Take a P/C Soft Market, Throw in a Recession, and Stir

The P/C industry’s chief economist on how agents are affected when a recession coincides with a soft market

The following interview with Robert Hartwig, president of the Insurance Information Institute, took place with Insurance Journal‘s Andy Simpson in mid-February.

How would a recession affect Main Street agents?
Hartwig: [T]he Main Street America focus for your typical agent or insurance company is going to be in the form of reduced exposure growth. By that I mean we’re seeing fewer new homes being built. For instance, new home construction fell 43 percent from 2005 to this year, 2008.

The number of new cars being sold is down about 5 percent. We’re actually seeing employment fall, both nationally and, in particular, in some segments of the economy. Some sectors of the economy like construction and manufacturing tend to be the most cyclical and the most volatile.

To the extent that you’re an agent or you’re an insurer, you’d expect to see slower growth, apart from the slower growth associated with the stock market. You’ll see slower growth because the fact of the matter is the total number of exposure units you’re able to insure is increasing more slowly, or in some cases is actually decreasing.

Essentially, people aren’t buying as many things that need insurance.
Hartwig: That’s right. The good news is that, unlike homebuilders or unlike auto manufacturers that are totally reliant on new production, new homes and new cars, the vast majority of insurers’ business occurs through renewal. So it’s only on the margin that insurers would tend to see slower growth because of what happened in the economy, rather than an outright decline.

If an insurer or an agency specialized in writing, say, construction business, then they would likely be more hit than someone that had diversified?
Hartwig: Right. You would expect that if your revenues were more tied to one of the more cyclical industries like construction and manufacturing, which tend to cut back more sharply during economic contractions, then that would affect your business more than some other insurer that didn’t specialize in that particular segment.

Do customers, including commercial clients, shop around more for a bargain in a recession?
Hartwig: Aside from the recession, we have a soft market right now. Businesses in fact are appreciative of the fact that while their own revenues might be flat or might be slumping, the cost of insurance for most businesses is actually falling today. This is something that helps them maintain their overall margins while their overall revenue is flat or falling.

Does the recession put even more pressure on downward pricing?
Hartwig: It isn’t clear that it does. I think that most of the pricing that we see is associated with the insurance cycle as opposed to the economy itself.

Is it unusual for a recession and a soft market to coincide?
Hartwig: It has happened in the past. It occurred back in the early ’90s, around 1990 and 1991, sort of pre-Hurricane Andrew. We did have a soft market occurring simultaneously with a recession during that period of time. During that period of time, premium growth was slow even before the recession, but it did slump a bit even more during the recession. But the previous hard market, which had existed in the middle and late ’80s, it was well off the highs. So premium growth was already slow when the recession hit, and I think there was some additional slowdown associated with economic growth.

Is a recession a time when insurance companies might be looking to increase their writings?
Hartwig: Again, that’s something to do more with the overall soft market. In 2007, overall growth in the industry was basically flat; it was approximately 0 percent. One incentive, of course, when you see premium growth that low [is that] there is an incentive to want to grow the business faster. But the reality is that the pie is not really growing much at all right now. And those companies in the past had chosen to maybe grow by, in some cases, slashing prices in an effort to maybe grow their market share.

Now in the 1990s, that strategy wound up producing a lot of red ink in the industry. But so far in the current cycle, what we’ve seen is it remains a very highly competitive market, but where it seems that they’re [price decreases] being made based on risk and other factors — are being made judiciously.

You don’t think a recession would necessarily change that?
Hartwig: I don’t think so, no. Insurers are focused on managing through the property/casualty insurance cycle, which historically has created more challenges for the industry than has an economic recession. That’s an important point.

Is there anything about a recession that makes insurance more needed or cause more segments of the economy to seek it out more?
Hartwig: What will happen is that, as the price — particularly of commercial insurance — continues to fall, I do think that some commercial risks will look like, quite frankly, a bargain. We’ll be able to increase our coverage without increasing our cost, or maybe even by still lowering it.

But businesses generally right now are more consumed with the idea of attracting more customers. When [businesses] have expense-related issues, a typical business today, when it talks about an expense issue, it’s not typically talking about insurance. It’s looking at issues like health insurance for employees, perhaps. It’s looking at energy costs. It’s looking at employee compensation. For most businesses today, insurance is actually a shrinking [part] of their total cost structure.

Are there any lines of insurance, workers’ comp in particular, that spike in claims during a recession or go down for some reason?
Hartwig: [For] workers’ comp, there is likely to be an initial spike, but that would only likely occur if it looked like there were going to be large-scale layoffs in the economy. We’ve not seen those yet. That’s when people tend to file a workers’ comp claim or a disability claim. There would be concerns, say, in the area of homeowners’ insurance, where if we have — and this is a little bit apart from the recession but more as a result of the subprime issue — but if lots of people are upside down on their mortgages, underwater on their mortgages, are people going to have the incentive to maintain their homes properly?

If people simply walk away from their homes, and the bank and the insurer don’t know about this, there you have a policy that’s enforced on a home that’s been abandoned or not being well-attended to. Those types of homes can incur higher losses than ones that are being occupied and maintained.

Can you think of any ways that a recession might affect the relationships agents have with their carriers?
Hartwig: Not specific to the recession per se. Insurers are going to want to work with agents who are producing significant volumes of high-quality business. That’s always been the case, of course. But in eras of slow growth, there’s a balance between volume and quality business. Most insurers are looking to manage the cycle so that they can move through the slow part of the cycle profitably.

You don’t see many [insurers] pursuing a “growth at all costs” strategy today. I don’t think there are many agents that are going to get green lights from insurers that “write anything that comes in the door.” No agent should get the idea, in this slow growth environment, that performance doesn’t matter, because it still does.

Any advice for a P/C agency that’s looking at the recession, and what steps that it as a business might take?
Hartwig: Like the insurer, the agent potentially faces a slow-down on Main Street. One strategy for an agent, of course, is to work closely with personal line or commercial customers, and kind of have a low-key discussion about closing any type of coverage gaps that they have. Given overall declining prices, they may be able to close those coverage gaps without much of an increase in the overall premium that’s being paid by the risk. At the same time, [they’ll] improve the situation of the policy.

So look at your current customer base, and get them to basically tone up their insurance policy; this may be the time to do it, because it can actually be done at relatively little cost. It’s a good time to do it.

In a recession, are mergers and acquisitions more or less likely, either at the company level or at an agency level?
Hartwig: Historically, M&A activity has ticked up during periods of slow premium growth, irrespective of the economic cycle. In the late 1990s, when the economy overall was going very well, there was no recession but we had a slow market in property/casualty insurance, M&A activity hit an all-time record high, although the overall economy was good. It had to do with the fact that the P/C insurers were going through a soft market at the time. We’ve begun to see an increase in M&A activity in insurers and reinsurers, but also in the distribution ranks among brokers and agencies themselves.

Topics Carriers Agencies Workers' Compensation Pricing Trends Market Property Casualty Construction