Although insurers generally price life insurance books at three times renewal commissions, Alain Vezina, a Montreal-based advisor and business consultant, says a well run business can be worth significantly more. He urges advisors to factor in what he terms the "economic value" of their block of business when putting it up for sale.
Mr. Vezina, who is also president of the private business bank Nessa Capital, explains that "economic value" is basically the income-generating capacity of a portfolio. The larger the portfolio, the more income it will generate.
As an example, he says that the generally accepted market value for an in-force life insurance block of $1 million is three times renewal commissions, representing a sale value of $150,000.
Except that in real life, $1 million of in-force life business has considerably more value simply because it represents many clients and contracts, Mr. Vézina adds.
The in-force of a typical book of $1 million includes 1,000 clients. An advisor armed with a solid development plan can go back to this clientele regularly and bring in more business. To take the example above, the advisor can easily transform 10% of the in-force into new business each year, for commissions of $100,000. If this block of $1 million in premiums generates $100,000 in first year commissions and $150,000 in renewals (3 X $50,000) its market value can easily increase to five times commissions.
Mr. Vézina is currently consulting for an advisor who is selling his book of 89 physicians in non-cancellable disability insurance. Offers have skyrocketed to seven times renewal commissions. The source of this "economic value" is that physicians have a promising profile, with strong savings capacities and life insurance needs related to wealth management – good indicators of a cross-selling bonanza.