by Bobby Reagan and Brian McNeely, December 2008

National Underwriter

The sun is about to set on 2008, a tumultuous year for the U.S. economy.  Each day we are inundated with new information regarding the economy, from retail sales numbers, to the Dow falling, to more government bailouts.  This is, of course, all in addition to the fact that a new President will be sworn in next month.  All of this information, combined with the constant commentary by pundits, has created a tremendous amount of uncertainty and confusion.  This uncertainty permeates all industries, including insurance distribution.  While no one can exactly predict the future, these are some of our perspectives on how the agents' and brokers' business, from customers to perpetuation plans, will be affected.

Customers.  Most agents and brokers have customers that are in a multitude of industries.  While some industries will experience more dramatic impacts than others, all will have to address the economic issues 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 a sale or extreme cut-backs, which will lead to diminished renewal revenue, at best.

However, all is not lost.  As was mentioned by Kevin Stipe, our esteemed colleague, in an article that he wrote in November for National Underwriter, "insurance is a need, not a want."  Therefore, if a company stays in business, they will still buy insurance.  The question that will remain is who will serve as their agent.  Companies will certainly become more price-focused, looking for ways to lower their total cost of risk.  As a result, agents and brokers are likely to see increased competition as customers explore cost reductions and, therefore, are more open to hearing what others have to offer.  This represents both a challenge (your current customers) and an opportunity (the world of prospects).

Insurance Carriers.  The struggles and bailout of AIG have been well documented.  It appears that AIG is in the "too big to fail" category and will survive.  It is assumed that many other insurance carriers, such as Hartford, would fall into the same category.  That said, the financial position of these firms is far from stable as their investment income has been hammered and their underwriting income has also taken its share of hits.

All these factors point to a market hat will have some firming, if not outright hardening.  However, this hardening may be tempered by the aggressive pricing of troubled carriers in an attempt to offset the uncertainty surrounding their financial condition.

Employees.  To say that employee retirement accounts have been affected by the economic downturn may be the understatement of the year.  As a result, many employees that were planning to retire in the short-term will be forced to work longer.  In addition, as a result of the general economic conditions, employees will be concerned about their job security, their ability to meet future obligations and their ability to live as expected, now and in the future.

All of this suggests a higher level of stress ad frustration among employees.  That aside, it is unlikely that agencies will experience any material level of turnover, as employees will most likely choose to stay in a stable situation versus exploring other opportunities in this market.

One of the silver-linings as respects employees is the fact that this will allow the industry to attract talent that would not have considered the insurance industry in the past.  As other industries face cut-backs and insolvencies, insurance agents and brokers have the opportunity to capitalize on this downturn and bring new talent into our industry.

Agency Financials.  It is our expectation that unless the market experiences a significant hardening, most agents and brokers will 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 the wagons."  There are a lot of great opportunities to invest in the growth and future of your organization.  We do, though, recommend that you use the difficult times to address problems that you have not been able to, or willing to, address in the past.  These areas of improvement can range from the organizational structure 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 is expected that the credit markets will loosen in the coming months as the government uses all available tools to promote this loosening.  However, we do not expect that the credit markets will return to the health that was experienced over the past few years.  As a result, those agencies that have strong cash reserves will be afforded growth opportunities that others will not have.

The growth strategies can take many forms.  Perhaps there are areas of specialization or programs that an agency or broker can enter.  Also, new producers are the lifeblood of an agency.  As mentioned previously, we expect talent to flow to the industry.  From an acquisition perspective, the number of large aggressive buyers has diminished.  This will put agents and brokers in a much better position to compete for acquisitions.  There also may be opportunities for two peers to combine their operations, forming a larger, stronger business.  No matter what course of action is taken, those that are able to continue investing in the business will be in a much stronger competitive position in the years to come.

Perpetuation.  With the decrease in the number of active buyers in the market and a tempered level of aggressiveness of the remaining buyers, some agents and brokers that would have considered selling in the past will turn internally to perpetuate their agency.  With little revenue growth and the resulting pressure on profitability, agency owners will see small increases to small decreases in the value of the agency's stock.  That said, this performance will far exceed the performance of most other securities in a typical stock portfolio.  Therefore, it will be possible to make a very compelling case to internal buyers for internal perpetuation.  However, internal perpetuation, while compelling, will still have its own challenges, requiring careful planning and effective execution.

Healthcare.  Healthcare was one of the most discussed topics during the presidential campaign.  President-elect Obama's plan focused on three areas:  1)  make health insurance affordable and accessible to all, 2) lower healthcare costs and 3) promote public health.

As a result, it is expected that changes will be made to the current system; however, the impacts of the initiatives on our industry are still unclear.  President-elect Obama's ability to enact many of the changes that he has proposed in the short-term will be difficult as much of the energy and resources of the administration and Congress will be focused on the economy.  Although most agents and brokers continue to experience employee benefit growth and profitability that outpaces the P&C side of the business, we would recommend caution in making material new investments in the employee benefits business.

In summary, when you compare the world we live in today to the past, the current state is a bit more challenging, but certainly not as bad as it is for many others.  We are, in fact, fortunate in that we are insulated from some of the challenges that others are facing.  With all of this understood, we remain confident in the future prospects for our industry.