Local agents swim in the waters around them, and while a rising tide lifts all boats, that sucking sound before a tsunami hits shore is a clear signal that locality risk is a constant. It's good to be lucky with a rising tide, but luck is not a strategy.
Simulations of the world are a way to describe observed reality and anticipate change, and modeling the changing economic tides of every locality in America (call that a list with 1,900 locations) is a good way to both reflect on what has happened since COVID-19 and to help those agents see what's coming next.
Modeling Communities Like We Model Weather
We simulate weather daily to anticipate storm tracks and estimate damage. We simulate climate change with variation in sea level, flood plains, and riverbanks. We simulate fire spread, hail fall, straight-line wind… and so, too, we should simulate the local economies of 1,900 communities across America.
In a consumer-driven economy, simulating how America spends is like watching a developing hurricane pattern off the shore – is it intensifying or waning, is it heading for land or staying off the coast, what amount of intrusion to interior geographies will a footprint create, and will there be additional risks set in motion as the dynamics unfold, including supply chain and demand patterns that may also be interrupted or surged?
Affordability and Fiscal Health as Key Signals
Just as a student loan may go unpaid if post-graduate incomes are low, the choices households and individuals make on debts to service and debts to default are mirrored at businesses, organizations, and local communities, cities, and municipalities. These local priorities of affordability affect decisions on risk transfer and affect premiums – agents sit amid it all.
(See this article on a data source to predict financial health, going beyond the backward-looking credit reports that insurers use.)
Affordability is a key signal, as is the fiscal health of a locality. When you combine these with the inflows and outflows of households and businesses, any agency can make a plan for the year or two ahead and set in motion a process for continually navigating their locales.
Looking Backward: The Affordability Crisis
People living in houses and driving cars work at businesses and spend money in their communities. Unsurprisingly, changes in the economies of those communities are both observable and predictable. That matters to local agents.
Looking backward, hindsight is usually 20/20 – higher uninsured driver populations occurred where affordability was lowest. More UM/UIM claims drive insurance costs higher, and rates may go up even further. In an economic downswing, rising costs and flat to slow wage increases force more budget stress on consumers. Where job loss escalates stress, things twist up even faster. Not only do consumers decide not to be insured, but they also change other spending habits. More businesses fail when customers can no longer afford them. Collections of tax revenue suffer when high earners migrate away and when business activity slows or falters. Taxes suffer further when sales slump, and property values deteriorate. These can lead to cuts in community services, and spiral from there.
Emerging Patterns: From Data Centers to Remote Work
Independent agents, brokers of all sizes, carriers, wholesalers, specialty, excess, and MGA/MGUs all compete in these predictable localities. And predictions for consumers, businesses, and even the localities are proving their value in understanding and pricing risk.
Some localities see changes that are from emerging patterns of life and risk, like hyperscale data centers. Other changes are more subtle, like a work-from-anywhere job landscape that allows high earners to live wherever they want. Or what happens when AI shifts work tasks in legacy workflows or creates new ways of working?
Boomtowns to ghost towns and everything in between paint the map of America -- parcel-by-parcel, building-by-building, business-by-business, organization-by-organization, job-by-job, and so, too, insurance and risk management dynamics. Some things change very slowly, while others shift abruptly, but the profound effect of "work anywhere" from COVID may be the most significant overarching impact in our generation and the next.
Anticipating Economic Consequences
We anticipate sudden changes to life patterns in a variety of peril-driven scenarios – hurricane, tornado, fire, severe convective storm – as well as in environmental scenarios like sea level change, cyclical patterns like El Niño, and even major disruptions like power outages, transportation interruptions, and cyber interference.
Anticipating economic consequences, especially shifts in contribution to cash flow in community capital assets and liabilities, is another risk in the underlying infrastructure where all the other risks interact. Thriving localities add services and amenities, which attract more growth. Dwindling localities lay off public workers and renegotiate long-term liabilities while trying to improve local revenues with more taxes and fees. Debt offerings and the ability to service debt obligations are then most comparable to Ernest Hemingway's famous line on personal bankruptcy – which happens "gradually, then suddenly."
New Analytics for Local Planning
Analytics now exist for consumers, businesses, and their communities across the 1,900 localities that make up the investable and insurable economies of America.
This observability of a locality, its finances, its threats/opportunities, and its ability to service its debts and obligations is summed across the consumer and business mix of their constituents and forecast against those changing elements to portray current and future years' planning horizons. Local agents can take heed.
Situations with imminent insolvency are expected to make certain choices, while growth-busting upside creates better problems.
Adapting to Local Reality
While agents can always relocate, they are more likely to need to adapt to their local reality. While premium forecasts and business mix are constantly used in distribution planning and customer appetite focus, the pace of change has accelerated inside of the existing process steps. Using a locality stress index along with existing forecasts and affordability measures will make agents smarter in their marketplaces and quicker to react to change.
This means that in troubled areas, expect more business failures, lapses, and non-payment of premiums in a dwindling premium pattern, yet a rise in risk for fraud, theft, and malicious mischief, including a heavier threat of arson. This includes household stress, too, where skyrocketing base rates have pushed daily budgeting stress onto most households for car and homeowner insurance into an affordability squeeze where many drivers are underinsured, overcommitting to large deductibles, or going all the way to lapsing insurance entirely and becoming uninsured drivers.
What does luck look like?
A common quote from successful businesses – "It's better to be lucky, even if you're good."
Never has that been more relevant than today, as changes in local luck have magnified in recent years. Some places have a deep downside – rising taxes, failing businesses, public service degradation, municipal financial stress, drops in quality of life generally, and the ensuing changes in household composition from thriving to just holding on. Some places have all sunshine -- growth in incomes, formation of new jobs, infrastructure improvements, and engaged public services.
To live in an uninvestable locality is the hallmark of being unlucky.
The endpoints are always locality-based. It is where people live, where businesses operate, and where municipal authorities administer. For an agent, the forward look in these markets is flat to down. Fewer businesses for fewer booming households means fewer insurable assets. Even if premiums rise and commissions float with them, the total insurance value opportunity won't be in a boom cycle. The larger concern is a doom cycle.
Investors are aware of the general migration trend outlined in this recent Census article, whereby large metro areas are losing residents, while many smaller metro areas are growing. Details matter, and this is where data and analytics add critical value:
- High earners are migrating away from large metro areas in fiscally troubled states.
- They are migrating to small and mid-sized metro areas: Boise, Idaho; Frisco, Texas.
- High earners are responsible for the majority of personal and property taxes, new business formation, and capital investments.
Scoring the 1,900 Localities
Across the observed 1,900 cities, the municipalities, consumers, and businesses are scored based on their future fiscal viability and likelihood to default across a set of debts (everyday bills, credit cards, car loans, mortgages, business loans, pension commitments, municipal bonds, etc.).
Ranked near the top of the list is St. George, Utah, with a short-term debt ratio of 0.31, which represents total liabilities divided by total assets. St. George is representative of 60 mostly mid-sized "under the radar" cities that have low legacy liabilities and sustainable budgets and are growing their populations with a healthy taxpayer base. This is where you can feel comfortable doing business for the long term. Lucky local agents!
Then there are plenty of typical "middling" cities, with budgets that are not sustainable over the long term due to underfunded pension and benefits liabilities. Steady as she goes for the next few years.
On the other side of the scale – consider a poster child for fiscal mismanagement to the extent it appears on a list titled Uninvestable Cities. These cities are laying off public sector workers today as they struggle with revenue shortfalls. Most of these cities meet the technical definition of insolvency. They appear to have accelerating financial deterioration over the next 24 months, resulting in a highly likely outright fiscal crisis.
Envision trying to do business in a city where high earners (lowest risk, rational decision-makers) are leaving. The businesses are shuttering, as well. New business formation is almost non-existent. The city struggles to fund basic services, while raising taxes. The residual population has lower FICO scores. Crime, including costly fraud, rises.
The Resilience of Independent Agents
Every year another study predicts the demise of independent agents. They are getting too old; they can't scale to digital; they can't compete with changing technology… add in AI.
Yet every year independent agents remain a dominant force in commercial insurance and have never failed to impress in personal lines. Watch how they adapt across 1,900 localities as a way to keep insuring America.
ADDITIONAL THOUGHTS PARKING LOT
What has changed is almost everything all at once.
Blame it on remote work options, but look at how many high-earner households opt to relocate for better taxes, better weather, better schools, better anything.
Blame it on migration, but the businesses and services they need will follow them, while the ones that used to serve them will feel the loss.
Blame it on anything you like, but the undeniable facts are that no one relocates to a state; they move to a specific location. The imbalances from losing localities to gaining localities are seen in shifts in income, housing, business formations/failures, and municipal financial resilience. To assess health, a current approach ties to the capital markets where municipalities trade their debt.
Using a locality lens, it is possible to observe the condition of consumers, businesses, and municipalities. With modern data and analytics, we can track changes over time. Did all three (consumer, business, municipality) improve, stay the same, or deteriorate in the last few years? What is the effect of these local changes, and how fast are changes now occurring? What is in store for the next couple of years?
The US is in the early stages of an economic transformation, by locality, and that means insurance agents have both local threats and opportunities.
Like Detroit filing Chapter 9 bankruptcy in 2013, it is conceivable that other major cities may follow suit. No city is immune to stress in changing local economies, and dozens of large municipalities have a reckoning coming. The tax base within these cities (high-earner consumers and meaningful business tax bases) is departing at rates never seen before.
