Broking in a recession - Surviving the downturn

As the global financial crisis deepens and recession looms, there are many steps brokers can take to recession-proof their businesses - indeed, the downturn may even prove to be an excellent opportunity for the most innovative players

As the global financial crisis throws up yet more and more unexpected upsets, it may be tempting for brokers to stick their heads in the sand and wait for the tough times to pass. But many are hailing this as an opportunity for the insurance industry to demonstrate the value it brings clients.

"There is a tendency to focus on the problems that can arise during these difficult times but there are lots of things we can do and plenty of opportunities that can be embraced," says Chris Lay, chief executive of UK national business at Marsh. "We need to be having broader, more strategic discussions with our clients."

Certainly, tougher financial periods do present more challenges. For starters, as recession grips, it's likely to result in more businesses failing, reducing brokers' customer bases as well as the opportunities to provide insurance advice.

With the financial slowdown affecting every business, it is unlikely any broker will be immune from this problem. But Paul Dickson, managing director of Dickson Insurance Brokers, says that careful planning can help reduce the loss. "You need to get on a more defensive footing," he explains. "Look at your client base and understand the nature of the businesses you advise. By understanding this brokers will be able to spot any potential problems and take action quickly."

As an example he recommends focusing more attention on the businesses likely to survive the recession while easing off the ones that are more likely to go under - for instance construction and housing related firms. "Be realistic about your clients and the business volumes you're likely to see. If you understand them, you'll be prepared for the unexpected," Mr Dickson adds.

In addition to clients going out of business, there are also concerns about them cutting back their insurance cover and insurers are seeing the number of policies being cancelled or simply not renewed increasing as the financial situation deteriorates.

To counter this, the British Insurance Brokers' Association is recommending a more proactive approach to delivering advice. Chief executive Eric Galbraith explains: "Brokers need to be aware of what's going on in the market and speak to their clients well before renewal. This will ensure clients understand what's going on and value their insurance. In turn, this will reduce the likelihood of them cancelling it."

Good news story

For some products the situation is not so bad. For example, Christopher Hood, senior partner at Pricewaterhouse Coopers, says that where cover is either mandatory - for example employers' liability - or seen as indispensable, such as home contents and third-party liability, demand is generally inelastic and a recession will probably not have a major impact. "Customers, both retail and commercial, may look around even more closely for a competitive deal though," he adds.

When shopping around becomes a cost-saving necessity, fears arise that clients will cut out the broker and go direct, viewing this as a potentially cheaper way of obtaining cover.

However, Mr Hood thinks the cost distinction between brokers and direct insurers isn't that apparent to clients. "As there's currently no mandatory commission disclosure, customers probably wouldn't draw a direct cost distinction between the two. Additionally, a survey commissioned by the Financial Services Authority to look at the cost-benefit of mandating commission disclosure indicated that only one-fifth of commercial customers would actually use commission information," he explains.

Others believe that, in spite of the reduction in business volumes, the recession gives brokers the upper hand. For example, Alan Griffett, head of partnership development at Allianz Personal, is expecting to see brokers strengthening their position during the recession. "Anecdotal evidence suggests that people are keener on using brokers when the economy is in a poor state," he adds. "The current economic climate offers the insurance industry a real opportunity to get away from price-focused discussions and demonstrate that there's a lot more to insurance. Advice will be of the utmost value in discussions with clients."

Taking a more proactive approach to both existing and new customers has certainly been paying off at the Broker Network. Mike Rogers, head of product and business development, says that as clients look for ways of cutting costs they are much more open to advances from brokers. "It is much easier to get through the door now," he adds. "Clients want ways to reduce expenditure and this includes cheaper quotes."

Certainly price will remain important but Mr Lay expects to also see greater scrutiny of cover to ensure it is appropriate and the client is not paying for protection they don't need. "It's worth analysing the cover clients have," he adds. "If you have a manufacturing client that has multiple sites around the country, full gross profit cover may not be necessary. Supply chain protection may be more appropriate." He also recommends a close look at any off-the-peg policies as these often harbour cover that a client does not require. A prime example of this, he says, is directors' and officers' liability insurance. "I'd encourage every director to look at this cover. So many people bought it off the shelf and the wordings aren't always appropriate," he explains.

The nature of advice given is also likely to change as a result of the downturn with brokers playing a more significant role in helping their clients weather the recession. This could include identifying ways of using insurance to improve cash flow and release working capital. As an example, many brokers are reporting an increase in enquiries about trade credit insurance from clients who weren't interested when the economy was more buoyant.

Certainly trade credit insurance can make a significant difference to how a business operates, especially in a downturn. By taking some of the liabilities off a business' balance sheet it makes it easier to manage cash flow and arrange credit.

Furthermore, brokers can help clients recession-proof their businesses. "Brokers need to be closer to their clients and really understand the pressures they're facing," says Mr Rogers. "It will also be important to offer additional services such as risk management and business continuity planning. These are even more important in tough times but demonstrate the value a broker can add." Putting a risk management strategy in place can help a business to see where any potential claims could occur and thus take action to reduce the likelihood of this happening. Not only does this boost firms' resilience but also makes their risk profile more attractive to insurers, potentially lowering premiums. And as a tougher risk management strategy also benefits the insurer, many of them are happy to work with brokers to support these initiatives.

Another area requiring closer attention during any recession is fraud. "There is a correlation between recession and fraud and whenever there is a downturn in the economy we do see more instances of this," says Mr Galbraith. "Insurers will be looking closely at claims to detect fraud but it is an opportunity for brokers to demonstrate the support and advice they can provide around claims."

Avoiding an increase in fraudulent claims is difficult but many feel the industry should be doing more to communicate the value of insurance to customers. Kate Penrose, director of insurance management consultancy Salient Solutions, explains: "During the floods the insurance industry was able to demonstrate how important it was to have cover. As the economic situation worsens and clients consider cutting back on insurance or committing fraud it will be essential that the industry explains why they shouldn't consider these steps."

Another factor that will make a major difference to how the recession plays out for the broker market is pricing. Opinion is divided on which direction premiums will head under this climate and, although there have been some single-digit price increases, many feel the market will remain soft. "I've never known a situation where the economy was in such a state and rates didn't harden but, other than some very small increases, there are no real signs of the market hardening and premiums over £20,000 are as competitive as ever," says Mr Rogers. "Although we've seen problems at AIG and Fortis, their underlying insurance businesses are sound. For this reason, parent companies may see insurance as a good source of cash flow, which would help to keep premiums competitive."

Others feel that with pressures such as increased fraud, higher numbers of claims and reduced levels of business it's inevitable premiums will rise. "The market is currently competitive but I think we are coming to the end of the runway. Increasing costs are bound to drive premiums up," says Mr Galbraith.

Despite these differences of opinion about how premiums will shift, there is agreement about how commissions will be affected. With business volumes set to decrease, as clients go out of business or reduce their insurance spend, insurers are likely to reduce remuneration packages to reflect this. As a result, broker-insurer relationships will be even more important. "Having a strong relationship with the insurers will be paramount," says Paul Upton, chief executive officer at Evolution Underwriting. "With lower volumes of business it will be vital to nurture these relationships."

In many instances it will be necessary to be more strategic about the insurers with which a broker develops relationships. On the one hand, concentrating business through a smaller number of players will enable better remuneration packages to be negotiated, but it could be foolhardy to work with too few players. "The financial uncertainty means that you don't want to have all your eggs in one basket," says Mr Griffett. "If you only have a small number of agencies you might want to look at opening up new dialogues with insurers." Furthermore, the financial security of insurers that brokers deal with will also be important. While insurance takes the risk off a client's balance sheet, transferring it to the balance sheet of an insurer that then hits the wall would hardly be prudent.

Pressure cooker

As well as keeping an eye on insurers and their clients' businesses, brokers must also pay attention to their own operations and the cost pressures they'll find themselves under.

Given the current difficulties in raising capital, it is likely that consolidation will slow. This will be particularly bad news for any brokers looking to sell their businesses and retire, with the prospect of either weathering the recession or accepting a lower price.

Although some may be forced to postpone retirement plans, the general expectation is that fewer brokers will remain in the market. "I think we'll see people leaving the industry; there's been so much consolidation in the last few years and many of these larger businesses will need to review their overheads to remain competitive," says Mr Upton. However, Ms Penrose believes this won't necessarily be the case. "The skills shortage isn't reducing in the insurance sector so there remains a need for well-trained and experienced people to stay in the market. If we do experience a lot of cost-cutting it could mean skills are cut too," she explains.

Additionally, with so many different business models in evidence, huge redundancy programmes won't always be required. For example, while some consolidators have adopted a big is beautiful model, where cuts could be possible, others have built up a range of niche businesses that all operate independently. For this latter group, it will be more difficult to reduce headcount.

Mr Rogers believes the recession will highlight those brokers with strong business plans. "Where a consolidator has grabbed business for the sake of volume they could find themselves struggling," he explains. "They could find retention levels dropping, especially where the old management is no longer in place."

Even though the headlines make for depressing reading, there appear to be plenty of encouraging signs in the broker market. "I've seen a number of good start-ups in this market over the last few months," says Mr Griffetts. "They've picked niches that are fairly recession proofed - for example, high net worth or classic cars - and have the expertise to perform well. It's an interesting time but not one without its opportunities."

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