Operational excellence is key to navigating tricky year ahead for agencies

Inflation, interest rate growth and labor challenges will loom large in 2023. What does all this mean for agency operations?

In the short run, agency operating income should increase as commissions follow the upward trend in premium increases. This will be balanced by a generally negative outlook on carrier profitability and contingent income for agencies. Agencies that don’t depend on contingent income will be generally better positioned. (Credit: Pyroll/Adobe Stock)

As I write this in January 2023, I see three macroeconomic factors that will influence opportunities and challenges for the insurance distribution industry in 2023 and two micro factors that will shape our immediate future. The interplay of inflation, interest rates, labor challenges and the ensuing impacts on insurer costs and industry talent — combined with how agencies respond to them — will determine profitability, growth and positioning for the future.

While challenges aplenty surround us, agency owners who make a commitment to operational excellence will see their way through these choppy waters, ready to take on smoother seas in years to come.

Economic factors at play

In terms of macroeconomic issues weighing on our industry, inflation is certainly taking its toll. Though the waning of COVID-19-related issues and fiscal policy responses are leading inflation to trend downward, most experts estimate that it will continue to be the primary economic challenge this year. The second factor is the Federal Reserve’s response to inflation in the form of aggressive interest rate increases. These rate increases are choking off new home construction, slowing investments and threatening a recession this year or next. The third economic factor at play is related to the demographic changes both in the U.S. and across much of the world that are driving labor costs up and permanently decreasing labor availability.

Those of us in the insurance distribution industry are certainly feeling the impact of these economic pressures. The most obvious is inflation’s impact on insurer loss costs with resultant threats to agents’ incomes through reduced profit sharing, constrained product availability and uncertainty around carriers’ distribution partnership plans.

Additionally, the U.S. talent shortages are being exacerbated in the agency industry because a large percent of the workforce is age eligible (or will be within five years) for retirement, the industry has and is doing a poor job of attracting new talent and it takes longer than most market segments for agencies to turn raw talent into productivity.

The forecast for 2023

What does all this mean for agency operations for 2023?

In the short run, agency operating income should increase as commissions follow the upward trend in premium increases. This will be balanced by a generally negative outlook on carrier profitability and contingent income for agencies. Agencies that don’t depend on contingent income will be generally better positioned. Those that do should take the opportunity to take a detailed look at operating expenses, and consider cutbacks to weather this period and to set themselves up for 2024 and 2025 when things should normalize.

While I don’t see much impact to 2023, it is clear that the trend in overall carrier commission payments is to reduce commissions. So, despite a welcome inflation-induced lift in income, 2023 could present an excellent opportunity for all agency owners to look for ways to reduce expenses and find efficiencies through technology.

Agency customers — both personal and commercial — will be challenged economically in 2023 and agency owners should be aggressive in communicating with them and remarketing their accounts. Commercial accounts are threatened by the dual realities of inflation in rates and underlying property exposure increases. At the same time, business is threatened with an economic downturn. Throw in dramatically escalated interest costs for those who borrow money (contractors, manufacturers and inventory-carrying businesses), and 2023 promises to be a profit-challenged year filled with uncertainty. Customers will want to see clearly how agencies respond to their challenges. Customers are going to continue to see double-digit increases in premiums as carriers try to catch up with not only rate, but exposure. Agents who are not out in front of this could see policyholder retention suffer.

In terms of the labor issue, as the agency industry workforce continues to age, expect age-related retirements to continue to accelerate in 2023. While this macro trend exhibits itself in highly unique ways agency by agency, talent replacement is and will continue to be a significant challenge for most for the foreseeable future. While inflation and competition have demanded wage increases in 2022 and will in 2023, wage increases alone will not be sufficient. Agencies with attractive cultures, carefully considered work flexibility policies and continual recruiting programs will be best positioned for the labor challenges this year will bring and the immediate future. Agencies that lack any one of these traits should make developing them an immediate priority.

Final thoughts

Finally, let’s take a look at marketing and selling, as well as agency perpetuation.

As we begin 2023, in terms of marketing and selling, many agencies are behind in planning for and managing the issues that demand attention now. Consequently, they are particularly vulnerable and could lose business. The current challenges should be a clarion call alerting agency owners to implement and engage in best practices now. But we know that call will fall on deaf ears in many cases. Aggressive, growth-oriented agency owners who heed that call will have an opportunity to grow their books of business with targeted marketing and sales efforts this year. Every year has opportunities for this, of course, but 2023’s should be stellar.

Tony Caldwell (Courtesy photo)

Higher interest rates usually mean lower values for agencies. I expect this to show up in 2023. As a result, those who have sat on the fence and failed to consider selling at some point in the future should get busy. The long-term rate outlook is not likely to see a return to the rates we’ve seen over the last 15 years — at least not anytime soon. Agency owners who aren’t yet ready to retire and sell should be focused on getting to that point by staffing properly and growing organically to ensure attractive sales prices several years from now.

Every year has its challenges; 2023 isn’t unique in that regard. But the combination of challenges upon us this year is something new. Inflation is at a generation high and interest rates are high as well. People are flooding out of the workforce. We have significant uncertainty about the economy’s near-term prospects. Fortunately, there is a clear path to success for agency owners who are committed to the future — it can be found in operational excellence.

Tony Caldwell is an author, speaker and mentor who has helped independent agents create more than 250 independent insurance agencies. Learn more by visiting www.tonycaldwell.net or contacting him at tonyc@oneagentsalliance.net.

Opinions expressed here are the author’s own.

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