While the rate of increase appears to be slowing, commercial insurance premiums continue to rise. The MarketScout Market Barometer rose 5.8% in the fourth quarter of 2021, down from 6.8% in the third quarter. Rates increased in 2021 at a slightly higher pace than in 2020. Some market segments, such as cyber insurance and coastal property, remain in hard market territory.
Increasing premiums are a mixed blessing for independent insurance agencies and brokerages. They can raise incomes and valuations, but they can also make retaining accounts harder.
Commissions
All things being equal, higher premiums mean higher commissions. A MarshBerry survey of agencies found that their average revenue increased by 9% in 2020, with an average 3.6% of that attributable to hard market conditions.
Commission increases may be offset if clients decide to retain more of their insurable exposures through higher deductibles and self-insured retentions, or if they drop some coverages altogether.
Retention
All things do not necessarily remain equal. Rising premiums mean more unhappy clients and more time spent marketing accounts in search of better quotes. Clients are more likely to shop with other agencies and leave their current agency if they find what they perceive as better deals elsewhere.
Agencies that have not cross-sold to write all of a client’s insurance coverages may be vulnerable to competitors who offer to fill those needs. They may also lose clients to agencies who provide better service, either through automation or the personal touch. Clients who feel a lack of empathy from their current agency’s staff may also be more likely to buy elsewhere. During a soft market when selling based on price is easier, these weaknesses may be masked, but an environment of rising prices may reveal them.
Agencies fighting to retain accounts may want to start the renewal process earlier than they have in the past. Regular and honest communications with clients about what they can expect may keep clients from feeling blindsided by increases. Agencies should also strive to make submissions as complete as possible. Underwriters will tend to prioritize submissions that answer all their questions.
Opportunities
Agencies that are prepared to offer consultation services with empathy may be well-positioned to take advantage of higher premiums. They can do this by:
- Identifying exposures that the clients’ current insurance programs are not covering and offering quotes to address them
- Patiently explaining current market conditions and what they mean for the prospective client, and actively listening to their complaints about the effects on their businesses
- Discussing non-insurance methods for addressing loss exposures, such as contractual risk transfer or loss prevention and reduction measures
- Communicating precisely what the client can do to make their business attractive to underwriters
This approach will help agencies peel off accounts from their less well-prepared competitors.
Valuations
Increasing premiums may produce increased agency valuations, but that result is not guaranteed and might not be proportional. Valuations are typically expressed as multiples of earnings before interest, taxes, depreciation and amortization (EBITDA.) If an agency is worth eight times EBITDA, an extra dollar of earnings increases the agency’s value by $8.
However, the key word there is “earnings.” Earnings are revenues minus expenses. Therefore, increased revenues from higher premiums are mitigated by any associated increase in costs. Preparing submissions for 10 carriers every year rather than every three years, and holding more frequent strategy meetings with a client costs time and money. A 10% increase in commission revenue from a particular account may produce only a 5% increase in earnings.
EBITDA and agency valuations may well rise during a period of increasing premiums, but perhaps not to the extent the agency principal might think.
An environment of increasing premiums has benefits but also presents a number of challenges. Agencies that practice regular and effective communication, cross sell, learn as much as they can about their markets, and operate efficiently will be in a good position to succeed.
