Critical Issue Report

Growth and stability

IIABA study finds that industry is faring well despite economic challenges

By Phil Zinkewicz

In today’s economically uncertain environment, where new reports of dastardly behavior on the part of miscreants in the investment community surface on a daily basis, it becomes ever more difficult for those who are victims of that behavior to whistle a happy tune.

Prior to the current economic debacle, independent insurance agents were already dwindling in numbers. Given today’s crippled financial services industry, could that situation possibly turn around? Consider a report from Future One, a collaboration of the Independent Insurance Agents & Brokers of America (IIABA) and leading independent agency companies. It may bring some hope.

The study, “2008 Agency Universe Study,” addressed myriad issues about independent agencies operating in the United States including numbers, revenue base and sources, number of employees, mix of business, ownership, diversification of products, technology usage, non-insurance income sources and marketing methods.

“The 2008 Agency Universe Study found that, despite tough economic times in many areas of the financial services sector, independent agencies remain strong, stable, flexible and have much potential for growth,” according to Robert A. Rusbuldt, IIABA president and CEO.

Madelyn Flannagan, the association’s vice president for education and research, said: “As predicted, the study found that the number of independent agencies has stabilized, halting a long trend of larger and fewer firms. More agencies are being formed than in past years, particularly in areas of the country suffering from difficulties in the availability of coverage, and their principals tend to be younger. This is a positive finding as the bulk of agents is Baby Boomers nearing retirement.”

Other key findings of the survey include:

• A long-term trend toward fewer, larger agencies has been interrupted. Compared to 2006, the number of agencies has remained the same. This stabilization represents a decrease in acquisitions and an increase in the number of start-up agencies.

• Growth in the number of small agencies. The percentage of small agencies (less than $150,000 in insurance revenue) grew between 2006 and 2008, while the percentage of all other sizes of agencies decreased slightly.

• Doing more with less. Agency operations are becoming measurably more efficient. Apparently, agencies are able to do more work with fewer employees, primarily due to advances in technology.

• Satisfaction with carriers continues to improve. Satisfaction with personal lines and small commercial lines carriers is up since 2006. The area considered to be the most improved across carriers is that “they make it easy” for CSRs to write business.

• Concern about controlling expenses. “Maintaining experienced staff,” finding carriers who will maintain their commitment to the agent’s market, and providing the coverage that customers need “still remain major concerns for agency future,” according to the study, but “controlling expenses and reinvesting in the agency” has risen since 2006, as one might expect in tough economic times.

The survey, which in addition to IIABA members also included leading independent agency companies, contained some negative information as well. For example, although the study showed that independent agency numbers remained stable over the last few years, the total is still down by nearly 15% from 1996, when the number of agencies recorded was 44,000.

Most agents—77%—still do not use customer service centers set up by carriers to handle business, which represents little change from the past. The primary reason cited by agencies for not using the insurer call centers is that they want to remain close to their customers.

At the top of the profession, men still dramatically outnumber women (87% vs. 35%) in the proportion of agency principals, while women dominate customer service representative positions. In addition, the study found that minorities continue to make up a very small proportion of the agency universe, despite the fact that insurance companies and associations have ongoing efforts to recruit more minorities into the industry.

Rough Notes asked Patrick T. Linnert, executive vice president of Marsh, Berry & Co., to comment on the IIABA survey. “While we agree with some of the findings, we may disagree on other points,” he said.

“According to SNL Financial, there have been 223 publicly announced agency/broker transactions year to date [2008], which is on par with the last several years. We at Marsh, Berry estimate that only 25% to 30% of all transactions are publicly announced because most agency to agency deals and small bank-agency deals are not announced. So we estimate that there will be around 850 agency/broker transactions this year. The 850 agency sales would represent 2.2% to 3% of all agencies in the U.S.”

Continued Linnert: “If you look at the top 100 agency list by size from 2005, 15 of those agencies have changed ownership over the last three years. So 15% of the top 100 from 2005 have changed ownership. Those 15 (including USI, HUB, HRH, Webster, etc.) alone have an aggregate revenue of more than $2.5 billion. Arthur J. Gallagher and Brown & Brown have acquired 27 and 24 agencies, respectively [as of 2008].” He said that while Marsh, Berry doesn’t dispute the Big “I” ’s report that the number of agencies remained the same last year, “there continues to be huge consolidation within existing agencies—just like with banks, investment firms and insurance companies.”

Linnert said that agency values have already plummeted due to lower profitability, limited growth prospects and fewer buyers. This year will see fewer sellers in the $8 million revenue range because many do not want to sell at depressed values. “They will try to weather the economic storm,” Linnert suggested.

Finally, Linnert said that Marsh, Berry expects to see continued consolidation this year, primarily among agencies below $3 million in revenue. “Why? Because they will see increased competition from larger players for their accounts and increased competition from direct writers, while earnings are falling, while they have weak balance sheets and while the average age of the owners continues to increase.”