The Cycle Turns: Preparing for a Softer Commercial Market

Shane and Tonya discuss the potential shift to a softer commercial market and what it means for independent agencies. They explore how a new market cycle can impact growth opportunities and share strategies to stay competitive.  

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Transcript

Announcer: [00:00:00] This is IA Forward, your playbook for success as an independent insurance agent. Here to help you knock it out of the ballpark are your hosts, Shane Tatum and Tonya Lied.  

Tonya: Welcome to IA Forward, and I'm about to utter a phrase that's going to get our listeners so excited.  

Shane: It's going to make them think that we're crazy, but excited. 

Tonya: I was reading an article this week that there is a soft commercial market ahead. Now, I know that's a challenge. It's not the best news in the whole world, but it gives us something to complain about besides a hard market.  

Shane: Unless you started in the insurance industry over the last two years, which most of you haven't, then you've been in a soft market before. 

You just didn't know you were in a soft market. And now having gone through a hard market and continuing to be in a hard market, The idea of a softening market, which is so funny to me that we have these terms, hard, soft. We've talked about that [00:01:00] before. We'll talk about it again. It's this never ending cycle of the insurance industry that actually. 

makes it fun in an insurance and geeky nerdy kind of way, but this idea of the market softening, and you heard it here first, in the event that it actually happens, I'll tell you for me, thank goodness, because I've said for a while, These are cycles and that it's going to change and when it changes you may not like it. 

This is the thing. Capacity shrinking and everything, price increases, everything that makes a hard market is exhausting. But then when the market starts to soften and pricing starts to retract and capacity goes through the roof. People don't make a lot of money in the insurance industry when that happens, including agencies. 

Be careful what you ask for.  

Tonya: Last night, my husband and I were sitting on the sofa talking and I even forget [00:02:00] how it came up, but I mentioned that our car insurance had gone up like 230 or something. Our car insurance went up. Why didn't our car insurance go up? We haven't had any accidents, we haven't bought new vehicles, nothing. 

I'm just sitting there with my head cocked to the side thinking, Do you have any idea what I do for a living? Do you ever listen to anything when I'm talking about work? No, he doesn't. But yeah, he was so totally shocked that our car insurance had gone up. In the state of Florida, what planet does he live on? 

Shane: There is a great meme floating around the husband saying, my wife says that I have two major faults. One, I don't listen. And then something else that I can't remember. That's probably the case with Daniel, which is the case with me, by the way. I'm guilty of that as well. But consumer lag of information here. 

The non insurance people, it's not, they're not feeling it. They're not going to feel it anytime soon. We're still fighting [00:03:00] retention issues in personal insurance market. Certainly still a little bit in the commercial market. I know the trends are there that it's stabilizing, but like. To Daniel's point and to his sort of, aha, even though you think he's crazy when he's asking that question, like he's a consumer, all right. 

So he's not an insurance person. He's a consumer and that's a great takeaway for what our customers are feeling as we're sitting here talking about a potential soft market turn. In commercial, which personal will lag that and it'll follow at some point because there's factors. There's things that are going to happen when all these prices go up. 

When capacity shrinks and prices go up and then coverage restricts, then profit follows. It happens. We've seen it within our loss ratios trending downward for most of 2024. Sure. There are. Catastrophic [00:04:00] losses. And it's, there's a lot of them, the 2024 year. But the reality of it is that we are trending towards profitability or we are. 

Hitting profitability. And in some cases carriers are reporting like really large profitability increases, which is going to contribute to a softening. How does it feel when you announce these record profits and then the consumer over here sees that and says, my insurance just went up 200 and some dollars or through the roof or 40%. 

It's okay. Then the watchdogs start coming out with C. We told you that you were going to gouge us.  

Tonya: Insurance companies really want to write insurance. That's why they're there. They want to make profits, but they also want to write insurance. They like being the best at what they do and they can't be the best. 

They can't be number one. If eventually they don't start writing some policies.  

Shane: You're trying to trigger me. You really, you're trying to trigger [00:05:00] me this morning with shrinking to profitability. This is a terrible thing. And we have some carriers that have tried to do this. I have carrier friends who don't agree with this. 

And then there are carrier friends that says, we don't have a choice. When you look at the big spectrum, the companies that are Moving back into profitability, the quickest or the soonest, they are the ones that are not shrinking to profitability. They are the ones that are growing through the profitability. 

The downside to that, if you're a product manager and look, if you're a product manager, actuary, I know you're a lot smarter than me with numbers and predictive issues and all that. I get it. I'll concede that. However, what no actuary. Our product manager has been able to accomplish in my three decades. In the business or historically to my knowledge is the loss of the [00:06:00] ideal customer while you're trying to attack the unprofitable customers. 

You can't do it. It's an impossibility. You run off the good while the marketplace is growing through the profitability issues and attracting your good away from you with The right discounts, the right pricing, et cetera. You're running that customer off while you're trying to run off the not so great customer. 

This is, at the very foundational basis, why I don't believe shrinking to profitability works.  

Tonya: And shout out to GEICO, because this is exactly what they've done. Their timing has been perfection, and they're getting those customers that everybody wants because of their timing in this hard market.  

Shane: It's the perfect timing, perfect storm for the independent agency channel and the longstanding carriers of that channel. 

We have many loyal. [00:07:00] relationships that we will continue to be loyal with and continue to support. When you have an entrant into the market like what GEICO has done into the IA channel, they don't have the, the so called ball and chain of those losses within the channel to drag along. There are other carriers, Progressive, who are growing through it. 

They are doing phenomenally well. Lots of carriers that are reaching profitability are doing well with this concept, some or not. This idea that Geico's entered the market, don't think that's just a coincidence. Those are very smart people. Leading that company, Berkshire Hathaway as the parent, Warren Buffett is not a dumb guy that doesn't equate to his life and his investment capability. 

He doesn't micromanage his investments. He doesn't micromanage the CEOs that run the various companies in the Berkshire [00:08:00] portfolio. They do their own thing. That means he hires really smart people to run these companies and then The people he hires to run these companies, they hire smart people. The reality of it is that Geico was working on this entry into the IE channel for several years. 

We think, oh my gosh, they've entered the market. On the heels of this crazy hard market scenario, they were going to enter this market several years ago, and the timing, it was really about when's the right time, and you don't just decide, we'll enter the market now. You don't just decide that when you're a company of that size. 

You predetermine that and then you look for the opportunity. And, and it's a perfect storm. It's a perfect storm scenario in terms of disruption. I hope that they understand that this is not going to work. State Farm, I hate to brag on State Farm as an IE channel guy. [00:09:00] But State Farm has continued to grow through this mess. 

Now, they have the surplus to do so. And we keep hearing and we kept hearing these financial downfall, underwriting losses, catastrophic losses. We just keep hearing about that and they keep growing. They're going to come out the other side of this thing pretty strong. They were already really strong, but they're going to do that. 

Then when the market softens, Back to our subject of the moment, which is crazy to say that is absolutely insane to hear myself say that out loud after two years of nothing but hard market, but we're going to see those that grew through this that just stayed the course. We're going to see them really benefit when the market turns soft. 

Tonya: I am not as seasoned in the insurance world for decades that you are. Why does commercial soften first?  

Shane: That it's really about property in this particular case. That we've [00:10:00] had hard markets around casualty in the past. We've had Hard markets around professional lines. This particular case, it's very property driven. 

This hard market was very property driven. Believe it or not. I know this is crazy to think about because everybody's send us all the auto. You can auto auto. I've been through two very hard markets when it came to auto and there was some tough marketplaces where. They were like, Oh my gosh, no auto. Send us home. 

It's just maddening because that's what happens is they tip the scales and they and they being again not to pick on our product manager friends. I know they're doing their job trying to save situations. In this particular case, property is the driver of this marketplace and driver of this hard market. 

Commercial was first. We write public K 12 school districts in East Texas, eastern part of Texas. And, That means a lot of T. I. V. [00:11:00] Total insured value on a very condensed land, so to speak. So the T. I. V. Of a school district, even small school districts will be 60 or 80 million up toe. 250 million. School districts own a lot of property. 

We started seeing this property rate adjustment three years ago. It's this perfect storm of inflation, of lost cost, of being under Valued for years in terms of the rate was depressed and all of this was starting to happen before the homeowner's crisis was happening. This is a shame pinion. Is that a word? 

Can we use that? Shame pinion?  

Tonya: This is nothing new.  

Shane: I'll write this one down. That's right. That's right. Shame pinion on this is That this started while we were still in COVID recovery, pandemic recovery within the commercial market. So it went first. So it goes through [00:12:00] the cycle earlier. The other thing is the consumer pressure's different. 

The business pressure, business owner pressure. Is one thing. Consumer pressure is a totally different thing. Believe me that societal social pressure and the new world of social media and everybody having a loud voice megaphone. It affects this congressman, senators. They're going to listen really heavily to their consumer groups. 

That's their voting base. And I understand businesses are a voting base, but businesses are a little different viewpoint. The consumer base for the most part is made up of employees. And so again, I'm going into this sort of. This economic scenario of we were late because we had depressed markets on the consumer side, the home side, the personal property side, because lots of political [00:13:00] pressure to keep that down through the pandemic, keep that depressed. 

Even pre pandemic it was depressed and the commercial property riders, which are different carriers, reinsurance heavy there, Within the commercial side, they just, they said enough's enough and we've got to have rate and they took rate and boom, the hard market gets born because now we add inflation to that and we add increased replacement values and all these things, TIVs soared. 

And just as a refresher for those that don't know, T. I. V. means total insurance value at a location, like T. I. V. And so, back to these school districts, as an example, huge amounts of property, huge amounts of exposure of rooftops, and, uh, Very concentrated so that if you get hit by a hailstorm, if you get hit by, uh, a wind or something, even normal peril [00:14:00] like fire, there's a really good chance that something happens to the whole property. 

And so, very condensed environment and we started seeing that well beyond the consumer personal property side. So, it's natural. That we're going to come out of that on the commercial side faster than the consumer side. What happens with the consumer side? Does it scream? Does it accept it? Where does this go and will it catch up to the commercial softening or will it stay the course and not retract? 

How's that for geeking out? Let's throw some marketing in there to have some fun somewhere. If you say it with confidence, they will believe you. Maybe there's some folks out there listening that are like, Wow, that Shane Pinnion was cool and awesome. I just said it with confidence. Just remember that. 

Sales 101. Say it with confidence.  

Tonya: I was thinking on the social media aspect when you were talking about the commercial versus the personal. People have a [00:15:00] tendency to take to social media to express their grievances. Mid large companies have a tendency to not go to social media to express their grievances. 

Now, I'm not going to say a small business owner doesn't get on there and come unglued about something, but rarely is it something like a commercial insurance rate. They're probably going to complain about a customer. or something, you know, smaller going on within their business. I don't think people even realize it has been as big of a challenge for businesses as it has for their personal car insurance or for their home insurance. 

Shane: It's just natural that if your wages aren't increasing or your, your income doesn't increase, That the pressure on your personal budget is different even for business owners I can go make more money over here as my business But as an employee, I may not can go make more money. I can [00:16:00] leave my employer and go find other employment I guess I should throw that in there It's not that you're stuck. 

I shouldn't say it that way. You're not stuck. This is a free market society. The smart employers are dealing with that, trying to deal with that, and have dealt with that in some ways. We've seen that through the wage increases over the last few years, especially on what I would call the lower end of most wage scenarios. 

I know we've paid really close attention to that. And back to education, we've seen the teacher pay scale, while not necessarily jumping the gun. At the more experienced end, it's certainly jumped at the entry end. And that's just stuff that kind of goes into the bucket to decide, okay, where's my pain point? 

What do I feel? Where is it hurting me the most? Business owners, Our price has increased. We've had price increases everywhere. Electricity, our cost across office supplies, across our own insurance. Our own [00:17:00] insurance is through the roof. Like, just saying. Some of that is growth. It's this I'm, what am I going to do as a business owner? 

Where's my decision? Benefit cost, health insurance through the roof, definitely not better coverage either. And so we feel it on that side, but then it's okay. I guess my brain pays way more attention to my personal rate increase, my personal price increase than over here on the business side, and I don't know why. 

Other than this thought of, I just need to increase revenue, I need to watch my expenses, but I need to keep growing. I'm with you on the effects of social media, pressure of it. The pressure of social media is real if you let it be more real than it is. That's where I feel like you go down this rabbit hole of never ending struggle. 

Tonya: One of the quotes in this article in Insurance Journal, That's was real world risk does not drive the behavior cycle. My [00:18:00] takeaway from that is the cycle is going to cycle. If everything we do is cyclical from a business standpoint, from a weather standpoint, from everything that's going on in the world, we can look back millennia and know that things are going to cycle. 

So, is this commercial softening actually something to get excited about?  

Shane: I don't know that it is, and I guess my caution to agency owners and carriers and so forth is that stabilizing, yes. Softening? I'm not a big fan of soft markets. Number one, I don't think soft markets are disciplined markets. They're what leads to hard markets. 

So it's like this constant cycle of the soft market. Leads us to the next hard market and sometimes our short term memory loss, we come out of a hard market and we let external factors do things to [00:19:00] us or we ignore external factors. And so an example right now is one of the things that I did leave out in my opinion was. 

The effect of interest rates and, uh, the investment returns on the movement out of a hard market for commercial sooner than personal. You also have this incredible growth in excess and surplus lines volume that's a less regulated. You've got. You've got a lot of things happening, people seeking those premium dollars so they can make the investments and that's where the returns coming from. 

If interest rates stay up, then that's going to trigger more growth. And right now, people feel, or at least everywhere I look and read from the really smart people out there, is that while we may see another slight decrease in interest rates from the Fed, We're not going to see a lot. They're going to balance this inflationary piece with quarter [00:20:00] point drops or if you're An economist, 25 basis points, and maybe they don't, maybe they leave it alone. 

The more return you can get out of those premium dollars between the time you collected in the time you pay the loss, there's Warren Buffett, one Oh one. That's why he loves insurance. You collect premium and invest it today and you pay losses later and you get to keep the money that you make in between what happens is this economic cycle. 

Affects the change in hard market soft market because once people start grabbing more premium They become more aggressive their pricing gets more aggressive. They want to grow faster again free market stuff Thank goodness that we have this type of free market activity I'm not a fan of the softening market, but I'm not a fan of what we've been through for two years either. 

I like stability. I like that long runway cycle that we have always done so well [00:21:00] in the insurance space, is to think about that long cycle. Not everybody can do that, and, uh, there's a lot of Obvious capital that's going to come in and say, okay, if we grow, we can get more investment return. And there you go. 

And all of a sudden you've tipped the scales from hard market to softening market instead of stable market.  

Tonya: It all comes down to playing the infinite game. You're winning if you're staying in the game.  

Shane: It applies to the insurance industry and particularly the insurance agency, the distribution side of the industry. 

There's money to be made and profits to be made. As long as you stay in the game, to Tanya's point, and in quoting Simon Sinek and The Infinite Game, there is the reality that there will be good years and bad years. There will be more strings of good years than more strings of bad years if you stay focused on that long term infinite game approach. 

Tonya: We're heading into a softer commercial market. We're [00:22:00] going to see what happens. But remember to play the infinite game.  

Shane: There is light. Okay. There is a trend that's happening for our commercial agents and agencies that also do commercial. It's about to get crazy growth time. And one of the things that I would tell all agencies and specifically personal lines agencies, if you're a commercial writer, commercial agent, you might be a little behind. 

If you're not ready for growth, you need to speed it up a little bit because growth opportunities coming. For our personal lines agents. I would really encourage you to continue to improve your processes, continue to streamline and get better at what you do, because once this cycles, once things stabilize across The spectrum, once the homeowner's capacity opens back up, what you're going to see is you're going to also start to see that growth opportunity in personal lines. 

I don't know if that's six months, a year, I don't know when. I don't have the ETA on that. [00:23:00] I'm just saying you need to prepare now because when it cycles through and I feel a little proud that I'm seeing the trend that I have always seen over the years, this feels Very similar to previous cycles. It was harder than previous cycles, but it feels like where things are going to end up, it's going to turn to growth opportunity, get better, improve, and get ready for a growth opportunity that's coming over the next few years as we cycle out of this hard market. 

Tonya: I'm going to leave us today with this quote from Mary Lou Renton, optimism is a happiness magnet. If you stay positive, good things and good people will be drawn to you. Attitude's a  

Announcer: choice. Make a great  

Tonya: one.  

Announcer: Bye y'all. At the Integra Partner Network, we understand that carrier access is the key to your agency's success. 

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Integra is ready to empower you and your agency to find sustained growth. Find your way to Integra. Visit integra partner network.com today. That's integra partner network.com.