Do you remember the first time you rode a roller coaster? I do, and I was absolutely terrified when I felt it pick up steam and hurtle down toward the bottom of the first big dip. As the car began to climb the next hill, all I wanted to do was get off. But after hurtling down the second dip, I began to realize it was fun. I learned even scary experiences can work out for the best. And today, I believe the economy, coming out of the COVID-19 crisis, will be just like that over the next several years.
There is still a great deal of uncertainty about the economy. Most believe the recovery will be strong, but almost no one fully understands how long the recovery will last, or what it will actually be like. There is a lot of concern around inflation and employment, as well as whether the rapid rise in consumer spending we are currently experiencing will become permanent. All these factors will determine, to one degree or another, how much money insurance agents and agencies earn in the next few years. These uncertainties will certainly present a number of opportunities. Let’s explore those.
Premiums, Costs Rise
The first opportunity for insurance distributors stems from the expected rise in property premiums and the resulting increase in insurance commissions. Consider the rapid increases in construction costs in residential and commercial marketplaces, as lumber and other materials prices have climbed as much as fourfold due to disruptions in the worldwide supply chain. Steel, copper and other material prices used in construction are in such short supply that distributors will only quote prices good for the end of the phone call. These material increases will eventually lose their volatility and prices will more than likely return closer to their means. But if past experience is indicative of the future, those inflated prices will never return to their former level.
Then consider the unusual labor market we’re experiencing, which is in part due to extended and amplified unemployment benefits. The 42% of businesses seeking to hire additional employees are being forced to pay more. While the prices of materials may go back down, it is very difficult for wages to do the same. The result will be an increase in the cost of construction on all kinds of properties, and in some cases, dramatic increases. Along with this will be an increase in the amount of insurance that is purchased to cover these new and existing buildings. That means increased commissions for agents.
Last year, most agents were engaged in conversations with their commercial clients about how to control costs in the face of shutdowns and decreased demand. In the next year or two, as sales recover rapidly, we are likely to see casualty premiums that are dependent on sales and payroll rise as fast or faster than they fell. This presents an additional increased income opportunity for agents.
The cost of both new and particularly used cars is also up significantly as a result of supply chain disruption. This has created supply shortages — along with unprecedented consumer cash availability due to government income replacement programs. This means premiums must go up or insurers, paying claims on an actual cash value basis, will see their margins erode and agent loss ratios climb. I believe carriers will have no choice but to raise auto rates commensurately, resulting in additional income for agents and agencies.
With the economic recovery picking up momentum, businesses are putting to work what they learned during the pandemic, just as they typically do in any economic downturn. Efficiencies of operations married to increased consumer demand are what typically fuel economic expansion, and many analysts and observers are predicting a historically significant expansion both in terms of duration and extent. This will also raise agent’s and agency’s incomes.
Those agents who stay close to their clients, give them choices, help them to understand what’s happening in the insurance environment and help them to control costs, will not only retain clients but grow organically at an even higher rate. As a result, these agents will experience increased income growth, which in turn will drive up the value of their agency. Combined with a shrinking pool of investable agencies, the opportunities for agency owners to exit at an attractive price must increase.
The only caveat to this scenario is that we will almost certainly see rising interest rates as the Federal Reserve attempts to control the natural inflationary pressures this economic activity creates. On balance, though, the situation for sellers should improve. Those agents who do not sell can be well positioned to further grow their businesses as they take advantage of the natural client volatility created by those transactions.
For agents, maximizing your opportunities in the coming environment is really very simple. It comes down to executing on any independent agency’s main value propositions: sound professional advice, choice and aggressive new business efforts.
This certainly will not be the time for agents to renew business as is. Every client, whether personal or commercial, will be experiencing changes in their risk profile and coverage needs. In the coming year or two, agents who stay close to their clients will be able to help them tremendously as they negotiate the changes to their lives and businesses. Many agents, unfortunately, will not do that, and that will only create more business opportunities for those who do.
As I have pointed out, insurance costs are going to go up for most purchasers. Controlling these costs through carrier choices and multiple coverage options is a place where independent agents can really shine. Helping clients understand what is happening in the marketplace may never have been more important, or more valuable, in developing long-term, trusted relationships.
Those agents with great professional service, coupled with aggressive education and marketing efforts, will have increased opportunities for growth at the expense of agencies that ignore their own client obligations. The volatility of the market, and the natural confusion created by unique economic circumstances, will heighten clients’ expectations and willingness to move if their needs are not met.
The next couple of years are going to be fascinating. And they promise to be full of incredible potential. Looking back years from now we may even think they were the best times in our careers. It’s time to get ready.
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