Trends for 2010

Soft Market, Economy, Taxes and the Producer Dilemma on the Frontlines for Agents

To be proactive, one needs to understand and exploit current and future trends. Most trends can be predicated by understanding recurring cycles and applying that knowledge to current situations. So what will 2010 be like for insurance agents and brokers? The following is a list of major industry trends that need to be factored into the business plans of agents and brokers.

Soft Market Is Not Going Away

The hard market was firmly in place from about 2000 through 2003. Prior to this, almost a whole generation had lived under soft market conditions! The current soft market has been in various lines and in various regions for a number of years. It hit most lines in 2007 and it seems to have no real end in sight. It was predicted to end in 2009, but it hasn’t.

The market cycle (hard or soft) is primarily a function of insurance company profitability and investment risk willingness of the reinsurance market (capacity). When profits are low and perceived risk high (low capacity), insurance rates increase. This is a hard market. When profits are high and risk is low, premiums drop, which is a soft market.

The current trends will continue. Property/casualty insurance companies and the reinsurance markets are still OK financially. Capacity is there, mostly because of the reduction in demand due to the economic turndown. So, it seems that the soft market will be around for another year, or more because of the overall economic uncertainty and weaknesses.

As agency owners know a soft market continues to mean a lot more work quoting, usually for less commission dollars due to lower premiums. To keep revenues up, agencies will need to sell more — either cross sell or to new customers. Value-added services should be offered and a fee charged, to increase revenue. Many agencies have been giving away these value-added services for free. People don’t appreciate free, nor do they see the value.

A Financial Squeeze

With the continuation of the current soft market and weak economy, profit margins will continue to drop, for most agency owners. Other revenue sources are also threatened.

There has been a realignment of compensation to national brokers, which eventually will trickle down to smaller independent agencies. Eliot Spitzer’s criticisms and actions resulted in an end to contingent commissions for many national brokers. Due to their size, they were able to negotiate higher commission rates or some other sort of compensation.

Most national brokers also charge fees for client services, such as for loss control, claims management, HR consulting or risk management. This adds to the top line revenue beyond just sales commissions.

Independent agencies still have contingency agreements in most cases. This is not expected to change. However, due to the push for national regulations, consumer disclosure interest groups and the profit motivation of insurance companies, there is a strong potential that the contingency structure will continue to change. If it does, it is a good assumption that most carriers will make up the difference through higher commission rates or other bonus plans arrangements.

In addition to adding new revenue streams, agencies will need to become more productive. This will be done through either automation or streamlining the work that is currently being done — or both. Paperless systems will be necessary. Insurance companies will be pressured to follow the lead from agencies and become more automated, as well.

Agency Ownership and M&A

A new twist in the mergers and acquisitions (M&A) marketplace is that national brokers are now focusing on the middle market arena and have specific capital to do so. Aside from Brown & Brown and Gallagher, which have been there already, there are some new players in the middle market, such as Hub and Marsh. These national brokers are acquiring to keep growing and adding volume. The pace is eventually unsustainable, but will continue through 2010. In fact, the reason they are in this arena is that the larger firms have already been bought up or do not intend to sell.

Today there is also a lot of capital still coming into the marketplace, via new brokerages starting up from players that have left agencies, especially those having sold to banks. These new buyers have the cash to pay sellers a large down payment and offer an earn-out based on performance or growth. Private equity players are also looking for good platform agencies, to expand and become players in certain regions.

Because of today’s economic conditions and the inability to get credit lines from banks, the value of agencies has been declining. Also, there is also a big misunderstanding about what are the “real prices” being offered. Many of the deals have a sizable portion of the “price” based on earn-outs for future performance. This confuses the understanding of “value” in the marketplace, because “value” is usually based primarily on revenue already on the books.

The infusion of well-capitalized buyers is impacting the ability of smaller agencies to do acquisitions. The prices being paid yesterday and today do not always add to cash flow, especially with the lower revenues from the soft market. Although the buyers are more intent on looking at cash flow when pricing is set. Small to mid-size independent firms will be doing fewer acquisitions.

There will still be activity within the smaller agency community in the form of mergers. There will be some attempts to bring enough brokerages together to go public or sell out to an interested deep pocket.

Capital Gains Taxes

Congress and President Obama are not expected to renew the Bush tax laws, so the current federal capital gains rate when an agency sells will go from 15 percent back to 28 percent, if a sale is done after 2010. There is concern that a tax increase will most likely be in place that could be even higher than 28 percent before the end of 2010, to pay for all of the stimulus money, TARP money and now a new national health care bill.

Options for the Small to Mid-sized Agency

Network organizations, consolidators and clusters are becoming more and more popular, although this trend is a bit contradictory with the current soft market conditions.

Small firms that cannot individually maintain the number of quality markets they need to compete today with larger firms. Networks, consolidators and clusters provide that service, so the agency can compete on equal footing.

Clusters vary in size, style, capability and appearance. Generally speaking, the individual agency can maintain some, if not all their autonomy. These entities can also be a way for new people opening their own agencies to own their own firms. Some cluster organizations even provide perpetuation for their members.

The soft market will have a big impact on consolidators. With carriers dropping premiums, the agency itself might have a competitive market already and have no need for a consolidator with preferred markets.

The Producer Dilemma

Most agency owners will agree that it is very difficult to find good, loyal, hard-working insurance producers. Producers that are available don’t produce. The ones that do produce are unaffordable or they want ownership in the agency. Perpetuation plans are held in abeyance when it is hard to find these good producer players, especially with any management talent. The lack of good producers is a perennial problem and will remain so.

A Final Thought

These are some of the key trends important for brokerage owners to pay attention to for the coming year. There may not be much an owner can do about the external threats to their agency. It is far easier to be proactive in the areas that are within one’s control.

Understanding how current trends will affect the firm is the first step. Managing the agency in a way that exploits these trends will then allow the firm to succeed.

Topics Trends Profit Loss Agencies Market