Agents writing residential contractors feel recession first; manufacturing, retail segments follow
Main Street independent insurance agents could take a bigger hit than their larger counterparts as an economic recession lands on top of the soft market.
The soft market coinciding with a bad economy is a real challenge for independent P/C agents, especially for the smaller firms, says Leonard Brevik, president and CEO of National Association of Professional Insurance Agents (PIA National), headquartered in Alexandria, Va.
“Our average agency (member) has about 10 or so people in their shop. So, they’re not huge operations,” Brevik said. “A downturn in the economy combined with a soft market can have a pretty good sized impact on the agency itself.”
The timing of a soft market with an economic recession is somewhat unusual but not unprecedented. According to Robert Hartwig, chief economist with the Insurance Information Institute, the same two forces converged in the early 1990s. (See interview page N4.)
Gary Ivey, president and chief operating officer of J. Smith Lanier & Co. in West Point, Ga., appreciates that the situation is unusual. “We are going through a very soft market; we are in the first couple of years of probably a protracted soft market,” he said. “But at this point and time you don’t have an expanding economy and that is usually not the case.” Ivey said usually the industry delivers rate increases to customers during a recession, probably the worst time to receive a rate increase. But today’s soft market offers some help to customers because they receive a better price for insurance, particularly in commercial lines, he said.
Dave Evans, senior vice president for the Independent Insurance Agents and Brokers of America, headquartered in Alexandria, Va., believes the cyclical nature of the P/C business hurts independent agencies but that agencies may be less affected by recessions than other industries.
“Independent agents and their employees probably have more job stability during a recession than other parts of the service economy, or certainly manufacturing,” Evans said. “So it does point to the fact as to why this can be an attractive career because quite frankly, agencies can survive recessionary times better than some other industries.”
Evans acknowledged the industry is in the midst of another soft market cycle, more so in commercial lines than in the personal lines side of the market. “That hurts our members (agents) in a macro sense, because obviously there’s a direct relationship with revenues for most agencies, unless they’re really growing organically in a big way.”
But P/C agents are not immune to the effects of a recession. Evans thinks independent agents may notice recessionary influences in products such as life insurance and disability insurance. “When people really have to make difficult choices, they may end up making a decision to either not purchase one of those policies or, quite frankly, let them lapse,” he said.
Life and disability insurance are not influenced by soft and hard markets, so premiums stay flat or increase slightly. “But on the flip side, they’re influenced by the recessionary pressures,” Evans said. “On the P/C side, they (insurance products) are less influenced by recessionary pressures and more (influenced) by the soft and hard market.”
Markets Most Affected
J. Smith Lanier’s Ivey says recessionary pressures can be felt locally and through certain industries, especially the homebuilders market. “We have homebuilder clients who have a lot of houses and inventory,” he said. They are not hiring more people and are not building more houses, he said. “We have homebuilders who are divesting assets, cutting down fleet sizes. If they had a plane they are getting rid of the plane; if they invested in raw land, they are getting rid of that land in order to stay in business.”
The commercial construction market hasn’t been hit yet, says Ivey. “But if you look at residential, which has been a big component in construction in the U.S., it has dropped off dramatically,” he said. “Where we would see new people coming into the homebuilder industry, starting up operations, we don’t see that at all right now,” Ivey said.
John Lumelleau, president and CEO of Kansas City, Mo.-based Lockton Cos., added that in an economic recession the insurance industry typically experiences a slowdown in the growth of property exposures because new construction wanes.
Since retailers may slow their expansion plans in a recession, agents writing this segment may also be affected.
Ivey said manufacturers will also be affected by a slow economy.
“We have seen inflation drive up the cost of raw goods and if you have a number of manufacturing clients, their cost to acquire raw materials has gone up,” he said. “Credit availability has made their cost of doing business a little bit higher and more difficult.”
Businesses that in the past may have been able to easily secure a line of credit may no longer be able to do so, he added.
In addition, Ivey says that consumer demand has dropped due to inflation, energy costs, the cost of raw materials, and home foreclosures. “As a result of that we see much slower growth along all the commercial lines segments other than health care,” he said.
Lumelleau noted that a recession could also affect product liability insurance because it is typically rated from sales figures.
Other lines that Lumelleau predicts may see some declines include property and business interruption coverage, as well as workers’ compensation in some sectors because it is rated from payrolls.
Claims and Services
But a recession can affect more than sales, notes Lumelleau. It means new challenges and issues for clients. “Directors’ and officers’ risks rise in a recession, (and) the dynamics in workers’ compensation can shift with the potential for increased claims when layoffs happen, so we have to be on top of our game to meet our clients’ needs.”
Ivey agrees that during a recession his firm “absolutely” sees an increase in claims activity for certain insurance sectors. If people are laid off from work, “the amount of slip and falls in retail businesses change,” he said. “You obviously have less money to keep up your facilities, less money to service your autos, and yes claims increase in times of a recession or economic downturns.”
Evans doesn’t see the statistical data to support a rise in claims frequency in P/C during a recession but said claims do rise on the disability side in periods of recession. “People that feel their job is threatened may be more likely … if they experience a health problem or whatever … to perhaps file a claim.”
According to Ivey, during recessions and soft markets carriers cut back on services offered. “Over time carriers have cut back on risk control or pre-loss, which is where they go out and inspect a risk and try to help a client avoid loss. They get no direct income as a rule for that and as such they have cut back.”
He also said carriers tend to cut back on expansion of claims services. “They don’t expand the claims organization or the post loss piece,” he said. “We don’t see insurers growing their employee force, and we see them shrinking their employee force particularly in these areas.”
As the market gets soft, and carriers chase premium dollars, Ivey said agencies also see less competition from carriers for qualified agency talent.
“We compete with insurers for talent coming out of risk management programs,” he explained. “During periods when pricing is soft, we don’t see insurers coming out to career days as much.”
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