2006: The year when changes take hold

This coming 2006 New Year seems like it will be the start of a year of big changes for the industry. It is not that the industry will be pulled out by its roots and shaken. Rather, many of the slow and even subtle changes that have been occurring over the years will manifest themselves.

When we are looking at trends, we look at them from the agency perspective. So what will 2006 and beyond hold for the independent agency? The following are the key trends that will impact agencies.

Contingencies aren’t gone, despite Spitzer.The dust that was kicked up by Eliot Spitzer regarding contingent commission is starting to settle. A few national brokers have chosen to sidestep contingents. A few insurance companies have limited contingents, but mostly for their own economic solvency. Agency associations have been working with state regulators to fight compensation disclosures.

The bottom line is that contingent commissions will continue “as is” for the near future. The only caveat to this is that insurance companies must remain profitable. If the market becomes soft or losses are large, contingents will naturally disappear. The key for insurance agencies is that the pressure by regulators to eliminate contingent commission has dissipated, at least for a while.

For the past couple of years, insurance market pricing has been mixed based on line of business, industry classes and geographical location. It is hard to say if it has been hard or soft. Personal lines, has been steady for years, except in certain geographical locations after natural disasters.

The New Year will see the commercial market generally continue to get soft. Traditional indicators, such as capacity, have not seemed to change significantly, yet. This prediction is based more on the overall trends in the industry.

The pace of acquisitions will slow down.This is a reflection of the strength of the remaining firms and the shrinking number of available sellers … not a waning interest by buyers. There still are many buyers, so the demand will maintain or even boost agency value.

The key with buyers today, as well as into the future is quality. The days of buying books of business just to add volume are behind most astute buyers. There will also be a bit of reluctance to buy if there is not a noticeable synergy or there is a lack of producers. If the insurance market slows down and becomes soft, acquisitions will also slow down and agency value will decrease.

There were many transactions occurring again in 2005. The main difference from the past was that the market began to soften and competition was fierce. Many agencies had to show what they were really made of when competing with each other.

Bank deals show cracks. Nationwide there are a number of third party financial institution deals that seem to be having problems apparent in 2005. The main problem is that these institutions do not really seem to understand our insurance business. They understand finance and often have unrealistic expectations of underwriting, compensation costs and profit, at least in the initial years.

There appears to be a number of talented people leaving the acquired firms. These individuals were not the original owners that got paid when the business sold and who are often happy with the deal. Instead, life under the tight control of a financial institution for employees has proven to be not their career choice, so they move on, especially producers who may have wanted to buy stock or earn vested interest in their books over time.

Paperless environments can and do exist. More and more agencies are paperless in both personal lines and now commercial lines of all size accounts. It is a chore to first educate your people of the need to let go of their files, but also how to live in a paperless environment without creating E&O problems or lack of communication between CSRs and producers.

Profitability and growth rates will decrease. Because of the softening market, growth will decrease. This will adversely affect profit, as expenses will not decrease at the same rate. In some areas of the country expenses may also increase, especially compensation, which accounts for 60 percent to70 percent of most agency dollars.

The age of the new CSR is here. CSRs have become highly skilled over the years. They are no longer just data processors. In the past, producers had the sales skills and the technical skills. Now, CSRs and producers are often equal with technical skills. The only difference in ability is the sales skills, and many producers are weak in sales anyway.

Because of the difference in compensation, agency owners will benefit if their agency has more CSRs and account executives (those who just service existing books as producers) and fewer producers. Producers in these agencies will focus just on new sales. The renewal process will fall under the domain of the service staff.

When noting a trend, it is often best to be proactive rather than reactive. 2006 and beyond looks promising for managers and owners who ride the crest of current trends.

Bill Schoeffler and Catherine Oak are partners at Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at (707) 935-6565, by e-mail at bill@oakandassociates.com, or visit www.oakandassociates.com.

Topics Agencies