Agency ValuationThe world has entered uncharted territory.  The corona virus has cloaked the world in fear and spooked the stock market.  Many economists believe that a recession is imminent.  Without a massive, targeted government bailout, entire industries will be decimated.  The impact to small and service-based businesses will be severe and economists predict many will not survive. 

So, how will this impact the value of independent insurance agencies?  Although it is hard to say definitively what will happen, here is some food for thought. 

There is a widely accepted notion that the insurance industry is recession-proof, and that agencies generally fare better than insureds.  The theory is that given the relative inelastic demand of the market – people and businesses will always need insurance.  However, in a recession that could be as widespread as some economists are predicting, a great many businesses could fold.  Many of these businesses are the bread and butter of main street agencies. 

Another impact that we have seen in past recessions is that customers focus more on costs and will consider moving their business if they can get a better price elsewhere.  This problem is compounded by what some see as a firming, or hardening, commercial insurance market that could see premiums spike.  Service, while certainly important to business owners, could take a back seat if the pricing isn’t right, and lead your customers to independent agency competitors or direct writers. 

With a potential closing of many businesses, there will be reduced demand for insurance.  With reduced exposures in the market, there will be intense competition to write that business, especially for agencies in smaller towns with smaller markets.  Furthermore, agents can expect to see reduced sales for products such as life insurance, which many people will determine to be an unnecessary expense. 

All of these factors in total could lead to less revenue, slower growth, and decreased agency value in the short term.  But it is not all doom and gloom.  There are several things that agencies can do now to impact their value when the economic pendulum swings the other way. 

Call your customers.  Do not wait for the renewal period to reach out to them stay connected with them now.  At times like these we all find comfort in knowing others care, so this is when relationships truly matter.  Reach out to your customers proactively, find out what they need, and offer to do a policy coverage review with them especially if the nature of their business is changing.  Explain the coverages they have and how they might help them during this crisis.  Reinforce your value as their trusted advisor.  Sometimes the best defense is a good offense.  

Do what you do best.  Advocate for your clients with your carriers. If possible, try to find a way to reduce premiums for those that are more price sensitive.  Although it will reduce the commissions you earn, it may win you referral business and increase your total overall commissions.  Remember, it is always less expensive to keep a customer you have than to find their replacement. 

Stay informed and communicate.  During this time, things are changing quickly, and we are being flooded with information.  We have resources for agents to stay abreast of key information on our website that you can also share with your customers.  Proactively providing information is one of the best ways to help your customers weather this storm. You can find these resources at – https://ohioinsuranceagents.com/news-events/coronavirus-update/. 

Rethink your expenses. To further bolster your agency value during a recession, be sure to implement expense controls.  By operating your agency like a business and not a way to fund a lifestyle, you will work to ensure your long-term viability.  Examine all of your expense and see what you can trim to increase your profitability.  And, by maintaining these controls when the economy roars back, you will greatly enhance your agency value. 

Focus on new business.  Lastly, you should re-prioritize your new business production.  With fewer people and businesses to write, and a likely increase in competition, you need to work diligently to fill your pipeline. Identify the niche or area that you have the greatest expertise and incentivize your producers to get creative to identify new business opportunities. Make sure you have the right compensation structure in place to reward them for their efforts.  Establishing a sales culture that has new business minimums and account size thresholds can help you achieve your new business goals. 

According to the Big I / Future One 2018 Agency Universe Study, the number of independent agencies held firm during the last economic recession (see chart below).  Although we can surmise that some agencies did not survive the recession, the size of the independent agency plant remained steady.  This suggests that some agency owners put off retirement to weather the storm and position themselves for a more fruitful exit, coupled with an increase in agency start-ups. 

The world is changing in ways we could not imagine.  The relative stability of the industry should give agents some comfort.  Although a prolonged recession could work to suppress agency value in the short term – by making a concerted effort to retain your clients, tighten your operation, and win new clients, you will increase the value of your agency over time.