pay a non-refundable fee to submit your application which is £2,500. The British Insurance Brokers' Association (BIBA) estimates the overall direct and indirect costs of regulation are equal to 8.1% of insurance mediation fees and commissions for insurance brokers so this is a fixed cost consideration to factor into annual profit and loss and cashflow forecasts.

Aside from the cost of achieving qualification and regulation there will be some investment in IT software and hardware required in order to get a started. Insurance brokers will need a decent laptop, mobile phone, website and internet connection to communicate effectively with both clients and insurers. The mission critical piece of software required to run an insurance brokerage effectively is a broker management system – more on insurance broker technology later (5).

(2) Compensation and incentives

Insurance brokers generate revenues via either commission or fixed fees associated with selling insurance policies. Commission or fees are charged by the broker to their client for the services they provide in finding and securing the appropriate coverage from insurers. When a client purchases an insurance policy, the insurance broker collects the premium and deducts their commission before transferring the net amount to the insurer who carries the risk of loss on the insurance policy. This process is known as client money handling – here is a great guide on client money handling by the Society of Insurance Brokers.

For commercial insurance brokers in the UK the average commission is typically in the 20-25% range. For larger clients with multiple insurance policies brokers often arrange a flat fee structure with their clients which caps the total costs for their client.

As a result of this compensation structure insurance brokers are able to generate revenues as soon as they have TOBAs in place with insurers and they have clients committed to purchasing insurance policies from them – more on distribution later (3).

Once established, insurance brokers can become desirable targets for acquisition by larger firms. There were a record 148 announced M&A transactions in the U.K. insurance distribution sector in 2023. This represented a 35% increase from the 110 transactions reported in 2022. Brokers are typically acquired once profitable and generating revenues above £1m per annum. There a several insurance broker consolidator firms in the UK who will regularly seek out acquisition of smaller firms. Brokers are typically acquired based on a multiple of their EBITDA (5-10x) depending on the underlying financial metrics.

The insurance broker compensation structure and regular market consolidation cycles mean there are very attractive financial incentives for insurance brokers that can scale up their book of clients efficiently.

(3) Distribution

Whilst insurance broking requires you to advise clients on their risks and arrange the relevant cover with insurers it is also ultimately a sales profession. In order to win new clients you must be able to sell insurance products and services. Winning new business consistently requires a thoughtful approach to lead origination and conversion. Many start-ups brokers decide to focus on a specific profile of customer – this might be based on region, type of business, business size or a specific type of risk.

Based on their ideal customer profile brokers must work to establish predictable new business sales channels:

1. Inbound – new enquiries via website, search engine optimisation based on keyword search and educational content.

2. Outbound – networking at industry specific events, cold calling, email sequencing and LinkedIn segmentation and outreach.

3. Referral – from existing clients, partners and introducers (accountants, investors and other service providers focused on the same client segment)

Insurance broking not only provides the opportunity to earn well but also the ability to provide significant value to the community of customers which you choose to service. Insurance provides businesses with the confidence to trade and expand without worrying about downside risks. As a result running an insurance brokerage can be a very fulfilling role as the services provided have real world purpose and are critical for the functioning of a healthy and growing local economy.

(4) Skills

Insurance brokering requires a well-rounded professional skill set. Excellent verbal and written communication skills are critical for good customer service and ensuring clients are able to arrange claims effectively and also renew their policies each year. The ability to upsell new insurance product based on a client’s changing circumstances will require intuition, strong business acumen, thoroughness and attention to detail. A strong understanding of the evolving market risks and the evolving profile of both internal and external risk will enable brokers to provide better quality for advice for clients. Staying on top of the latest risk information via industry specific publications will assist new brokers with their risk narratives.

Building a profitable book of clients will require persistence and determination over a prolonged period of time. Exercising patience with insurers who can be notoriously slow at times and the staying calm in stressful situations which can be make or break for clients is essential. Whilst previous experience within insurance is not essential, insurance broking is a relationship business and establishing trust and credibility with clients will ensure high conversion rates.

The future of insurance is digital and therefore strong IT skills and confidence with software like CRM, accounting, e-trading and payments is important.

(5) Technology

One of the main considerations the owners of a new insurance broker might have is competition.

‘Surely there are a lot of people already doing this?’ will be the first question that comes to mind. And the answer to this question is invariably – Yes.

But then one should ask, ‘How do I do it better?’

And the answer to that is technology.

It has been widely reported that in the next 8-10 years over 50% of the current insurance workforce will retire. At the same time, the insurance industry continues on its journey of digital transformation. At Recorder we believe there has never been a better time to setup an insurance brokerage than 2024 and that is because brokers can now leverage technology in order to digitise and automate processes which have historically been done manually. That means new brokers leveraging the latest broking technology will have a lower cost to serve clients and more time to provide better advice to more businesses.

There are three key processes in which brokers can leverage technology to assist them with building and efficient and profitable business:

1. Risk capture – the latest broker management technology provides customers with a broker branded digital journey for recording risk information. Once recorded this risk information can be enriched via third party databases (e.g. Companies House) and stored in a CRM.

2. Retrieving quotes from insurers – broker management technology will also transform risk information into a format which can be used to retrieve quotes from insurers via application programming interfaces (APIs). Sharing risk information with insurers digitally without the need for re-keying will significantly reduces the time and cost to quote.

3. Managing policies – insurance policies typically renew on an annual basis. During the term of a policy things can change leading to mid-term adjustments, additional cover requirements, new policies and finally the renewal of the existing policy. The latest broker management technology will allow for all of these changes to be managed digitally.

Recorder is a modern broker management system for the next generation of insurance broker. We take the hassle out of capturing client risk information, obtaining quotes from insurers and managing policies. New brokers can get started with Recorder’s product for free: https://signup.recorder.tech/