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Most economists are upbeat about next year, but just what does that mean for insurance agents in 2014?
For independent agents 2013 was a year in which one entity forecasted their eventual demise, and for the rest of the business world it was a year in which the anticipated U.S. economic rebound proved to be lackluster – with fewer job gains and smaller growth in the Gross Domestic Product than had been indicated.
Now experts are saying that growth will occur in 2014, with unemployment numbers slowly shrinking and the Federal Reserve’s outlook on the GDP up around 3 percent in 2014 and as high as 3.5 percent the following year.
There’s better news yet. Looking back on 2013, it may have been a bit better than some may believe – particularly for the insurance industry.
“As we approach the end of 2013 it’s a virtual certainty that 2013 will be the best year in terms of profits and performance for the property/casualty industry in the post-crisis era,” said Robert Hartwig, president of the Insurance Information Institute.
Hartwig and Dave Evans, senior vice president and executive director of the Independent Insurance Agents & Brokers of America Inc., were asked by Insurance Journal for their thoughts on 2014. Both industry experts say agents should look forward to the coming year.
Hartwig’s positive review of 2013 sets the stage for more improvement in 2014.
“We would expect the economy will continue a very slow improvement,” Hartwig said.
His list topper for reasons to have a positive outlook is that 2014 will see a rise in interest rates and an improvement in investment income.
“It could be there’s a reversal of that downward trend in investment income beginning in 2014,” Hartwig said.
Post-economic crisis, Hartwig is expecting the coming year to be the best in a while in terms profits, return on investment and underwriting performance for the industry. Those expectations, of course, exclude the ever-present possibility of a heavy year of natural catastrophes, which no one can predict.
The good news for agents? The Big “I”‘s Evans poured some cold water on a report in June from consulting firm McKinsey & Company that painted a grim picture for the future of independent agents – its insinuation that independent agents would go the way of the Dodo fired up those who felt differently, eliciting visceral reactions from a number of experts.
“I think the big issue this year is you did have the McKinsey study,” said Evans, who produced a preponderance of facts to support continued growth in the independent channel.
The angst this report added to the reality coming from a cadre of direct writers that continued to carve out a formidable presence for themselves online, leaving less room at the table for independent agents.
Evans believes the dynamics heading into 2014 have set it up as a year to watch and see how well independent agents respond to these challenges – namely how well they leverage technology, especially social media and digital marketing, to keep pace with the big spending direct writers.
Growth Areas
Just as direct writers are taking to technology to capture business, independent agents must do the same, Hartwig said, adding they should consider all forms of outreach: email, social media, websites, snail mail, texting the phone.
“I usually use the term ‘channel fusion,'” Hartwig said, referring to the style of marketing he suggested independent agents should embrace.
As with many industries, many of today’s customers prefer dealing with insurers though a multiplicity of channels. In other words, they don’t mentally separate insurers, agents, claims, or methods of communication, Hartwig said.
“I think that while the industry has a tendency to sort of silo channels, the consumer continues to view the interaction with the company as one dimensional in terms of its relationships,” Hartwig said. “The consumer simply wants to be able to have access in a multiplicity of ways.”
Evans sees technology as not only a way for agents to better compete with direct writers in 2014, but as offering an opportunity for more business.
“One (growth) area is definitely cyberliablity,” Evans said.
As more information continues to be passed over the Internet, particularly information required by the Affordable Care Act, a greater number of businesses will start looking at their coverage in that regard and will begin asking things like “Do they have gaps in coverage?” Evans said. “We see cyberliabilty as an area that is definitely gaining ground.”
Another growth area for insurance high on Evan’s list, driven by laws being passed by a number of states enabling marijuana sales, is in medical marijuana dispensary insurance, and dram shop and tavern keeper liability.
“There are a number of agents in select states that have the right policy form and coverage for people that are in this business,’ he said.
Hydrofracking is another growth area Evan sees for independent agents.
The method of hydraulic fracturing of rock by a pressurized liquid has drawn criticism from environmentalists, but is seen as a potential job creator and a way to get more needed energy resources, as well as potential jobs creator.
Landowners have in the last few years began to see opportunity in leasing land to hydrofracking operators, as well as to other companies looking to generate much needed energy.
“If I’m a farmer and I’m allowing someone to do hydrofracking, or put up a windmill, that’s a commercial use of my property, that is usually excluded on a personal lines policy,” Evans said. “There’s a lot of consumers out there, someone comes up and makes an offer, and they may not be totally aware of the commercial exclusion.”
M&As
The topic of mergers and acquisitions, no matter what year, always seems to be included in an outlook conversation.
“I don’t see it accelerating,” Evans said.
It accelerated in the past year as business owners hustled to get deals done ahead of the increase in the federal capital gains tax to 20 percent, but Evans thinks that has peaked, and M&As will now return to a regular pace.
Still, he sees the pace of sales being determined largely by aging agency principals without a perpetuation plan looking to hang it up.
“One of the other long-term issues in our industry is increasing age of agency principals,” he said, adding that many of those principals will eventually wish to monetize their agencies. “Yes you’re going to continue to see M&As. We sort of see a barbelling.”
Dismissing the notion that agencies are becoming fewer, Evans noted there was a 1,000 net gain in the number of agencies from 2010 to 2012, according to Big I’s Agency Universe study.
Evans added that some of those increasing ranks of agencies are former captive agents who went independent, something that’s occurring more frequently as agents can more easily joint clusters to pool their strength.
Those are reasons for the barbelling, as Evans referred to it, in which a great number of agencies are growing increasingly smaller, while others grow larger through M&As – making mid-sized agencies a good not-too-hot, not-too-cold buy for large agencies looking to expand rapidly.
“The medium-sized agency is very much a target, where the larger agencies want to buy it,” he said.
Regulation
The big question for 2014, not only for agencies, but for all U.S. businesses, is the Affordable Care Act.
“You still have the question mark on affordable care,” he said. “It’s still not clear when and if the dust ever settles how it’s going to affect agencies that do a lot of benefits. I don’ think anyone knows right now.”
Hartwig, who often testifies before Congress when the government is considering regulation that can impact the insurance industry, noted that each year there are numerous insurance issues related to regulation at the federal and state levels that require close scrutiny.
And 2014 is no different.
In automobile insurance Hartwig sees various challenges at the state level, including no fault reform being sought in states like Michigan.
The Consumer Federation in November issued a challenge of its own, calling for states to consider adopting regulations similar to California’s Proposition 103.
CFA issued a report showing that auto insurance expenditures in America rose by 43 percent on average over the past quarter century. Based on estimated savings to California drivers outlined in the report of $100 billion since 1988, the authors called for prior approval regulations similar to Prop. 103 for the rest of the states.
Prop. 103 passed on Nov. 8, 1988, and made sweeping changes in the oversight of auto insurance in California, including requiring prior approval for rate hikes and establishing an intervenor process in which people who challenge rate hikes can get compensated for doing so.
The idea of establishing prior approval in other states met with skepticism from Hartwig, who said he doesn’t expect many states to take CFA up on its suggesttion in the coming year.
“I don’t think that’s going anywhere,” he said. “It’s a quarter-century old piece of legislation that CFA does not appropriately attribute the savings in California to the true drivers of that savings.”
Tort reform, fraud fighting and improved safety can be credited with the savings, Hartwig argued.
“States have not sought to emulate California in the past 25 years,” he added. “I don’t seem them doing so now.”
Other regulatory speed bumps the industry may have to endure in the coming year include restrictions on underwriting criteria, banning the use of credit information and eliminating prior insurance requirements, Hartwig said.
One area where the industry may want some government intervention is in extending the Terrorism Risk Insurance Act. TRIA, created after the Sept. 11, 2001 terrorist attacks to stabilize the market and ensure the availability of private terrorism coverage, has been extended twice before and is set to expire at the end of next year.
Hartwig has testified in Congress three times on the TRIA issue this year. He thinks Congress will renew the program in 2014 – hopefully sooner than later.
“Yes, I do believe that Congress does recognize the value of the program, and I think there’s bipartisan support for re-authorization,” he said. “I hope the debate will be taken up in first half of year, rather than the last week of December, as has been previously the case.”
He added, “It’s one of the very few programs you can name that has achieved its goal, it has benefits that ripple throughout the economy, and comes at no cost to tax payers. No cost is key, because economy and fiscal environment is different today than during the last extension in 2007, the pre-crisis era.”
But he’s not so upbeat on the National Flood Insurance Program.
Despite NFIP reform going forward with overwhelming bipartisan support in 2012, parties within the government are now seeking to delay the reforms by as long as years possibly.
“I would say that those reforms are very much threatened right now,” Hartwig said. “It’s difficult to see where it’s going to wind up.”
Without those reforms in place, the willingness of private sector capital to underwrite flood risks could be greatly diminished, Hartwig said.
“The industry was firmly behind the reforms passed in 2012,” he said. “Should there be a reversal, or delay, it will work to the absolute determent of taxpayers.”
– Insurance Journal Vice President of Content Andrew G. Simpson contributed to this report