The last few years have been a bloodbath for agents, especiallycommercial agents. Prices have not been this soft since World WarII. While the rest of the economy is just beginning to fear thepossibility of deflation, the property-casualty insurance industryhas been experiencing it. We already know how much it hurts. Wealready know how it feels to increase sales and still fall behind.To overcome deflation–or, as it is better known in our industry, asoft market–agencies must achieve two objectives. First, they mustwork even harder to increase sales plus make enough additionalsales to offset deflation. For example, if the market deflates by 2percent and an agency with a retention rate of 90 percent–which isabout average–desires to grow 5 percent, the agency must sell 10percentage points to offset the retention loss, another 2percentage points to offset market deflation, and another 5percentage points to grow. So to grow 5 percent from its originalsales, the agency must write 17 percentage points more of newbusiness. When agents make their business plans and develop theirgrowth goals, they must consider all of these factors.
The second objective is to increase efficiency. If an agency has towrite 17 percentage points to grow 5 percent from its originalsales, they must write those 17 percentage points without addingresources. This is difficult because writing an additional 17percentage points requires writing a lot of new accounts or writinglarger, more complex accounts. In both cases, the staff must domore work and find the capacity through efficiencies to write thatnew business. The situation is actually worse because writing newaccounts requires much more time than renewing policies. Thiscombination is the only way to get ahead in a soft market –withoutbalance sheet engineering, often facilitated by acquisitions.
No wonder I constantly receive e-mails and phone calls from excitedagents when they hear the slightest whisper that a hard market ison its way. The thought of realizing big pay increases withouthaving to increase sales, just like they did in the 2001-2003 hardmarket, is appealing.
I have some bad news for these agents, though. The coming hardmarket is going to be different from past hard markets and it willbe different in a bad way for most. I recently read a term coinedby an insurance company CEO regarding the Jan. 1 reinsurancetreaties. He said the industry was experiencing “the invisible hardmarket.” Prices are supposed to be going up, but in reality they'renot.
Prices are not increasing as in a typical hard market because someinsurance companies still have plenty of capacity. Other companiesare irrationally exuberant in their reserving and convincingthemselves they still do not need to raise rates. Some companieshave lost tens of millions in their investment portfolios, causingtheir surpluses to suffer, but not all have incurred materiallosses. Do not make the mistake of believing all carriers make thesame investments. And yes, catastrophes were big last year, but notall carriers realized big cat losses.
An ocean of investment cash has been pulled out of hedge funds andthe stock markets, and that money is now seeking investments. Thecash cannot be allowed to sit idly and there are not many safeinvestments. A recent study from Munich Re showed thatproperty-casualty insurance is a good place to invest in bad times,so many investors are investing in property-casualty companies,including the U.S. government. This means these carriers, includingnew carriers, will have more cash, thereby suppressing rateincreases.
On top of this, we have not experienced a hard market in a badeconomy in a long time. When companies are laying people off atsuch a fast pace, a 5 percent rate increase will be obviated byexposure declines. Fewer miles driven, less new machinerypurchased, fewer buildings being built, less oil being pumped, andjust plain cost cutting results in clients purchasing lessinsurance. Additionally, the insurance industry needs to beextremely cautious about raising rates when people are losing theirjobs. If rates rise too much, the industry will have a publicityfiasco on its hands.
I understand this is not the message most readers want to read, noris it the message optimistic forecasters are making. Although Iknow optimism sells, dealing with reality pays. The reality for nowis that if an agency wants to be successful, they have to hit thebricks even harder. We still have deflation. It is from exposureloss now and those losses must be replaced. This means gettingproducers to sell, managers to manage producers, and sellingclients on solutions to their problems because in a recession,everyone wants to cut their insurance premiums.
The situation is exacerbated by at least one insurance companyadvertising that drivers' agents have probably sold themunnecessary coverages. This begs two questions: First, how is thislegal compared with state insurance departments forbidding agentsto advise that AIG may not be stable because it had to be takenover by the government to survive? Second, just how muchunnecessary insurance can anyone sell on a private passenger autopolicy?
Your competition is trying to get your clients to distrust you andto cut coverages. Agents cannot sit idly if they want to succeed.If your agency hasn't already done so, now is the time to invest innew producers and value-added services. Clients will only cutpremiums if they do not understand the full risk they are assuming.Agents need to sell their clients on how they are going to helpthem through these tough times.
Now also is the time to increase agency efficiencies by gettingeveryone to follow procedures and implement technologicalimprovements. Deals are easier to get now, so improvements are lessexpensive. My studies show that many agencies can cut 20 percent oftheir servicing costs.
Agents with head starts from managing their producers well,improving their efficiency, and most importantly, managing theirbalance sheets achieved growth during the past hard market and arenow achieving profit in a soft market and bad economy. If themarket does turn hard, they will make even more money. If you havenot taken these steps yet, don't wait. And don't wait for the hardmarket to save your agency because by the time it truly arrives, itmay be too late. Chris Burand is president of Burand &Assocs. LLC, an agency consulting firm. Contact Burand at719-485-3868, or by e-mail at [email protected].