Inflation's wrath: Keeping your agency solid in the new normal
Insurance has been, and will continue to be, affected by high inflation. These tips can help you keep your agency afloat as prices rise.
When I look at the current inflationary environment in the United States, I’m reminded of a favorite nursery rhyme from childhood that ends, “All the king’s horses and all the king’s men couldn’t put Humpty together again.” I’m growing increasingly concerned that “Humpty Dumpty” is the property and casualty industry.
As inflation started to become a primary focus of economic and political attention in the latter half of 2021, I grew concerned about its long-term impacts on the insurance agency business. I didn’t see U.S. Property and Casualty insurance companies taking the problem of inflation seriously.
As I met with senior executives from a number of companies during business planning sessions, I asked, “How will you stop your combined ratios from shooting through the roof?” At that point, we were seeing 80% inflation in used car prices since 2019. I also saw rapidly rising construction costs for new homes and commercial property. I saw snarled supply chains creating rising prices for raw materials. I saw businesses in every industry – construction in particular – raising wages to attract and maintain employees. In short, I saw double-digit increases in nearly all the costs that carriers pay to put insureds back together again after a loss. While I expected to see rate hikes accompanying these new costs, these executives only spoke of single-digit rate increases.
As I asked questions about what seemed like an obvious set of looming problems, I received bland assurances that inflation wasn’t expected to continue and planned rate increases would cover rising costs. My concern was, of course, not just for the health of the companies we represent, but also for the bottom line of the company I oversee. Like most insurance distributors we make a significant part of our profits from loss-sensitive “profit sharing.” To receive profit sharing, our books of business must meet stringent profit-sharing requirements. I was concerned that would be impossible in 2022 and 2023 given the proposed lack of action on behalf of the carriers. I predicted the follow-on impacts would be felt by agencies well into 2024.
Unfortunately, for all of us, I was right.
At mid-year 2022, carrier losses in property lines, especially auto, continue to worsen. Consequently, a number of carriers have frozen their growth plans, launched book re-underwriting initiatives, suspended agency appointments, increased their rate filings, closed agency appointments and taken other actions to begin to minimize the damage they now see as imminent and unavoidable. I am certain most agency owners are either seeing these actions or soon will. I also think we will be in the current hardening cycle for at least the next two or three years.
What should you do about it?
- Encourage your carriers to take aggressive rate action. Unlike Brigadoon, when everyone wakes up from their slumber at the same time, some carriers are still acting like this will all go away. It won’t. The sooner they take action, the easier your life will be as you’ve taken action to stop your agency’s negative loss ratios from deteriorating.
- Cooperate with your carriers where you can in encouraging regulators to allow adequate rate actions. Government is generally slow to act or respond, and the speed with which rates are approved and put into the market will determine how long, and how painful, this period will be.
- Consult with your clients. Explain to them what is happening to their costs. As most U.S. families are struggling with rising costs for basic living expenses, this news won’t be welcome, but it shouldn’t be surprising. You can offer solutions to weather the storm and reduce costs. You can move clients to different carriers more frequently to take advantage of what will be an increasingly volatile market, suggest higher deductibles and encourage loss mitigation strategies.
- Contract with additional quality carriers. Insurance is made out of money and responds rapidly to supply and demand. You may find some of your favorite companies restrict the supply of insurance they’ll provide you to sell. Just like every other business, you must get creative to have an adequate supply of insurance for your customers. Having some extra carriers at the ready could prove to be invaluable.
- Re-underwrite your own books of business and remove less attractive risks if you must in order to preserve capacity. Insist on rounded books of business. Not only will this save customers money, improve your loss results and increase your commission income, it very likely will mean that piece of business is one your carrier won’t refuse to renew.
- Examine and evaluate your loss ratios and carrier rate actions to determine if you need to be moving business proactively to minimize profit-sharing risk or damage to your agency.
- Aggressively round accounts. As mentioned above, this will improve the likelihood of maintaining carrier capacity, but it will also provide additional premium to support your loss ratios. It will also increase commission income to offset the loss of contingency income.
- Consider negotiating fixed contingency deals where you can. Many larger agencies or agency networks do this routinely. This practice allows producers to spread loss risk over a period of years and reduces volatility in contingent income.
- Increase your marketing and sales efforts. This is going to be a difficult period for everyone and when costs go up significantly, and continue to do so for a long time, consumers (both commercial and personal) start shopping. Some agencies won’t do a good job of mitigating cost increases for their customers. Take advantage of that.
Of course, the news isn’t all bad. Commission income will be increasing, which will partially offset the reduction or loss of contingent income. That good news needs to be taken with the understanding that your costs will also be increasing and you will be working harder than ever to maintain adequate supplies of insurance for your customers while managing the fundamentals of your business.
At the moment, I think it’s impossible to know how long this hard market will last. During the COVID-19 era, we’ve come to know a new paradigm for work some call “the new normal”. For many in our industry, many careers have been spent in a seemingly perpetual soft market. The new normal we have now is a hard market. It’s time to adjust your business strategies for it.
Tony Caldwell is an author, speaker and mentor who has helped independent agents create over 250 independent insurance agencies. Learn more by visiting www.tonycaldwell.net or contacting him at tonyc@oneagentsalliance.net.