Insurance may be insulated from the worst of the recession, but brokers still need to adapt their businesses. Ian Clark explains why
FOR THE past six months, pretty much all the news has been bad news when it comes to the economy.
In the UK, GDP has fallen off a cliff since the second half of 2008 and we are now officially in recession. This appears to be a precursor to what could be a nasty couple of years, with all the economic data suggesting things are going to get worse before they get better.
Official figures show GDP declined by 1.5% in the last three months of 2008, the most rapid decline in 20 years, while unemployment rose sharply as firms, suffering from the rising costs of credit and declines in consumer confidence, have tightened their belts or gone to the wall.
The big questions are how deep the recession will be, and whether government intervention will allow a quick recovery or if there will be a protracted recovery with several years of low GDP growth.
History indicates that recessions preceded by financial stress usually have the greatest impact on the time it takes for GDP growth to recover; the consensus is that there will be a contraction in the UK economy of about 1.6% this year.
This is not a happy picture, but what should a broker be doing to survive in 2009?
It is not all doom and gloom. While the financial world has been collapsing and the price of equities has plummeted over the past six months, the share price of both insurance brokers and the Lloyd’s listed stocks have significantly outperformed the stock market.
Relatively speaking, insurance is insulated from the effects of the downturn. Insurance, by and large, remains a necessity for most businesses and individuals, and demand has held up despite the downturn.
However, the impact of the downturn on brokers and their customer bases will lead to a change in the way a broker needs to manage its business.
It is likely that many will face a lack of available finance, which will restrict their ability to grow through acquisition in the medium term. Plus, insurers are putting pressure on the high commission payments paid to consolidators – and to broker networks in particular. This is at a time when brokers that receive part of the remuneration in a form linked to underwriting profitability will be suffering from increased claims costs, putting loss ratios – and thereby profit commission receipts – under pressure.
As with any business in a recession, brokers will need to exercise tight control over their costs and manage cash flows closely.
They should be reducing discretionary spend where possible and deferring any non-essential large one-off spends until trading conditions improve. They must also reduce the amount of credit offered to customers, collect debt more regularly and look at any way of harvesting capital within the business.
However, the successful broker will be the one that gets close to its customers and understands the challenges they are facing.
They will need to pay particular attention to customers with business in sectors under strain – for example, the motor trade, housing, construction and retail.
These customers are likely to be more price sensitive than they have been in the past, something that may lead to increased switching and demand for higher voluntary excesses and reduced cover.
Brokers may also find it harder to cross-sell products to these customers. However, increased switching offers an opportunity for those brokers that understand their customers well and can adapt services and products to meet their clients’ needs.
The recession is likely to make 2009 a tough year for brokers. They will need to manage capital carefully and increase efficiency where possible. To reiterate: the companies likely to prosper will be those that have the best understanding of their client base and the pressures they face.