The Bank Soundness Question: What It Means for Agents

Many independent agents have watched with concern as a small number of high-profile banks have faltered during 2023.

Just what does this shock to the banking system mean to independent agents and brokers throughout the country?

The soundness of the banking system, frankly, is not something that most independent agency principals spend time thinking about. But since these issues have arisen, it’s important for agency leaders to navigate the issue. I see four takeaways as relevant to agents in the current environment.

Many banks today face challenges to earnings and balance sheet strength. I expect there will be a fair number of banks posting lower profits in coming quarters. That’s a long way from saying they might fail, but it does mean they could change the way they operate. This could affect the way banking relationships work for independent agencies.

In this environment, independent agency principals may expect banks to shy away from lending for agency perpetuation, new producer development and acquisitions. New loans, when available, likely will cost more.

For years, I’ve seen many banks avoid independent agencies as borrowers. Bank lenders tend to have little appreciation for the enterprise value of an independent agency and tend to discount the value associated with an agency’s policy renewals, client retention, carrier relationships and loss experience. Faced with recent events and the forecast of higher interest rates, I don’t expect banks to suddenly change their perception of independent agencies.

Even as some banks tighten lending, institutions that truly understand the agency financial model will continue to be active lenders. Banks that exhibit strong earnings, liquidity and available capital will have the financial flexibility to continue providing capital to independent agencies.

Independent agency principals tend to be fiscally conservative. They’ve weathered crises large and small, and they’re used to sleeping well at night. It makes sense for agency owners to ask questions of the banks they’re doing business with. In addition to asking about financial soundness, now is a good time to ask about their current and future appetite for agency lending.

If you are an agency principal, there is one last point to consider about your own financial picture. Any agency owner who has taken out a loan in recent years should carefully review their loan terms and conditions. Numerous agency loans have been made at floating rates based on the prime rate. With interest rates sharply higher over the past two years, loan payments may be significantly higher. You can use the current yield curve to your advantage by thinking about refinancing to a fixed rate loan. In many cases, a medium-term fixed rate may be lower than the floating rate you currently have. A lender that is knowledgeable about the independent insurance agency channel can quickly identify opportunities to save on future interest costs.