Agency Financial Planning: Today And Tomorrow

by Carol Hammes

There can be little doubt that changes are in the wind in the Commercial Property/Casualty marketplace. Some industry observers have referred to this transition period as the 'beginning of the bottoming out,' reflecting that all rate decreases are not over with yet but that the percentage decreases are not as great as they were, and in fact some accounts have even seen slight increases in premiums. Certain lines of business such as Workers Compensation and Medical Malpractice seem to be the ones that are firming up more than others. And some of the insurance companies that pronounced their willingness to start walking away from underpriced risks at the beginning of 1999 are actually following through with action to back up those words. Perhaps one of the most subtle signs of a change in the market is the fact that underwriters are starting to ask more questions and want more information about a prospective account.

While all of this is heartening news to agents that have experienced 10 years of rampant premium reductions, it does not mean that it is time to start budgeting for across the board 15%-20% rate hikes any time soon - if ever. The chances of returning to the very hard market days of 1986-87 are slim to none. There is still so much capacity in the marketplace that competition will remain fierce for the more attractive risks. And there are probably enough companies so hungry for premium dollars that they will keep pricing levels down even on some of the more marginal accounts. In planning their growth strategies for the next two years, prudent agency owners are looking at a stabilization in Commercial lines but are not expecting any significant help in account growth from market forces. If the economy stays strong there may be some additional assistance from increased exposures which went up 4% in 1998, helping to offset the 9% price deterioratioin.

The average insurance agency in U.S.grew at a compound rate of 4.5% from 1988-1998 and only increased revenues by 4% in 1999. This growth was only slightly higher than inflation which is staying around 3.5%. Of even more concern, the average increase in employee compensation (which makes up two-thirds of total agency expenses) was also 4%. The average return on ownership (profits plus owner compensation) remained at 27.7%, only slightly above the 10-year average of 26.6%. It's pretty hard to increase the bottom line when expenses are keeping pace with or exceeding revenue growth.

Most buyers of insurance agencies today will establish pricing based upon profitability. To increase the value of the agency, the owners must find a way to achieve growth rates that exceed the projected increase in expenses. The agencies that have survived this past decade have become very adept at controlling expenses. Not much more can be done in that area. So whether the eventual goal is either to perpetuate internally or to sell to a third party, a key part of an agency's strategic plan must be to focus on finding a way to use this transitional market to help them increase revenues at a faster rate than the agency has been experiencing in recent years.

To achieve any kind of noticeable increase in the overall agency commission levels, it will be necessary for the agency producers to grow the total number of accounts at the overall target agency percentage growth rate plus the average attrition rate. If management wants an 8% growth in Commercial commissions and the average Commercial lines attrition rate is 8%, producers will need to write 16% more accounts in the coming years. If that level of growth seems too aggressive, there's one other way to increase revenues. Get more income from each account. The marketplace might not give it to you in Commercial Property/Casualty, but many agencies are showing increased interest in expanding into other lines such as Group Business where premiums are clearly on the increase.