How to start an insurance company as a small business owner

Starting your own insurance company might seem like an ambitious undertaking, but it’s not impossible. Let’s look at what it takes to start an insurance company from the ground up. We’ll go over the essential steps, regulatory requirements, and other factors to consider before launching your business.  

Insurance companies protect people and cover businesses through risk management. They may protect someone from the costs of a car accident, cover a business when someone slips and falls on the premises, or take care of medical expenses after a health emergency. Typically, insurance businesses collect premiums from policyholders and pay claims when covered losses occur.

There are two main types of insurance businesses: carriers and agencies/brokerages. Carriers underwrite policies and bear the financial risk. They typically require significant capital, extensive regulatory approvals, and a large workforce.

Agencies and brokerages, on the other hand, are intermediaries between the consumers of insurance products and carriers. They earn commissions from selling insurance policies from multiple insurance companies and don’t assume financial risk themselves. Agencies and brokerages are easier and more affordable to start than carriers.

The first step in how to start an insurance company is to decide what type of insurance business you want to start. The type you choose will determine how difficult it will be to launch and how much capital you will need. The three most common options are an insurance agency, managing general agent, and carrier.

Agencies sell policies from insurance carriers for a commission. They also help clients choose the right coverage and provide ongoing customer support. This option is the most affordable to start.

Managing general agents (MGAs) operate under carriers and are authorized to underwrite policies and handle claims. Because they have more control over policies, they typically earn higher commissions than agencies. The barrier to entry is higher, however. MGAs require more experience, and they have more regulatory oversight.

Carriers assume financial risk by underwriting policies. Starting an insurance carrier business requires substantial capital to pay claims and for the workforce and overhead. Carriers are also subject to extensive regulatory oversight.

Once you've decided on the type of insurance business, you'll need to choose a specialization. Focusing on a certain type of insurance can help your business stand out in a competitive market. Clients may see you as an expert if you specialize, which may increase your business.

Some insurance niches to consider include:

• Small business liability
• Professional liability
• Life insurance
• Home insurance
• Pet insurance
• Health insurance
• Auto insurance

When choosing your insurance specialization, consider the market demand where you live and your expertise. Also, check out the local competition to see if there’s room for one more. It’s also important to make sure there’s good profit potential and you can comply with the regulatory requirements.

One of the most important things to consider as you work through the steps on how to start an insurance business is how much capital you'll need. It'll vary depending on the type of insurance business you're starting and other factors.

An independent insurance agency is the most affordable option—it typically requires $5,000 to $50,000 or more to get started. You'll need sufficient capital to cover licensing fees, office setup, computers, and marketing.

MGAs require a higher investment to cover specialized underwriting systems, licensing fees, and experienced staff. They also need to meet the financial requirements of the carriers they represent. The typical investment is $100,000 to $500,000 or more.

Carriers have the highest startup costs, which are typically $1 million to $10 million or more. A significant investment is needed due to state-mandated capital reserve requirements to ensure the company can pay claims, even during catastrophic events. Additional costs include actuarial support, computer systems, experienced staff, licensing fees, and marketing.

The insurance industry is heavily regulated, and you'll need to follow state and federal rules as you work through the steps on how to start an insurance brokerage. If you aren't compliant, you could face significant fines or the closure of your business.

How you structure your business will determine the amount of personal liability you take on. There are several options to choose from, including:

• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• Corporation

Each business entity has its own pros and cons. For example, a sole proprietorship is the simplest and most cost-effective to set up, but it doesn’t separate your personal and business finances. This means your personal assets could be at risk if your business faces legal action or debt.

Forming an LLC or corporation creates a distinct legal entity. They’re more complex, but they provide protection for your personal assets.

The U.S. Small Business Administration (SBA) can help you learn more about choosing your business structure.

You’ll need to obtain an employer identification number (EIN) from the IRS and register your business with your state’s Secretary of State or business registration office to operate legally. This process typically involves submitting formation documents and paying a registration fee. Most states also provide a checklist to help you meet all of the requirements for starting a business. You will also need to obtain a business license locally.

If you’re a sole proprietor, by default, the legal name of your business is your own name. But you can also choose a “doing business as” (DBA) name. Be sure to pick a name that:

• Is easy to say and spell
• Meets your state’s requirements
• Communicates what you specialize in
• Is easily searchable

Most states prohibit or restrict the use of certain words to prevent a business’s name from misleading the public. For example, “bank” or “banking” are commonly restricted words that can only be used by certain financial institutions. Check with your Secretary of State’s office to learn about naming restrictions.

Insurance is primarily regulated at the state level. You’ll need to contact your state’s insurance commissioner or department of insurance to apply for an insurance license. This allows you to operate legally as an insurance business within the state.

You may be required to complete a short course and pass a licensing exam. You’ll also have continuing education requirements to keep up with. You can check with the National Insurance Producer Registry for state licensing information.

Insurance carriers must comply with the National Association of Insurance Commissioners (NAIC) requirements. These include requirements for financial reporting, licensing, transparency in marketing, and data reporting. For a detailed breakdown of the requirements by state, you can review the NAIC Guide to Compliance.

Your insurance company will need different types of coverage to protect you from risks. Common policies you will likely need include:

General liability insurance protects your insurance business from third-party claims of bodily injury, property damage, and advertising harm. It handles legal defense costs, medical expenses, and settlements.

Errors and omissions (E&O) insurance is also known as professional liability insurance. It protects you from lawsuits related to accusations of errors or oversights. Some states require insurance businesses to have E&O coverage.

Workers' compensation insurance protects both your business and employees when workplace injuries occur. It pays for injured workers' medical expenses and lost wages. Workers’ comp is legally required in most states.

If you buy or lease an office space, you’ll need commercial property insurance. This coverage will pay to repair or replace stolen, lost, or damaged business property, including your building, furniture, supplies, and office equipment at your fixed business location.

A business owners policy (BOP) bundles general liability, property insurance, and business interruption coverage. The bundled cost is typically lower than if the policies were purchased separately.

Commercial auto insurance provides coverage for vehicles used in business operations. It includes liability coverage, vehicle damage, medical expenses, uninsured motorists, and legal costs from covered accidents. This policy is required in almost every state for business-owned vehicles.

Cyber insurance protects against data breaches, ransomware attacks, and system intrusions. It handles notification expenses, legal fees, regulatory fines, data restoration, and business interruption losses.

Fidelity bonds protect your business against employee dishonesty and fraud. They compensate for losses from employee theft, embezzlement, and forgery.

Having a business plan is essential. It helps you secure startup capital and long-term financing. It also helps you identify your market and determine where your business will be located.

At a minimum, your business plan should:

• State who's involved in the business and who will execute the plan
• Identify your target market, suppliers, and competitors
• Describe what sets you apart from the competition
• Summarize your risks
• Include an initial budget that covers startup costs and cash flow projections

Raising capital is a challenging but necessary step in the process of starting an insurance agency. You'll need funding to cover licensing fees, marketing, staffing, and regulatory compliance.

Two of the most common sources of business startup financing are business loans and venture capital. Both have important pros and cons to consider. Business loans are usually less risky but offer smaller amounts. In contrast, venture capital typically provides larger amounts in exchange for giving up a portion of business ownership. Many insurance business owners also use personal savings and private investors to get started.

If you're starting an insurance carrier, you'll also have to meet reserve requirements to operate. A reserve is mandated by the state to ensure your business can pay future claims.

You'll also need capital to invest in the technology infrastructure you'll need to run your insurance business. This often includes:

• CRM and agency management systems
• Quoting, binding, and policy management tools
• Cybersecurity and data compliance

Your insurance business's success hinges on the team you build. You'll need licensed insurance agents or producers who are personable and easy to talk to. These are the people your clients will interact with the most, so you want to make sure you find new agents who are relatable. This is important since your team will sell policies, advise clients, and build relationships. Additionally, you'll also need underwriters if you're operating as a carrier to assess risk and determine premiums.

As your insurance business grows, you'll likely need additional support staff to keep things running smoothly. Consider bringing on people to take care of customer service, compliance, and tech support. Some of these services can be outsourced at first, like tech support, but you'll eventually need to hire full-time help as your operation expands.

As a new insurance company, it's important to build trust. You can do that by always being transparent and by highlighting your team's expertise. Also, consider obtaining testimonials for your website from satisfied customers as your business grows.

Digital marketing is a cost-effective way to market your insurance business. You can take advantage of SEO, social media, and paid ads to reach new clients online for very little money. If you don’t have the time, you can use an SEO consultant to help you build brand awareness and generate leads.

A referral program can also be used to land new clients. You could offer a discount to existing customers who bring you new business or develop partnerships with businesses in your community.

The insurance business model has a high earning potential with good underwriting, especially with recurring premium payments. Although you can expect your income to be low when you are first starting out, your revenue will likely grow over time as your customer base expands.

Keep in mind that a successful business launch requires an upfront investment and a long-term vision. It isn’t something you can approach casually. Most successful operators recover their startup costs gradually through clients’ premium payments.

Customer retention and claims management are essential to long-term profitability. Retaining clients reduces your acquisition costs, while effective claims management helps you keep your clients satisfied.

Consumers have options, and the key to making your business stand out in a crowded market is to offer superior customer service. You can go above and beyond by providing personalized guidance to help customers select the right policies. Also, be sure to respond quickly if customers file a claim or need help with anything.

Using modern systems can help you serve your customers’ needs more efficiently. What's more, developing expertise in the insurance product line you specialize in helps to position your business as a trusted authority. When customers know they can rely on you, it helps to build strong long-term relationships.

It’s important to leverage underserved markets. Start by researching your local insurance market to see if there are any insurance coverage gaps. You can then offer insurance products to address those opportunities.

You can also build trust by making sure your clients fully understand their policies. Taking a few minutes to answer questions and be transparent helps to build stronger client relationships. It establishes your insurance business as an honest provider people can count on.

Starting an insurance company requires industry knowledge and capital. Here are some frequently asked questions (FAQs) to help you decide whether it’s the right move for you.

Yes. The process is complex, but individuals with industry experience and access to capital can start an agency or even a carrier.

It depends on the type of insurance company. Agencies may need tens of thousands, while carriers typically require millions due to state capital requirements.

An independent agency or brokerage is generally the easiest and most affordable insurance business for entrepreneurs to start.

It's easy to get insurance for your small business with Insureon. Just fill out our online application to receive quotes from trusted providers. Our expert insurance agents are available to answer any questions and help you find the best small business insurance for your needs.

Most small business owners can get same-day coverage and easily download a certificate of liability insurance as soon as they purchase a policy.