Insurance hard markets are generally welcomed by agents because rising prices typically mean rising commission and income. Agency owners often welcome the increased revenue while employees have more work to do and customers are frequently unhappy. These are the things we generally think about, but there are some other that are very important.

In a hard market, not all agents prosper. In fact, looking at our agencies and considering agents in business five years or longer I saw a number that ceased growing or actually went backward. In the face of double-digit rate increase, how is this possible?

The first possibility is that these agencies were not aggressively looking for new customers and were relying solely on rate increases for increased income. You simply cannot do that in a hard market! Customers will shop when their premiums go up! It’s obvious, but unfortunately some agencies fail to increase their marketing efforts in hard markets. BIG mistake. 

The second is that a hard market really shows the weakness of an agency with poor retention efforts. A well run agency should have a retention rate of 90% or better because they are selling on something besides price and work hard to take good care of customers. Agencies with lower retention rates in normal times often see their retention plummet during a hard market. This becomes a HUGE double whammy. Think about the math. Rates up 10%. Retention goes from 80% to 70%. What happens to growth?

The third is that average commissions go down! This is because during hard markets companies shrink their underwriting appetites and more business moves to the Excess and Surplus Lines market at lower commission rates. Depending on an agency’s business mix this can be stunningly painful. Consider an agency which writes a lot of restaurants, for example.  Say the book is $500,000 total and 50% moves to E&S markets. And assume retention drops from 90% to 80%. The agency is not marketing for new customers and just trying to keep existing ones. Commission was $75,000 at 15%. Now commission averages 12.5%. Once retention is factored in commission on the book drops from $75,000 to 50%. A drop of 33.33%! And NO CHANCE of profit sharing on half the book. 

The fourth is that carriers get more aggressive about trimming their agency force to save marketing dollars and agencies with smaller books or marginal loss ratios lose carriers.  This inevitably results in a loss of customers and income

 Finally, when the hard market is driven by weather-related losses, as the current one is, commission cuts become inevitable as companies struggle to maintain margin. 

So, as you can see, smart agency owners have a lot to think about – and proactively manage – to take advantage of a hard market. What are you doing about these issues?

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