Hard Market Strategies

HARD MARKET STRATEGIES

by G. Edward Kalbaugh

As agency owners well know, nothing fits the 'good news bad news' scenario better than hard market conditions. Rates are high, but there are fewer markets in which to place business. To make matters worse, agency costs increase with the additional workload of conditional renewals and new business underwriting imposed by insurance companies.

INCREASE SALES OPPORTUNITIES

There are hundreds of Managing GAs in the United States, ranging in size from a few million dollars to around $1 billion in premium, and representing from a handful of companies to several hundred companies each. Many General Agencies (GAs) can write business in all states, and most GAs can write business in at least half the states. GAs compete heavily for retail agency business, to the point of assisting in lead generation, helping close business, and educating and training agents on Commercial risk assessment and management.

However, agencies usually prefer to stay with the companies they represent, rather than accessing business via markets provided by GAs. There are several reasons for this, not the least of which is that GAs pay less commission than direct markets. In addition, GAs add another layer between the agency and the insurance company that sometimes impacts the agency’s customer service negatively.

Nevertheless, in a hard market, agencies should seriously consider gaining access to the markets provided by GAs, for both Personal and Commercial lines. Accessing GA markets enables the agent to keep or get business that would otherwise be lost.

When entering into arrangements with GAs, agents should structure the relationship to achieve longer-term goals, not just immediate market access. Here’s what Allegent Growth Strategies recommends.

Establish business goals for using GA markets. Identify GAs that could write the agency’s business. Interview GAs to determine the best fit and negotiate agreements based on long-term goals. The agreements should include guidelines for submissions from the agency, level of service expectations for the GA, and provisions for increased commission if certain volume and profit levels are reached.

Once the agreement is in place and business flow is established, take personal responsibility for staff relationships with GA underwriters and customer service agents.

PRESERVE CASH FLOW

Cash flow is the second important area for maintaining agency profitability. Cash flow is simply how much money moves into and out of your agency. Losing control of cash flow can easily put your agency in financial jeopardy, especially in a hard market when renewals and new business are tenuous. Accordingly, sensible cash management can provide the cushion necessary to make it through hard cycles. Here are some techniques for improving cash flow and profits in your agency:

Never allow your money to be idle. Use a money market account at your bank and make sure it’s linked to your checking account for telephone or online transfers. Deposit daily receipts into the money market account, where they’ll start drawing interest immediately. Never leave checks lying around in a desk drawer until you can get to the bank. Use every cent of your money to make money.

Never deposit receipts into your checking account directly. Keep a minimum balance in the checking account and transfer cash as needed to cover checks written. This allows you to draw interest with almost all of the money moving in and out of your business.

This guideline is important even when money market accounts are paying low interest rates. When the rates start to move up again, so will the interest income on your bottom line.

Use other people’s money. Building large, successful businesses without borrowing money is the exception, not the rule. Especially during periods of low interest rates, careful use of credit can be one of your most effective business-building tools.

Because the costs of borrowing are legitimate tax deductions, borrowing for business makes sense. Also, it makes more sense to distribute capital purchase costs than to stress your cash flow by laying out large amounts of cash that could be put to productive business use.

Lease instead of purchase. Leasing makes sense in business, especially if you’ll be able to use the cash in your business or in your investments to earn a better return than the cost of leasing. However, each case must be evaluated individually. Discuss large capital expenditure requirements with your financial advisor.

Delay bill payment. There’s a reason why checks are slow to come in from your accounts receivable. Keeping your cash as long as possible means that money is available to draw interest or to work in your business. Establish a system for paying bills only when they’re due, but make sure you don’t jeopardize your credit by paying bills late.

Collect accounts receivable aggressively. If clients learn that you’re casual about money owed to you, they’ll stretch your cash flow to the limit. Be aggressive about collecting receivables within 30 days. Never fund client premium payments, and never allow producers to fund client premium payments.

Maintain a cash cushion. Always keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. Achieve this objective even if you have to sacrifice your life style temporarily.

Seek the counsel of a financial advisor. Managing money is a financial advisor’s function. Even if your agency is small, it’s a good idea to have a strong relationship with a financial advisor and with the bank where you do business. Discuss your financial circumstances honestly with your advisor. You’ll receive sound advice and have an advocate when you need a little financial help.

Use your computer to help manage your cash flow. Whether you’re a large agency using one of the agency management systems or a small agency using Quicken or Money on a desktop PC, use the computer to handle as many financial matters as possible, including your investments. All of the inexpensive software packages designed for small business and personal finance are infinitely easier to use than they were as recently as a couple of years ago. And they can illustrate in dramatic fashion how much you can benefit from a sensible cash management system.

SUMMARY

The difference between financial success and failure depends on managing the top line and the bottom line to ensure positive cash flow through difficult periods. To help with the top line, seek out GAs that can provide assistance with markets and other sales related functions. To help with the bottom line, follow the basic principles of cash management.