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 property/casualty agents, especially for the smaller agency, 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, economist with the Insurance Information Institute, the same two forces converged in the early 1990s.
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.
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.”
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.”
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,” he 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.
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.
Even while the soft market continues to plague commercial lines’ prices, Ivey said manufacturers will also be affected by a slow economy which could in turn affect insurance.
“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, which continues to expand.
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.
Note: This is an edited version of the complete story on how agents are dealing with the recession. For the complete National story, see Insurance Journal magazine, April 7, 2008. This issue also contains an article on strategies for agents in a recession.
To read how agents are faring in other regions of the country, see Insurance Journal’s exclusive regional reports.
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