Insurance Industry Trends to Know for 2018
Major trends in the economy and society can have an impact on the insurance industry. While insurance agencies are not in control of government policies, technology, consumer demands, regulations, or actuarial analysis, it is important for business owners to observe what trends are occurring in each of these areas, and then determine how those trends could affect their business. It is often an educated guess, but those businesses that start adapting early are typically in a much better position than businesses that sit and do nothing. Trends can be macro-level trends, those that start outside the agency and then trickle down, or micro level changes, which are seen immediately. If you want your business to be an early adopter, these are the three insurance industry trends to know for 2018.
Federal Government Policies and Legislation
The two most discussed issues in federal policies are healthcare and taxes. And both types of policies affect the insurance agency. Tax reform typically has its biggest impact directly on owners’ and employees’ income taxes. This also includes potential changes to corporate taxes since most insurance agencies are privately held. Many insurance agencies tend to be S-corporations and LLCs, which also means that a lowering of corporate taxes will not change much for agency owners, as these are ‘pass through’ entities where the business taxes flow through to the owner’s personal taxes. While there could be a cascading effect across the economy, it isn’t something that will be seen right away.
Healthcare is the federal policy with a much bigger impact on the insurance agency business. Starting with the fact that most agencies offer insurance to their employees. Any changes to the Affordable Care Act will have ramifications on the business’s financials and employee benefits.
Changes to healthcare policy will also impact the business model for insurance agencies that sell healthcare. Potential healthcare policy changes could affect premiums, commission rates, and possibly even the ability to sell health insurance.
While the Trump administration has yet to pass a major healthcare overhaul, there have already been a few executive actions that should be noted. President Trump eliminated the reimbursement to health insurance companies that was allowed by President Obama through executive order. This means that any losses companies face will not be subsidized. In anticipation of this change, companies have increased their 2018 rates to cover previous losses.
Trends in technology reshape the rest of society, and those changes impact insurance agencies. Changes in technology impact everything from how insurance works to how insurance companies operate.
The use of smartphones is a multi-level trend for insurance agencies. Consumers expect that they can do anything instantaneously because they carry a wireless device with them in their pocket.
In the short-term, smartphones have caused a spike in the severity of auto accidents due to distracted drivers. Insurers have had to increase rates to account for the jump in claims. In the long-term, technology will likely resolve the distracted driver problem through autonomous driving. This long-term trend could lead to the elimination of personal lines auto insurance.
Most consumers prefer to handle their insurance needs through a smartphone application. In turn that has required insurance agencies to create applications where consumers can do things like file a claim at the scene of the accident complete with pictures and details. Additionally, consumers want to access and pay for their accounts on their phone. There are many tools available that allow insurance agents to perform sales and service through their smartphone apps.
Some other long-term technology trends to watch are artificial intelligence, blockchain technology, and wearable technology. It’s possible that artificial technology will reduce the need for jobs like underwriters and customer service staff. Blockchain technology will become the way data is collected, stored and distributed since it allows for total transparency, it is not corruptible, and it is widely distributed. Wearable and built-in technology will reduce risk, and cause a shift in how liability is assigned.
If insurance agencies remain profitable, there will be buyers. Supply and demand. The current prices for merger and acquisition activity are already extremely high and will not likely increase. Because many of the larger independent agencies have already been bought up, or do not intend to sell, many national brokers are putting resources into the middle market arena and have specific capital for that purpose.
Local peer buyers often cannot compete at those rates since they need to pay out of cash flow. This means there will continue to be a price differential between those that receive offers from the well-funded buyers and those that sell internally or to local competitors.
Private equity firms have been buying up insurance agencies for their investors. Given that return on investment is typically 20 percent, plus or minus, the investment offers a greater return than most other available investments today. Private equity firms are paying typically eight to 10 times earnings before interest, taxes, depreciation, and amortization. When the value is translated to a multiple of revenue, this means two to three times revenue.
However, many independents prefer not to sell to a much larger, or publicly traded firm. One reason is that the existing firm often is completely transformed a few years later, and not always for the better. On the other hand, it is getting more difficult for small- and medium-sized agencies to perpetuate internally. And if an owner does sell internally, it is usually for less than the value of an external sale.
These key trends within federal government policies and legislation, technology, and business succession are the insurance industry trends to know for 2018. Once you know the trends, insurance agency owners need to establish both business and marketing plans. Understanding how these trends will affect your agency is the first step. The next step is becoming an early adopter, finding a way for your agency to exploit these trends and allowing your firm to succeed.
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