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Rising Rates and Your Insurance Agency

 
The early stages of a rising interest rate environment is a good indication the economy is strong and growing. According to the Bureau of Economic Analysis, the gross domestic product (GDP) increased 3.4% and 2.6% respectively in the third and fourth quarters of 2018(1). In a growing economy, consumers have more money to spend which can contribute to growth for your agency. How? Consumers who have more disposable cash will likely spend more on cars and even upgrade their homes, either by purchasing a larger, newer home or investing in improvements and expansion of existing property. All of which lead to an increased need for insurance.
 
A growing economy also means that businesses are growing. As businesses grow and expand, their need for commercial insurance can contribute to growth for your agency for commercial products you offer. Additionally, business growth can lead to greater needs for health insurance benefits provided by employers as they expand their staff thus leading to growth for agencies who specialize in life and health products.
 
Capitalizing on Economic Growth
 
Organic growth may be easier to facilitate in an increasing rate environment. However, many operations will be limited in their growth with existing resources, and eventually the capacity of existing staff and operations hits a maximum. When an agency reaches its capacity, continued organic growth may require working capital to hire additional staff, expand office space, or add technology to improve operating efficiency, thus leading to higher demand for credit to support that growth. Another way to create growth within your agency is through acquisitions. Acquiring another book or office location can accelerate growth faster than organic growth and allow you to combine operational tasks to gain capacity for additional growth.
 
Do you take on debt to foster growth?
 
In a rising interest rate environment, the cost of debt will be higher. So how do you know if taking on debt to facilitate growth makes sense? When debt is used as a strategic tool, it can be healthy for your agency. Ensure that you have a definable purpose for your debt. Your purpose may be to hire new sales or operational staff, invest in a new agency management system, build out or lease new office space, or acquire another book or agency. Quantify the benefit you will derive from the investment and compare that to the cost to borrow. If your return on the investment is greater than the cost to borrow, then taking on debt may be the right choice for you. Reach out to lenders to discuss your objectives, learn about their process, and find the best option for your specific needs.
 
The definition of "insure" is to secure or protect someone against a possible contingency which is what you do every day. So do the same for your business by ensuring that you have a backup plan that meets your objectives should your first alternative for growth not work. Remember it's never too early to start planning.
 
(1) https://www.bea.gov/news/glance, US Economy at a Glance