Intern Insights: Outside Influences on Businesses
August 13, 2012
When I took on this internship, I thought I was entering into an industry wholly separate from that which in which I grew up. My dad’s office smells faintly of oil, most of his employees sport beards or mustaches, and he answers phone calls at 3 A.M. from clients with no heat. How could there be any similarities between that and what I thought to be the most boring industry out there?
Insurance isn’t as boring as I previously thought. It is an ever-changing industry subject to outside factors, much like the oil industry. The most notable factor that draws similar comparisons to the oil industry is agency commission rate-change. When the agency writes a policy with an insurance company, the agency receives a percent of the premium paid by the insured. With agency commission the premier source of income, rate change can either inflate or deflate agency revenues. Commission rates are not something the agency can control. Agencies are at the mercy of insurance companies and state regulators when commissions and premiums are set.
The oil industry is subject to price change relative to oil supply and demand. I’m no master in future’s trading, but I’ll do my best to shed some light on oil price fluctuation. Foreign affairs can have a particularly adverse effect on the price of oil, driving it up when tensions grow high. With Iran continuing progress towards development of a nuclear weapon, President Obama issued sanctions in an executive order that levies huge fines and penalties for dealing with banks that aid Iran in selling oil. In an attempt to suppress oil related revenues, a fruitful endeavor for countries exporting hundreds of thousands of barrels of oil per day, President Obama also took millions of gallons of oil off the market. Basic rules of microeconomics would dictate that demand remaining constant, a sharp reduction in supply would spur an upward price shock. This past winter, above normal temperatures proved to be a nightmare for oil companies. Demand sharply reduced due to abnormal temperatures leading to higher per gallon prices. The nature of business is making money. Oil companies do so by selling oil at a markup to account for their expenses, called a profit margin. If my dad bought oil at a $2.75 a gallon and wanted to make a profit of $.30 per gallon, he would sell it as $3.05. The higher the price goes, the further the profit margin shrinks. The inverse is true for insurance companies. The lower the commission rate goes, the more profit rates shrink.
Every business faces systemic risks it cannot control and can have a negative effect on the business’ well-being. Whether you’re a chocolatier facing a cocoa embargo in South America (women would go crazy), or a financial institutions facing increased government regulations, there are factors you cannot prepare for. Weathering the storm that these outside influences bring is monumental in ensuring financial well-being.