The property-casualty world has had its share of hard and soft markets. But over the long run, agency principals have been able to rely on their own self-reliance to build a viable business that could provide a desirable standard of living. Until now.
It’s not easy managing an independent insurance agency.
The skill set required to ensure an agency not only survives, but thrives, continues to evolve. Years ago, the key components involved developing a strong service culture and a foundation of insurance knowledge, building a respected reputation in the community and hiring capable agency staff.
Sure, the property-casualty world has had its share of hard and soft markets and periods like the municipal liability crisis of the late 1980s. But over the long run, agency principals have been able to rely on their own self-reliance and confidence in their fellow agency personnel to build a viable business that could provide a desirable standard of living. Competition existed mostly with other independent and captive agents and some affinity groups that solicited through direct mail.
This year marks the 50th anniversary of Bob Dylan’s album “The Times They Are a-Changin’”—and the observation has never been more appropriate. Today, agency principals have to deal with a variety of operational issues, including understanding and deploying technology in an efficient manner, taking advantage of everything digital marketing has to offer and tackling ongoing encroachment from direct writers that leverage huge advertising dollars in an effort to commoditize insurance.
And the economy isn’t helping matters, either. Throughout the years, businesses always had to deal with financial peaks and troughs. But now, global competition and the emergence of monetary policy from gridlocked fiscal policy has created more economic volatility in the economy—and more anxiety among business owners who want to expand their businesses.
So where can agency principals go to gather insights into the direction of the economy? One objective source is the Federal Reserve online, which is the website for the Board of Governors for the Federal Reserve. It provides a variety of economic information and discusses several important economic factors driving the U.S. economy: rates for unemployment, interest and inflation, as well as the outlook for the Gross Domestic Product (GDP). Of particular interest is a chart indicating the proposed outlook for the Federal Funds Rate, pictured on page 3 of "Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013."
The chart explains that the Federal Funds rate is expected to climb for 2014, 2015 and 2016, with the consensus for the longer run rate at 4%. This translates into significantly higher rates for the prime lending rate, mortgages and more. Based on this outlook, if an agency principal were looking to buy a building or seek financing to acquire another agency, 2014 and 2015 would be the best years to do so before rates start significantly increasing.
Additional charts report the consensus view on the GDP (2.8-3.2%), unemployment (6.3-6.6%) and inflation (1.4-1.6%)—all relevant economic factors to consider when planning staff wage increases.
Dave Evans is a certified financial planner and an IA contributor.
