As the sun sets on 2008–a tumultuous year for the U.S.economy–uncertainty permeates all industries, including insurancedistribution. While no one can exactly predict the future, theseare some of our perspectives on how the agent and brokerbusiness–from customers to perpetuation plans–will be affected.

o Customer Impact: Most agents and brokers have customers in amultitude of industries. While some will experience more dramaticimpacts than others, all will have to address our economicchallenges in some form or fashion.

First, revenues and payrolls will be more often down than up,resulting in lower renewal premiums and commissions. In addition,more companies will face potential insolvency and be forced into asale or extreme cutbacks–which will lead to diminished renewalrevenue, at best.

However, all is not lost. As pointed out by Kevin Stipe, ouresteemed colleague, in last month's “Best Practices” column(appearing in NU's Nov. 10 edition), “insurance is a need, not awant.” Therefore, if a company stays in business, they will stillbuy insurance. The question is, who will serve as their agent?

Companies will certainly become more price-focused, looking forways to lower their total cost of risk. As a result, agents andbrokers are likely to see increased competition as customersexplore cost reductions–and, therefore, are more open to hearingwhat others have to offer.

This represents both a challenge (your current customers) and anopportunity (the world of prospects).

o Insurance Carrier Impact: The struggles and bailout ofAmerican International Group have been well-documented. It appearsAIG is in the “too big to fail” category, and will survive. It isassumed that many other insurance carriers, such as The Hartford,would fall into the same category.

That said, the financial position of these firms is far fromstable, as their investment income has been hammered and theirunderwriting income has also taken its share of hits.

All these factors point to a market with some firming, if notoutright hardening. However, this may be tempered by the aggressivepricing of troubled carriers in an attempt to offset theuncertainty surrounding their financial condition.

o Employee Impact: To say employee retirement accounts have beenaffected by the economic downturn may be the understatement of theyear. As a result, many who were planning to retire in theshort-term will be forced to work longer.

In addition, as a result of the general economic woes, employeeswill be concerned about job security, their ability to meet futureobligations, and whether they can live in the style they expectedto–now and in the future.

All of this suggests a higher level of stress and frustrationamong employees. That aside, it is unlikely agencies willexperience any material level of turnover, as employees will mostlikely choose to stay in a stable situation versus exploring otheropportunities in this market.

One of the silver linings as respects employees is the fact thatthis will allow the industry to attract talent that would not haveconsidered the insurance industry in the past. As other industriesface cutbacks and insolvencies, agents and brokers have theopportunity to capitalize on this downturn and bring new talentinto our industry.

o Agency Financial Impact: It is our expectation that unless themarket experiences a significant hardening, most agents and brokerswill have single-digit organic growth to small declines in 2009.With flat or declining revenues, profit margins will be hurt.

In response to this, we do not recommend that you “circle thewagons.” There are a lot of great opportunities to invest in thegrowth and future of your organization. We do, though, recommendyou use these difficult times to tackle problems you have not beenable, or willing, to address in the past.

These areas of improvement can range from the organizationalstructure of the business, to contracts with vendors and carriers,to non-performing employees, to producer compensation.

As for many growth opportunities, cash will be king. It isexpected that the credit markets will loosen in the coming monthsas the government uses all available tools to promote thisloosening.

However, we do not expect that the credit markets will return tothe health that was experienced over the past few years. As aresult, those agencies that have strong cash reserves will beafforded growth opportunities that others will not have.

The growth strategies can take many forms. Perhaps there areareas of specialization or programs an agency or broker can enter.Also, new producers are the lifeblood of an agency, and asmentioned previously, we expect talent to flow into theindustry.

From an acquisition perspective, the number of large, aggressivebuyers has diminished. This will put agents and brokers in a muchbetter position to compete for acquisitions. There also may beopportunities for two peers to combine operations, forming alarger, stronger firm.

No matter what course of action is taken, those able to continueinvesting in the business will be in a much stronger competitiveposition in the years to come.

o Perpetuation Impact: With the decrease in the number of activebuyers in the market and a tempered level of aggressiveness amongthe remaining buyers, some agents and brokers that would haveconsidered selling in the past will turn internally to perpetuatetheir agency.

With little revenue growth and the resulting pressure onprofitability, agency owners will see small increases to smalldecreases in the value of the agency's stock.

That said, this performance will far exceed that of most othersecurities in a typical stock portfolio. Therefore, it will bepossible to make a very compelling case to internal buyers forinternal perpetuation.

However, internal perpetuation, while compelling, will stillhave its own challenges, requiring careful planning and effectiveexecution.

o Health Care Impact: Health care was one of the most discussedtopics during the election campaign. President-elect Obama's planfocused on three areas–making health insurance affordable andaccessible to all, lowering costs, and promoting public health.

As a result, it is expected that changes will be made to thecurrent system. However, the effects of the initiatives on ourindustry are still unclear.

President-elect Obama's ability to enact many of the changes heproposed in the short term will be difficult, as much of the energyand resources of the administration and Congress will focus on theeconomy.

Although most agents and brokers continue to experience employeebenefit growth and profitability that outpace the property-casualtyside of the business, we would recommend caution in making materialnew investments in the employee benefits business.

In summary, when you compare the world we live in today to thepast, the current state is a bit more challenging–but certainly notas bad as it is for many others.

We are, in fact, fortunate in that we are insulated from some ofthe challenges that others are facing. With all of this understood,we remain confident in the future prospects for our industry.

Reagan quotebox/mug:

“Those who are able to continue investing in the business willbe in a much stronger competitive position in the years tocome.”

Bobby Reagan

McNeely quotebox/mug:

“As other industries face cutbacks and insolvencies, agents andbrokers have the opportunity to capitalize on this downturn andbring new talent into our industry.”

Brian McNeely