Customers will expect more: Historically, insurance agencies and some brokers have operated under the legal concept of duality, whereby they have varying levels of responsibility to carriers and their clients. The legal perspective is that there is no conflict of interest, because agents are not representing both parties simultaneously. They represent one party during part of the relationship, and the other party during the other part. This concept, however, is confusing to most people–not excluding agents and carriers.
Adding to the confusion, the line between brokers and agents has blurred, and in some states an entirely new classification–the producer–has emerged. The result, at least from the perspective of some state attorneys general, plaintiff attorneys and many customers, is the feeling that agents and brokers do not always act on the insured's behalf, even though they've given the customer that impression or though the customer is obviously acting on that assumption.
Hurricane Katrina has underscored this perception, as customers and attorneys now question the venerable legal doctrine that insureds are responsible for reading and implicitly understanding their policies. Doctrine aside, the reality is that the public is tired of bearing this responsibility. Clients now contend that if theirs agents or brokers are working for them, they have an obligation to tell them when they lack certain coverages, and that those coverages are available.
Another force is the emergence of large direct writers that spend more money on advertising than anyone previously thought possible. The majority of their ads (at least the ones I've seen) never so much as mention coverage. In contrast, many independent agencies advertise that they will seek to obtain the proper coverages for their customers. These are two very different approaches, eliciting different customer expectations and requiring different business strategies.
The upshot is that agents and brokers will need to make increasingly clear to clients whether they're peddling price but not coverage or are professionals providing coverages and working on their clients' behalf.
Agents will use MGAs, E&S markets more: The percentage of business agents write through E&S markets will continue to increase because of the reduction in the number of admitted, multiline national carriers. I expect this number to decline further, because these carriers are growing much more slowly than the industry as a whole. If they can't grow organically, they'll have to merge.
The diminishing number will require many agents to access national carriers through brokers, rather than direct appointments. Some of the national multiline carriers are fully embracing this strategy, because they believe it's more cost-efficient. Additionally, E&S markets and MGAs have developed a lot of solid programs, many of the E&S carriers also have admitted companies, and the quality of some of these markets exceeds that of the traditional carriers.
Successful agencies will offer a wider variety of solutions: People buy insurance to obtain a hedge against potential loss. There are numerous ways to accomplish this, and successful agencies will offer alternatives. In the past, agencies went to their standard carriers for a solution, and that was that. Now, however, those carriers are offering less underwriting support, thus necessitating more agency knowledge. With this additional knowledge, the smart agencies will see that sometimes the best solution may be another carrier, the E&S market or even alternative markets, such as risk retention groups or captives. This is a growing trend in this soft market.
Agencies will need more capital: Normally, insurance agencies need little capital to operate. This is changing, because competition for accounts is increasing. To compete, agencies must spend more on their personnel. Their people must have more product knowledge, because agencies can no longer depend on company underwriters. Unfortunately, there is a dire shortage of experienced insurance agency employees, so agencies will need more capital to develop staff from scratch, both CSRs and producers. It costs a minimum of $200,000 to develop a producer.
Agents will have to provide more value-added services: Provided they have a low price, anyone can sell insurance in a soft market. Agencies will need to offer value-added services to differentiate themselves from competitors. These services, however, are not cheap. I've seen some agencies begin offering great value-added services, only to discover they greatly underestimated the costs. With these services becoming critical, agencies must calculate the costs accurately, so when a sale is made, it's a profitable one.
The soft market is only beginning: The world economy is awash in money. There's so much that investors can't find places to invest it all. All these fresh funds enable companies to chase market share, so carriers are cutting prices. Adding fuel to the fire, carriers are making more money than ever, so they believe they can cut prices a lot and still make money. Moreover, under Sarbanes-Oxley carriers cannot pull their cash out as easily as they used to, which means they're keeping it. In other words, the soft market isn't going away anytime soon.
The end result is that, in the future, agencies will have to work a lot smarter, not harder. Owners will need to apply more business acumen, rather than more sales acumen. This will cause some agencies to fall out but will open the door for many others. Start planning now to ensure that your business stays on the right path.
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at Chris@burand-associates.com.

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