Trends for 2012

Soft Market Here to Stay, Merger Activity, Financial Pressures and More

In order to be proactive, one needs to understand and exploit current and future trends. So what will 2012 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 in various regions for a number of years. It hit most lines across the country since 2007 and it seems to have no real end in sight. It was predicted to end in 2009, but it hasn’t.

The current trends will continue. Property/casualty insurance companies and the reinsurance markets are still financially sound. 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 continuing soft market means a lot more work quoting, usually for less commission dollars due to lower premiums. In order 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.

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 the “smaller” independent agencies. Eliot Spitzer’s past actions resulted in some national brokers not accepting contingents, although a couple brokers have since reversed this decision. The impact was not too significant on them, since 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 is to add 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 plan 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 acquisition (M&A) marketplace is that the national brokers are now focusing on the middle market arena and have specific capital to do so. Aside from Brown & Brown and A.J. Gallagher, which have been there already, there are some new players in the middle market, such as Hub, USI and Marsh. These national brokers are acquiring to keep growing and adding volume. The pace is eventually unsustainable, but will continue through 2012. 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 wanting to get into the insurance business are also looking for good platform agencies, to expand and become players in certain regions, such as Assured Partners.

There are also players, like Integro and EPIC, in the game. Firms like NFP (National Financial Planners) and CBIZ that have been players in the benefits and financial services arenas are looking at also getting into the property/casualty insurance marketplace and have the capital to do so. There still continues to be no shortage of buyers of independent agencies, if the agencies are good firms.

Capital Gains Taxes in 2012

It is not much of as prediction to say that taxes will go up. Congress and President Obama temporarily extended the Bush tax laws. It is probable that the current federal capital gains rate will go from 15 percent back to 28 percent, or higher, when the tax law runs out. Personal income taxes will most likely go up, especially for the higher income brackets.

Owners that are contemplating selling the business have two choices. First, sell before the tax rates go up after 2012 to lock in the low tax rates. For those that are not quite ready to sell, but choose to sell now, this will require the acceleration of preparing the agency to sell and realigning one’s financial goals and expectations.

The second option is remain an owner for now and sell after 2012. Because of the higher tax rates, anyone selling their business after 2012 will need to grow the business by more than the tax increase in order to net the same amount of after tax proceeds they would have received before the tax increase.

Since the soft market is expected to continue and 2012 will be equally as difficult on everyone economically, growth will continue to be difficult for any agency. The process of finding a suitable buyer can take fourt to six months from start to finish. A merger might be also a good option to selling for some, see the next trend.

Options for Small to Mid-sized Agencies

Many small to medium sized firms cannot individually maintain the number of quality markets they need to compete today with larger firms. Consolidators, networks and clusters provide that service, so the agency can compete on equal footing with the “big boys.”

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 within the group or umbrella entity.

The Producer Dilemma

Most agency owners will agree that it is very hard 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 from now on.

There needs to be a shift in perception for the traditional producer role to be split into a pure sales role and an account technical service role. Many firms today are adopting the account executive role to ease the burden of the workloads of the owners and non-owner producers with large books. The account executive approach costs the agency less money and provides the service staff more room for advancement in the organization. Account executives usually still have service staff to delegate day-to-day service work on an account.

National Healthcare

No one knows for sure the impact of the current legislation and the affect on the value of firms with these books of business, if indeed the reform does come into effect, or parts of the legislation are reversed. There is still much uncertainty what the implementation will result in due to the ambiguities in the language of the bill that was passed and the complexity of the system.

Presidential Election in 2012

What will the impact on the insurance industry and the United States be under a new Republican president or another four years with President Obama at the helm? No one knows for sure, but it will most likely impact regulation and tax laws no matter which party is in place.

A Final Thought

These are some of the key trends important for agency and 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 impact 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 Legislation Market