Remember the golden years of the 1990s, when commercial insurance rates fell by only about 5 percent per year? Those were the days! When second-quarter statistics are released in about 30 days, it is expected they will reveal that we’ve just completed our seventh-straight quarter of double-digit commercial pricing declines. While that might be great news for insurance buyers, it is extremely painful for insurance brokers, whose compensation is normally based on a percentage of those declining commissions.
Like in the 1990s, dire predictions about the future of the insurance brokerage business are beginning to take hold. Financial hardships, free-falling valuations and massive consolidations on a scale and pace never before seen are being forecast.
It is reminiscent of 1995, when the Texas insurance commissioner made headlines by proclaiming insurance brokers the “buggy-whip makers” of the late 20th century.
Well, if you’re trying to sort through the hyperbole and attempting to get a read on the future prospects for insurance agents and brokers, history says: “DON’T PANIC.”
Yes, these are difficult times. And yes, agents and brokers must respond aggressively to market conditions by doing everything possible to grow their business, even while streamlining their operations to maintain profitability.
With that said, be careful not to get too swept up in the pessimism. If you followed the advice of the Texas insurance commissioner and dumped your insurance agency holdings back in 1995, you missed a great run. During the 12.5 years since he made his famous proclamation, the buggy whip makers did pretty well, thank you.
Both the publicly traded insurance brokers and Reagan Consulting’s index of private brokers outperformed the stock market by more than a 2-to-1 ratio, as shown in the accompanying chart. (The Reagan Value Index—or RVI—is a proprietary database of approximately 30 privately held agencies whose valuations are tracked annually by Reagan Consulting.)
But, one might object, that is the past. What about the future? Given how difficult the market is, what will happen to agency values if pricing remains soft not just for one or two more years, but for several?
Good question. History provides comfort here as well.
Consider this: Over the past 20 years, 16 of them (80 percent) have been soft pricing years, in which one would expect extremely modest growth in agency value.
Surprisingly, however, our review of our valuation clients over that 20-year period indicates that the average firm in the Reagan Value Index has increased in value by more than 10 percent per year—for 20 years!