As prices continue to fall for the vast majority of commercial insurance accounts, agents and brokers are searching for ways to keep growing their top- and bottom lines despite drops in renewal commissions.

"2007 was the year the soft market caught up with everybody, and the boat is leaking," observed Kevin Stipe, senior vice president and principal at Atlanta-based Reagan Consulting Inc., which developed and produces the "Best Practices" program in conjunction with the Independent Insurance Agents and Brokers of America.

Indeed, the pricing environment going into 2008 is "much softer than what was expected," according to Robert J. Lieblein, managing principal with the consulting firm Hales & Company in Harrisburg, Pa.

"There appears to be no end in sight," he said. "There is some realization that rates can't go too low, but competition is continuing to drop rates. This will continue through 2008."

"There is no sign prices are firming," agreed Wayne Walkotten, senior vice president for the Willoughby, Ohio-based consulting firm Marsh, Berry & Company Inc. "This is the third year in a row of deteriorating renewals."

What makes this particular price softening especially problematic for producers is that while the market is going through one of its traditional cycles, the customary levers to offset the loss of commission income are absent, according to a number of experts queried.

During prior soft markets, noted David Small, a financial analyst with Bear Stearns in New York, brokers compensated for lower standard commissions by convincing clients to buy back coverage they gave up during the hard market. Today, however, buyers appear to be comfortable holding more risk on their balance sheets, he said.

That may change at some point when insurance becomes cheap enough to just transfer more risk once again, he remarked--but it hasn't reached that point. However, the fear, he added, is that when insurance does become that cheap, it could mean the beginning of bad underwriting--again, a point the industry has not yet reached.

Another strategy brokers have employed to deal with soft cycles is to strip out the fat in their firms--cutting expenses to maintain profit margins, noted Mr. Stipe.

However, to increase their margins over the past decade, brokerages and agencies have already "tightened up their waist lines," stripping away a lot of waste and redundancies, he said, adding that the result is that with no fat left to trim, "one dollar of lost premium to the soft market can have a pretty significant impact to the bottom line."

The big question now is whether intermediaries will begin to cut muscle and not merely fat to improve their short-term profit margins--at the expense of their long-term viability, warned Mr. Stipe. "To be healthy, you have to invest in future growth" despite market conditions, he advised.

In a softening market, the challenge is to have the best-trained, most productive and innovative people in the field to be creative in holding onto good accounts while attracting new business, which means the war for talent will heat up, according to Mr. Lieblein of Hales & Company.

Firms need to recruit producers from nontraditional sources, including other sales fields, he suggested.

What makes investment in untested but high-potential talent so difficult for so many firms, Mr. Lieblein acknowledged, is that new producers will take at least two years to pay off with production results.

While making that kind of investment will be tougher and tougher in the current downcycle, the value of producers with their own books of business only increases, observed Mr. Stipe.

One strategy to increase earnings during this soft market is to identify new avenues of revenue through 2008.

"Cross selling will be mandatory," said Mr. Walkotten. He observed that more agents and brokers will look to both the property-casualty and the employee benefits needs of their commercial clients to grow their overall business. He noted that the benefits area is the one place where there is continued growth or at least stability.

"Producers need to get every policy under their relationship and work at growing those relationships," said Mr. Walkotten.

Chris McShea, a partner in the insurance advisory practice with Ernst & Young, said what the market is seeing in 2008 is a power shift back to the policyholder and broker.

With the hard market, investigations by state attorneys general into contingent commission kickbacks and steering of insurance contracts, plus the resulting changes in the compensation and business model, power shifted to underwriters in early 2000.

As that wave of issues has passed, power shifted back to brokers and buyers--a development Mr. McShea said is "important for brokers to embrace" while it lasts.

The role of the broker is also changing, he suggested. They are no longer merely price negotiators but have become more sophisticated navigators in a very complex world of insurance coverage and alternative risk-transfer, he said.

"The shift is continuing today and [will continue] beyond 2008," according to Mr. McShea.

Some firms may simply buy or merge with other agencies to grow. Despite falling profits and tightening credit, merger and acquisition activity is heating up, with a large influx of sellers expected, noted Mr. Walkotten, who anticipates a lot of activity in early 2008.

The credit squeeze, according to Mr. Walkotten, will probably not have much effect on brokers with the resources to make acquisitions. Indeed, the major acquirers and agency aggregators--such as Arthur J. Gallagher and Brown & Brown--have cash, stock and loans at their disposal to make acquisitions, he noted.

However, the crunch may undermine private equity firms that were considering getting into the brokerage business but now can't get their foot in the door because sellers will be leery of their ability to finance a deal.

"I think we are at a real interesting time for the brokerage industry," said Mr. Stipe.

Special Reports /

Agents, Brokers Expected To Struggle For Growth Despite Softening Market

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