What is Book Ownership?

book ownership

As someone who has helped over 150 individuals launch successful agencies … one of the most frequently misunderstood terms in our industry is Book Ownership.

Everyone wants it … knows they need it … but few understand the term … or even the right questions to ask.

Book ownership is an allusive term used liberally by agency networks and owners trying to recruit you to come build a book of business (and policies in force, or PIF) under their agency contracts. Yes, the first and most important question to ask is simple: If I join your network (or agency), will I own the book of business I’m building?

Yes is the answer you want to (and need to) hear. However, don’t let your questioning stop there. From here, it is important to drill down and ask significantly more questions about that ownership and how that group ultimately defines Book Ownership. Failure to do proper diligence here is risking learning the hard way when it costs you dearly.  

Why is defining the book of business so important?

Because it’s a part of the contract that only truly comes up when you’re selling your agency or trying to leave, switch, or change Networks. Oftentimes this piece isn’t well understood, because the agency owner didn’t really care about maximizing their agency’s sales value when starting the agency … they were just thinking about getting their own agency launched.

Remember, you are building an asset … and book ownership happens to be a key factor in the ultimate valuation (or sales price) you can achieve for your agency. When selling, it is important to remember the buyer will require standard due diligence before making a competitive offer and in the event this results in a sale, transfer the following:

  • Policy ownership rights
  • Commission deposits
  • Client Files – preferably digital

Without all three deliverables, it is likely the Buyer will move on or at best low ball. While some network structures claim the agent gets ownership of the book, oftentimes the way the group is setup specifically limits or takes away control of one or more of these 3 core factors. Many networks will check off the first box and consider that full book ownership. However, if you the agent aren’t in control of your own commission deposits and/or client database … those can become major sticking points in sales negotiations … sometimes regretfully after-the-fact and then the seller is really in a tight spot. 

When buying an insurance book of business, what will the buyer typically require as a part of due diligence?

While each buying process and negotiation is different, there are three common pieces of “evidence” that a potential buyer will request from an agency.

  • 3-5 years of results directly from the insurance company partners. These results should be yearly and should include premium, loss ratio, and retention (at the very minimum). 
  • 3 years of financials and/or tax returns. These should of course be the most recent 3 years of financials/returns and providing both provides significant reassurance to the potential buyer. 
  • Non-piracies and non-competes on all persons that have had access to your client files.

Many networks and agencies will have you place your agency’s business on a shared code.  This makes the due diligence process incredibly difficult to navigate because there is no way to provide a production report that shows the loss experience of your production alone.  In addition, this means non-staff can see your clients when they log in … making it impossible to comply with the third point above.  This generally is not a deal-breaker but it does provide the Buyer with leverage and impact your ability to sell for a premium multiple.

Can we understand Policy ownership rights a little better?

First, ownership rights matters to the eyes of the beholder. In the eyes of the insurance company, you do not own your book of business unless you have a free-standing Master Code with that insurance company – no matter what your contract says with your Network/Cluster/Brokerage. As far as an insurance agency buyer goes, they will be focused on who truly controls the client and the client’s information.

  1. If you have a subcode or are writing under someone else’s, you will need your upline to sign a Release Letter and send it to the insurance company in order for the insurance company to recognize you as the rightful owner.  If it does not explicitly state in your contract that they will sign a Release Letter upon request and in a reasonable timeframe, you are entrusting your retirement plan to their goodwill because if they do not sign this Release Letter, you will have to collect AOR letters one insured at a time.  
    1. The cleanest way to transfer the policies is through a Code Release Letter because this allows the carrier to grant access to all of your policies immediately.  If you do not have your own sub-codes or your upline is unwilling to release your subcode then you would default to a Policy Release Letter.  The challenge with this type of release is that almost all insurance companies lack the ability to move a policy to a new Agent of Record mid-term.  This means the seller would have to wait until renewal of each policy before they will be able to see and service the client through their carrier login and in the interim they would have to call the carrier 800 number to alter the policy or answer billing questions.

I thought handling accounting was a benefit of a network, why is it important to control commission deposits?

The age-old adage still exists … follow the money. If the commissions are going directly to the agency, that control is known and thus helps embolden the potential buyer. If you have a sub-code, it has the ability to have a unique checking account for commission Pay-To.  Most do not realize this capability exists at the sub-code level because most networks have all commissions funnel through them, they take their haircut, and send you the balance.  This is the decision of the Network, not a limitation of the insurance company.  This is another reason a Code Release Letter is superior compared to a Policy Release Letter.  Once they “own” the code, they have the right to update the pay-to and immediately all commissions begin hitting their account.  This important simplification instills peace of mind and emboldens confidence for the Buyer to make a lucrative offer.

  1. The alternative Policy Release Letter means that the Buyer would see commissions as they renew and unfortunately it is fairly common insurance companies when fulfilling a Policy Transfer, some accounts are missed making this a full 12+ months of closely watching each and every account to ensure they properly transferred.

Why is control of the client files so important?

They need to be digital to earn top dollar for sure. That’s not all. These days most agencies use a cloud based policy management system and unfortunately these systems do not make it easy to transport your data to a competing management system.  While you can pay for a Data Transfer, rarely do the fields match in a way that does not require a lot manual labor on the back end.  In that case you are having to do a Policy Transfer, having all insureds organized for tracking and verification of transfer fulfillment is imperative.

Many networks will provide you with a management system database that they ultimately own.  If this is the case you would most likely have to do a Data Transfer and this is likely to get messy and any informed Buyer knows this so once again giving them leverage and putting you on defense.

Furthermore, if they are named on your database, then they have eyes on your clients which complicates due diligence.

In summary, book ownership ranges from an excel spreadsheet of client information that you have the right to AOR to a turnkey agency that the Buyer can step into on day one and own, service, and get paid on the policies they just wrote you a check for.  What a buyer pays for this ownership spectrum ranges from .75x to 2.5x gross commission.  

Here are the key questions I recommend everyone ask about book ownership before joining a network, cluster, aggregator or brokerage agency:

  • Will I have subcodes unique to my agency on which only my agency has authority to write business?
  • Will I have access to commission and production reports through the insurance company login so I can monitor my production, loss ratio, and commission?
  • Will anyone other than me and my contracted employees be able to view my clients and their information?
  • Where in the contract does it say that I can continue working with any and all insurance companies provided by you in the event we part ways?
  • Where in the contract does it say you will sign a letter releasing my subcode and send it to the insurance company?

Once you have the answers to those questions, I think you will have a much stronger picture of which network setup is right for you.

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