My research (available at www.burand-associates.com) strongly suggests that this soft market is going to be severe and prolonged. The forces creating this cycle are unique, and adequately understanding them is key to devising a strategy for surviving and thriving.

This is not a typical soft market. This one has four distinguishing characteristics:
o Difficult as it may be to believe, figures published by A.M. Best suggest that net premiums written (NPW) is still growing at roughly the same pace as exposure growth. In the last soft market, NPW growth was approximately 50% of exposure growth (using the CPI and GDP as proxies for exposure growth). This means carriers can cut rates even more before they underprice risks as severely as they did in the last soft market.
o Direct premiums written growth is roughly half of NPW growth. This means carriers are taking more risk because losses are so low.
o Actual claims (not the combined or loss ratio) decreased 11% in 2006 (assuming carriers are reporting claims correctly, which is a big assumption based on their history). This means rates can decline another 11% without increasing loss ratios. In other words, carriers are not yet underpricing risks. Based on historical market cycles, companies have to underprice risks for several years for a market to turn hard again (barring, of course, major catastrophes).
o Insurance carriers have more money–literally–than at any time in recent history. Based again on market cycles, not only do they have to underprice the market; they have to underprice it until the cash is gone. That will take quite awhile. The market has much further to plummet before it turns hard again.
Most agents have never seen such a long and brutal soft market. Well, get used to it. Survival will require skill and planning. Thriving will require improvements in productivity, sales and company relationships.
Productivity
I hear many agencies talking about watching expenses and tightening their belts. If this is an agency's only strategy, it'll squeeze itself to death long before the soft market ends. Agencies cannot cut expenses enough to cope with a market like this one.
The better option is to increase productivity. Anyone can cut expenses. Improving productivity, on the other hand, requires skill and talent. It starts with adopting and following proven procedures. Relatively few agencies have adequate procedures, and even fewer follow them when they do have them. Following consistent procedures creates a system, which means new people can be trained faster and better, and current staff can do more work with less stress.
Henry Ford's stroke of genius was creating standardized procedures for building cars. Previously, each car's tie-rods, for example, were slightly different because they were made by hand. This allowed workers to do it “their” way. In your agency, is everyone, including the producers, doing things “their” way or the agency's way?
First, good procedures provide structure for inputting data into your agency's system. This is important, but good procedures should go much further. They include instructions on what kinds and sizes of accounts to write as well as how to write them properly, such as using coverage checklists. They include mandating that CSRs no longer be required to read producers' minds. The time saved by having producers document instructions for CSRs, instead of relying on them to develop ESP, is phenomenal.
Sales
The only way to survive a soft market is to increase sales. A $2 million-commission agency with a 90% retention rate that incurs a 10% drop in prices must write $380,000 of new business just to stay even! That's 19% of the book. What are you doing to increase sales by that much? Simply “working a little harder” isn't going to get it done. Agencies have to invest in sales programs and education (both sales and technical), and someone has to make more sales calls. This means spending money to make money.
Agencies have to really grind out the renewals to maintain retention rates, because accounts are being shopped so much harder. This means working smarter, and it's a key reason to improve productivity. If an agency is shopping more accounts without hiring more staff or improving productivity, where are CSRs going to find the time? Even if CSRs don't shop risks in your agency, whoever does still has to find that additional time. Agencies need to make sure the producers are working the accounts efficiently and making plenty of touches. To ensure this is happening, an agency needs excellent producer management.
Carrier relationships
Carriers are making a lot of money. Can they spend some of it on your agency? Probably, but not unless you ask. You'll need to show them your plan for growing, because despite record profitability, carriers aren't growing fast enough. They're passing on this need for growth to the agencies.
Some carriers are demanding a certain amount of growth or they're cutting commissions or contingencies. This, however, doesn't benefit anyone. A partnership works better where carriers help their agents through the soft market in return for growth, rather than use threats to force it. Agencies already have plenty of motivation. They need help, not punishment.
Work with those companies that will work with you. Show them your growth plans. Be specific and tell them exactly how and where you need their assistance. The smartest companies will listen and lend a hand.
The soft market is going to get worse long before it gets better. It will take skill and planning to survive and thrive. Thriving is clearly possible, as many agents are proving. What does your future hold?
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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For The Manager: Belt-tightening is not enough in this soft market

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