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Agency Survival in a Down Economy

As more businesses and individuals are economically affected by our Crisis in Confidence, insurance agencies and their owners must proactively alter their efforts in one of two ways. The only sure path to self-destruction in our industry is pretending that everything is all right and changing nothing.

There is no doubt that our economy is having a snowball effect on every section of the industry – including insurance agencies. We still don’t know whether the Administration’s efforts to stem the recession will work, or whether it will rush us into a period of hyper-inflation equivalent to the Carter years at best and Germany in the 1920’s at worst. My belief is that the country and the world have fallen to a Crisis in Confidence rather than a weak economic foundation.

Politically motivated, once the people believed that things are bad and getting worse, we began suffering the Pygmalion Effect – the Self-Fulfilling Prophecy. Of course, there were absolutely terrible business decisions made that should have resulted in failures of the businesses that were baited into making those decisions (primarily banks and insurance companies). But we should be much more concerned with the long-term economic results of saving defunct companies.

Either way, as more businesses and individuals are affected by our Crisis in Confidence, insurance agencies and their owners must proactively alter their efforts in one of two ways. The only sure path to self-destruction in our industry is pretending that everything is all right and changing nothing.

Solution One: Buck the Tide (the Al Diamond philosophy of buying when others are selling and selling when others are buying)

This solution involves proactive management of an agency to identify the successful businesses in your area, concentrating on targeting markets, and aggressively pursuing new business. Why? Because we all know that the soft market will continue to pressure price and revenues downward until the reinsurance treaties force the market to harden. Traditionally a hard market is better for agents since the carriers constrict and raise rates simultaneously. But this time, the next market change may not bring particularly good news. When the market hardens in this global economy the carriers will be forced to slow writings even more than increasing prices.

Today we can still help prospects properly manage their asset risk. In this economy, when the market hardens, the individuals and business in our markets will still need our help. Unfortunately, we may not have the product available to make them our clients. The solution requires considerable intestinal fortitude of agency owners because it implies active marketing and growth oriented strategies to replace lower revenues and lost clients with new ones who will eventually profit the agency in the hard market through the effect of rate changes.

Without this aggressive solution, agencies will find it ever more difficult to maintain their revenue base and will still have to face the second wave of the crisis when the market hardens. Imagine losing business last year, this year and, perhaps next year, finding your remaining clients sponsoring less revenue each year and then facing a hard market in which you are restricted from writing new business.

In order to Buck the Tide, agents must be good managers and risk takers. And we all know that many agency owners are neither.

Many agents will not be capable of planning, hiring producers and marketing through this economic time. We are, after all, a conservative industry with many conservative business-people who are concerned with the state of the economy. They need a different solution to make their agencies survive.

Solution Two: Hunker Down – If you know that revenues will decline, if you know that growth will be difficult, if you know that profits which are already stressed may disappear, now is the time to manage your business to the levels needed to maintain the integrity of your agency. This means reducing costs and, if necessary, reducing staff in order to survive until the economy bounces back and permits agencies to operate in a normal fashion.

Hunkering Down means taking the hard steps to survive in a non-growth period. It also implies strong management to identify the areas of expense that can be reduced without affecting customer service. And it implies the pragmatic decisions of agency owners to save their businesses by cutting staff.

Staff reductions are a particularly difficult decision for most agency owners. Most owners have both compassion and deep regard for their employees. However the pragmatic side of every business owner must decide whether it is better to reduce staff temporarily and continue to support his family, or eliminate all profit, reduce his own compensation and, if the downturn lasts long enough, sell or merge his agency to keep staff employed as long as possible. And if the downturn continues, the new owners will certainly trim staff to enjoy the economies of scale of their combined agency operation. They don’t have the loyalty to the employees that the former owner experienced.

Of course elimination of discretionary expenses comes before Reductions in Force (RIFs). And this is the time to eliminate the “dead wood” that may be cluttering your agency. A bad economy and difficult profit-times may be the rationale for eliminating the least productive employees in your agency.

Ed Curry, a friend, long-time fellow consultant and author has written a book that is an excellent guide to Hunkering Down. As a matter of fact, the book’s title is Hunker Down Survival Plan. I recommend it to you if you cannot motivate yourself to create a strategic and tactical plan and market for all of the businesses that need your help and still maintain their insurance programs in your area.

Solution Three – The Ostrich – Like all good ostriches, many agency owners will find the idea of marketing for growth in a difficult economy too daunting and the idea of hunkering down too threatening. They will find the nearest sand pile into which they will bury their heads until the economic storm abates. What they don’t realize is that this storm may be extended and the result will be dramatic. Here are the signs of the ostrich mentality:

First, the profits of the agency, always taken in full each year, are usually dependent upon strong contingency compensation. Ostriches spend more than they generate in operating income (commissions and fees) and need that annual injection from the carriers to survive.
They notice that the contingency amounts are in decline and they are using every dollar for expenses and are not able to take the generous bonuses they once took.
Two other events arise almost in unison:
a. For a year or more, client renewals decline in value. Premiums
    decline for existing customers renewing. Where clients’
    premiums increase, pressure from competitors require the
    agency staff to re-market to lower premiums and commissions
    to keep the account.
b. Regardless of the attempts to retain business, more clients
    leave the agency than ever before. Some of these clients are
    long term relationships who the agent felt were “safe.”
The reduction in renewals and lower retention acts to exacerbate the contingency decrease and the agent finds his profit disappearing and the need to reduce his compensation to pay expenses.
The agent responds like all ostriches by stopping “discretionary” spending like advertising and marketing while still maintaining his perks and personal expenses. After all the view is all the same from inside the sand pile.
Eventually, the agent realizes that he is having difficulty paying his own family expenses and the agency’s payroll, as well.
The agent, always the magnanimous father-figure, faces the reality that his business is failing and decides he must sell or merge.
a. In a last-ditch effort, he tries to impress upon the buyer how
    important it is to maintain the staff that has been so loyal, as
    well as himself, to support the transferring book of business.
b. The buyer maintains the former owner and only the staff
    members who prove themselves productive and valuable,
    which happens to be the same ones that the original owner
    should have retained while terminating the less productive and
    less valuable employees.

Are you willing to Buck the Tide, are you ready to Hunker Down, or should we send you more sand. The choice is yours. If you want to Buck the Tide or Hunker Down, give us a call at (800) 779-2430. We can help you. At the very least, get Ed Curry’s book. It is an excellent guide to the hunkering down process. If you have been an ostrich, let us know. We may be able to help you sell or merge before the value of your asset declines too much. The only thing you must NOT DO is sit on your assets and hope for the best. We are already getting calls from agents who have decided to close the barn door now that all of the livestock is gone…

Reprinted from the PIPELINE, the national newsletter for agency principals, by permission of Agency Consulting Group, Inc., a leading consulting firm for independent agents in the U.S. for more than 20 years. Call 800-779-2430 for information or subscription; e-mail info@agencyconsulting.com; website, www.agencyconsulting.com.