By Alistair Body
Business Development Director, Momentum Broker Solutions
Starting an insurance brokerage is a great thing to do for the entrepreneurial insurance broker and the Appointed Representative (AR) model continues to grow in popularity.
There are a number of options available for those looking to start up, and in selecting the Principal to work with there are some important contractual matters to consider – not all are the same!
The importance of understanding what is the norm and what you, as a new business owner, need to consider and what to be careful about.
Client ownership is a very important feature of being an AR and this should be clearly explained in the contract – there should be no ambiguity.
What happens if you want to leave and retention of client records
Sometimes, this is unnecessarily complex and can become problematic when the decision has been made to move on to pastures new.
There are five specific issues to consider here:
- Your right to leave and take the business with you.
- How are the clients are transferred to their new home and what support is given by the existing Principal to facilitate?
- What broking support is provided for existing e-Trade business, that cannot be transferred mid-term in respect of any MTA’s that need to be processed prior to renewal?
- How can you ensure you have complete client records post departure, along with any data/information stored within the broking system?
- During the notice period, what restrictions if any, are imposed in respect of the business continuing to write new business, use premium finance and access to the additional support services the Principal provides?
While the contract may be silent on the above, there is no reason why this cannot be added to the contract and/or confirmed in writing as an addendum to ensure you have the clarity you need.
Joining and exit costs
Principals have their individual business models and they will need to earn from the partnership in one form or another. This usually is in the form of a commission share or annual fee arrangement.
If there are joining costs, you need to balance what you are paying with what you are getting and consider if that is the norm for Principal/AR relationships. Cashflow is, of course, vitally important when starting up, so upfront costs should be kept to a minimum.
Exit costs are not something you should expect to see in an AR contract, unless the agreement is cut short in respect of the contractual period. You have worked hard to build the business and exit costs shouldn’t hinder you from making the decision to move elsewhere.
There is a huge variation on contractual periods offered by AR Principals, they range from 1 year to a staggering 10 years. While you don’t necessarily join a Principal with the intention of leaving, the reality is that your business needs and relationships can change over time.
While a longer contract period might give you additional comfort for the medium term, it is a big step signing up for anything longer than 12 months when you are initially starting up.
Shared ownership arrangements
It is becoming more common for new start-ups to have investment/shareholding from third parties and/or their AR Principal. This can help reduce the cashflow needs in the first 12 months. If you are starting up your new venture and have additional shareholders in the business, you need to consider the end game before you finalise contracts and shareholding agreements. Regardless of what you want to achieve short and long term, you need to consider and document the following:
- What happens in the event your Principal/shareholder is acquired?
- How can you realise the value of your shareholding if you wish to retire or move on?
- What options are available to you if you wish to acquire the remaining shareholding?
Contracts should be clear and concise and shouldn’t require legal advice to understand their intention. While it is advisable to seek legal advice before signing an AR contract, a sensible first step would be comparing it to other AR Principals.
If you want to find out more about how Momentum supports its broker partners and how to ensure you get your business off to the right start, then please do get in touch.
This article was originally published on LinkedIn by Alistair Body.
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Momentum gives your business stability, longevity and a secure platform for growth. Our unique model is designed so that you can focus on your clients while we provide you with a broking team, back office and the tools to grow your business.