Riding out soft and hard market cycles with quality relationships

By Jim Romano and Michelle Duffett | July 24, 2006

Analyzing the economic rhymes and reasons of soft and hard market cycles in the insurance industry would make for a challenging university-level business course. Theories abound on why and when these cycles occur, but no matter how analytical or strategic we get, the industry’s response to them hasn’t changed much over the years.

Soft markets invariably lead to increased competition as more players enter the market, placing pressure on pricing, decreasing premiums and expanding policy terms. A soft market underwriting philosophy puts the focus on production volume, where the standard operating procedure is to sell low/sell more for market share gain. Clients are happy with their lower premiums, and insurance carriers and agencies rack up policy counts as they busily reel in new clients. But if the agency fails to deliver an even lower price on renewal, how many of those previously happy clients will shop around for a new agent and jump ship? Ultimately this pricing scenario is inadequate to justify the real costs of doing business.

It’s much harder for agents to thrive during market cycles when they switch from carrier to carrier chasing lower prices. They end up working twice as hard for less money. Any businesses that hope to hold onto their clients based solely on pricing, without truly devoting the time and resources needed for quality client service, are making a big mistake. They eventually make themselves a commodity, and inevitably their clients will move on.

So, what can an independent agent do to ride out extended soft market cycles, keep clients and manage a book of business for the long term? The answer lies in providing real value to clients–value through building relationships that are based on more than pricing. Real value comes from being a trusted consultant and advisor, not just a vendor. It comes from being concerned with clients’ insurance needs now and in the foreseeable future, not just providing the lowest price available. An agent’s value lies in providing insurance expertise, including the ability to explain why the low-cost coverage is not always the best deal. This is the foundation of solid client relationships that builds loyalty, prevents turnover and affords an agency some market cycle stability.

In soft markets, insurance carriers are the facilitators of lower pricing. They fall prey to volume selling in order to achieve short-term corporate gains. While many carriers practice irresponsible pricing to obtain market share, it’s the independent agents that enable it. Being the gatekeepers, agents are positioned to provide insurance expertise and lead the way to quality products.

Too often insurance jobs depend upon production goals. These production targets become the measuring stick of success. Agents and insurance company personnel alike find themselves pressured to put premium on the books and they lose sight of the long-term benefits of adhering to the fundamentals of underwriting integrity, financial responsibility and client service.

Three key relationships are the basis for success, or failure, for every insurance agency. Focusing on quality in each of these relationships–with clients, carriers and employees–will help agencies prosper through hard and soft market cycles.

Client relationships
Having quality relationships with clients takes commitment and discipline, but it pays off in reliability and client retention. It also helps reduce errors and omissions claims. Client turnover can lead to poor client selection when agents need to replace business. But the commission generated by a questionable client is never enough when a claim comes in. Bad clients often switch firms until they find one willing to go their way. It’s up to the agent to know where to draw the line to protect themselves. Having the fortitude to say “no” will weed out the bad clients and build stronger relationships with the good.

Insurance carrier relationships
Strong agencies build and maintain relationships with carriers that offer stability, longevity and market discipline. They selectively feature carriers that offer their clients the kind of service that they expect for themselves. In addition to relying on financial ratings, it’s valuable for the agent to evaluate the insurer’s strengths and goals for different types of coverage. A preferred standard lines company that introduces a new specialty line may not maintain underwriting discipline while building market share. Or an established company that has just participated in a merger or acquisition may change their underwriting or claims approach. An agency with strong insurer relationships understands these nuances can make the difference in surviving market cycles.

Employees be happy!
There is a saying that goes, “Happy employees make happy customers.” If you expect your employees to treat your clients and carriers with the respect they deserve, you must treat your employees with respect as well. This seemingly simple approach pays off in so many ways. Providing consistent service is much easier when your agency is staffed with experienced loyal employees. Constantly training replacement people is counterproductive and takes away from client-time. Companies and clients also appreciate dealing with people they have done business with for a while, which translates into satisfied customers, better success ratios and higher retentions.

Success in riding out market cycles requires a long-term view. Strong relationships with carriers, clients and employees that are focused on quality over quantity requires patience. We can’t eliminate competitive market cycles but we can use discipline to improve our opportunity for success.

Michelle Duffett and Jim Romano, Insight Insurance Services, specialize in professional liability for architects, engineers, accounting professionals and insurance agents.

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