The last few years have been a bloodbath for agents, especially commercial agents. Prices have not been this soft since World War II. While the rest of the economy is just beginning to fear the possibility of deflation, the property-casualty insurance industry has been experiencing it. We already know how much it hurts. We already know how it feels to increase sales and still fall behind. To overcome deflation–or, as it is better known in our industry, a soft market–agencies must achieve two objectives. First, they must work even harder to increase sales plus make enough additional sales to offset deflation. For example, if the market deflates by 2 percent and an agency with a retention rate of 90 percent–which is about average–desires to grow 5 percent, the agency must sell 10 percentage points to offset the retention loss, another 2 percentage points to offset market deflation, and another 5 percentage points to grow. So to grow 5 percent from its original sales, the agency must write 17 percentage points more of new business. When agents make their business plans and develop their growth goals, they must consider all of these factors.
The second objective is to increase efficiency. If an agency has to write 17 percentage points to grow 5 percent from its original sales, they must write those 17 percentage points without adding resources. This is difficult because writing an additional 17 percentage points requires writing a lot of new accounts or writing larger, more complex accounts. In both cases, the staff must do more work and find the capacity through efficiencies to write that new business. The situation is actually worse because writing new accounts requires much more time than renewing policies. This combination is the only way to get ahead in a soft market –without balance sheet engineering, often facilitated by acquisitions.
No wonder I constantly receive e-mails and phone calls from excited agents when they hear the slightest whisper that a hard market is on its way. The thought of realizing big pay increases without having to increase sales, just like they did in the 2001-2003 hard market, is appealing.
I have some bad news for these agents, though. The coming hard market is going to be different from past hard markets and it will be different in a bad way for most. I recently read a term coined by an insurance company CEO regarding the Jan. 1 reinsurance treaties. He said the industry was experiencing “the invisible hard market.” Prices are supposed to be going up, but in reality they're not.
Prices are not increasing as in a typical hard market because some insurance companies still have plenty of capacity. Other companies are irrationally exuberant in their reserving and convincing themselves they still do not need to raise rates. Some companies have lost tens of millions in their investment portfolios, causing their surpluses to suffer, but not all have incurred material losses. Do not make the mistake of believing all carriers make the same investments. And yes, catastrophes were big last year, but not all carriers realized big cat losses.
An ocean of investment cash has been pulled out of hedge funds and the stock markets, and that money is now seeking investments. The cash cannot be allowed to sit idly and there are not many safe investments. A recent study from Munich Re showed that property-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, including new carriers, will have more cash, thereby suppressing rate increases.
On top of this, we have not experienced a hard market in a bad economy in a long time. When companies are laying people off at such a fast pace, a 5 percent rate increase will be obviated by exposure declines. Fewer miles driven, less new machinery purchased, fewer buildings being built, less oil being pumped, and just plain cost cutting results in clients purchasing less insurance. Additionally, the insurance industry needs to be extremely cautious about raising rates when people are losing their jobs. If rates rise too much, the industry will have a publicity fiasco on its hands.
I understand this is not the message most readers want to read, nor is it the message optimistic forecasters are making. Although I know optimism sells, dealing with reality pays. The reality for now is that if an agency wants to be successful, they have to hit the bricks even harder. We still have deflation. It is from exposure loss now and those losses must be replaced. This means getting producers to sell, managers to manage producers, and selling clients 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 company advertising that drivers' agents have probably sold them unnecessary coverages. This begs two questions: First, how is this legal compared with state insurance departments forbidding agents to advise that AIG may not be stable because it had to be taken over by the government to survive? Second, just how much unnecessary insurance can anyone sell on a private passenger auto policy?
Your competition is trying to get your clients to distrust you and to 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 in new producers and value-added services. Clients will only cut premiums if they do not understand the full risk they are assuming. Agents need to sell their clients on how they are going to help them through these tough times.
Now also is the time to increase agency efficiencies by getting everyone to follow procedures and implement technological improvements. Deals are easier to get now, so improvements are less expensive. My studies show that many agencies can cut 20 percent of their servicing costs.
Agents with head starts from managing their producers well, improving their efficiency, and most importantly, managing their balance sheets achieved growth during the past hard market and are now achieving profit in a soft market and bad economy. If the market does turn hard, they will make even more money. If you have not taken these steps yet, don't wait. And don't wait for the hard market to save your agency because by the time it truly arrives, it may be too late. Chris Burand is president of Burand & Assocs. LLC, an agency consulting firm. Contact Burand at 719-485-3868, or by e-mail at chris@burand-associates.com.

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For the Manager: Hard market not the solution

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