How to Set Up an Insurance Company

Setting up an insurance company takes time, money and patience. Furthermore, legal expenses quickly pile up as insurance is a heavily regulated industry in every state. The insurance industry is more or less recession-proof, which offers an advantage in starting your own insurance company compared with starting any other type of business. Although the industry is dominated by big players, there is still room for a small "boutique" insurance company to survive and prosper with careful planning and business savvy.

Determine a specialty to focus on. Although many large insurance companies offer a wide variety of insurance policies, a smaller company is generally better off specializing in a particular area at first and gradually expanding its product range.

Become a licensed insurance agent or broker in your specialty. Licensing will require you to pass several difficult examinations, for which you are likely to need to take classes. The nature of these exams vary from state to state.

Gain experience as an insurance broker or agent. It would probably be best to spend at least five years working for a small but reputable insurance company in order to learn how the small-scale insurance industry operates and to build up a loyal customer base.

Join a local insurance industry association and get to know other local insurance agents, particularly those in other specialties. Since it takes a lot of capital to start an insurance company, it would be best to pool the funds of a group of insurance agents before seeking additional financing for your insurance company.

Create a comprehensive written business plan. This document should cover location, facilities, potential market, marketing and advertising strategy, and human resources. Your business plan needs to take into account legal restrictions and requirements in every section.

Set up a corporation under the law of your state.

Create a written marketing strategy. This is will entail significant market research in order to identify your company's target market, to design insurance products that are distinct and tailor-made for this market and to develop a method for communicating your products' distinctiveness and value.

Conduct a complete cost analysis that takes into account your product offerings, anticipated payroll expenses and characteristics of your target market. Use this cost analysis to determine the initial pricing of your insurance policies. The end result should be a pricing structure that is marginally less expensive than equivalent products offered by competitors. Pricing is particularly critical in the insurance industry because of the intangible nature of the services provided.

Secure initial financing. Although banks are rather reluctant to finance start-ups, the Small Business Administration is a friendlier alternative. Otherwise, you might seek assistance from an "angel" investor (a wealthy individual). Note that a good business plan is essential in order to secure financing. Be aware that most states require an insurance company to establish and maintain a minimum capital surplus in the six and sometime seven figure range.

Invite your long-term customers to do business with your newly established insurance company as soon as their current policies expire.

Tips

  • If you are willing to accept unlimited liability, you might consider setting up a partnership rather than a corporation. This might make it easier to secure financing, although it's likely that even lenders to a corporation will require you and any other founders to personally guarantee the debt.

Warnings

  • Because the insurance industry is subject to regulation, a struggling small company might be tempted to skimp on legal expenses. This is not a good idea; although regulatory compliance is a time-consuming process, state authorities take noncompliance issues seriously.

Resources

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.