At the end of the first quarter, I published an article as a call to action for independent insurance agents. While Hold, Fold, or Double Down is worth its own read, the main point is that maintaining the “current state” of how you have always done things is not an option. The current landscape is constantly changing, volatile and filled with sometimes ostensibly conflicting insurance data.
During the recently concluded second quarter earnings season, there’s been a continuation of seemingly conflicting data. The publicly traded insurance brokers and carriers generally reported seeing a continuing hard market, ex-workers compensation, with pricing strong (albeit moderating). However, in a June 2022 U.S. P&C Insurance Market Report, S&P Global projects that at the end of 2022, the industry will suffer its first underwriting loss since 2017, with a forecasted combined ratio, or the sum of claim-related losses plus expenses divided by earned premium, of 100.4 partly due to inflationary pressures. There is risk of future rates not keeping up with loss costs, especially in the Personal Lines that are seeing rising social inflation and higher claims costs.
While it’s been apparent for some time that the hard market has benefited some more than others, carriers are now catching up with Personal Lines rate increases during the first half of this year, beginning with auto filings at the state level – in some instances greater than 50% and, most recently, home. Since Personal Lines account for 51% of all U.S. insurance premiums last year, and loss cost trends continue to increase faster than rate, the overall profitability of the carrier market is shifting. In some product lines, inflation, supply-chain issues, and economic pressures are contributing to insured losses.
Factors That Could Threaten Growth of Insurance Brokers
There are also increasing signs of economic slowdown and uncertainty that may impact the organic growth of insurance brokers and carriers, including the August Purchasing Managers Output Index figure coming in at the weakest since 2009 (ex-the early 2020 pandemic) and U.S. GDP declining for two quarters. On August 26, Federal Reserve Chairman Jerome Powell spoke about using “tools forcefully” to manage inflation, that may cause “some pain” to the U.S. economy.
What does this mean for you? As consolidation continues in the agent and brokerage channel, larger brokers may be better positioned to weather the storm. Leverage with carrier partners has already translated into higher contingent income when the industry was benefiting from underwriting profits. This leverage will continue as brokers execute on inorganic growth strategies and further gain bargaining power over carriers. During the second quarter earnings reports, the public brokers cited greater macroeconomic challenges, but were confident that they were well positioned for the current environment.
Benefits of the Aggregator Model
For those of you who believe in independence, however, all is not lost. Some may already be in or are considering the aggregator model. This best-of-both worlds approach allows agencies to remain independent while benefiting from more lucrative carrier contracts. This is especially important when underwriting profitability is challenged, making it easier for carriers to reduce expenses related to brokers on the smaller end of the scale.
The benefit of the aggregator model reaches beyond carrier leverage and contingent commissions. The ability to have a network of peers to share best practices with and compare performance against will further position your agency and allow you to continue to double down in a more challenging environment. The right aggregator partner can provide highly valued resources and assets that allow independent firms to scale their business or better compete with local or regional competitors. Effective aggregators can provide talent development, insurance competence, financial stewardship, and agency differentiation that assist independent brokers.
Remaining independent does not mean you have to do it alone. Having a partner to help navigate through the confluence of data is not only reserved for those who folded and partnered with a larger agency.
If you are interested in understanding more about the aggregator model, or the current state of agency and broker consolidation, please email or call Brian Refici, Vice President, at 440.769.0321.
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