Insurance brokers, who helped clients manage risk during the recession, are now adapting to the different risks in a post-recession economy, guiding businesses as they take steps to expand again. The Business Journal’s Jane Yu recently talked with executives in the brokerage business about what risks they, as agents working between the insurer and the insured, are facing in today’s economy and how risks have changed along with the overall market. Here’s an edited version of what they had to say.
Kris Allison
Burnham Benefits Insurance Services, Owner, Chief Executive.
Risk is and always has been an inherent part of our business … but the current risk of being surpassed by competitors has escalated to the point of borderline insanity. A few types of risk that are of concern today consist of patient utilization, carrier reaction to the market, and the impact of the Affordable Care Act on employers.
From a claims perspective, risk generally tends to follow the lead of the economy.
People tend to utilize care far less when they fall on tough times financially … Risk from premium increases from health insurance carriers often also follows suit. … Finally, the risk associated with retaining or discovery of new clients has been impacted by the changes that have come along with ACA. Employers now have a burning desire and constant thirst for new information, direction and regulation. They have been placed in the position of being experts when a desired level of proficiency seems extremely hard to come by at this point. For this reason, employers are looking to their consultants for answers more now.
The aforementioned risks are currently driving the market in many directions. However, the real risk factor lies in the potential to focus too much on one topic, such as healthcare reform, and not enough on the big picture. The question is, ‘How do we choose the right direction with confidence and the sense of urgency that employers want and need?’ Gone are the days of presenting black-and-white options to employers.
David Kummer
SullivanCurtisMonroe, Managing Director.
The 2008-2009 economic collapse occurred deep into a ‘soft’ insurance market cycle in which insurance companies had been pushing down pricing for many years in almost all lines of coverage.
As the economy declines, several forces mount to put tremendous and increasing pressure on the insurance company’s balance sheets.
First, claims activity—both workers’ compensation and employment practices—begins to rise sharply. Second, investment returns begin to drop. In this recent economic cycle, most companies held low pricing until 2011. At this point, they had several years of underpricing to correct, and the market shifted to ‘hard’ very rapidly.
The recently ended soft market cycle was one of the longest ever recorded. Prices declined steadily from 2004 until 2011. Absent new business production, a California insurance brokerage that wrote a meaningful amount of workers’ compensation business might have experienced a 30% to 50% drop in revenue. Beginning in 2008, we began to see customer bankruptcies. Most of them survived but few without meaningful staff reductions, revenue reductions, fleet and property reductions, or location closures. All of those events translate into lower premium and lower commissions paid to brokerages.
The primary expense of an insurance brokerage is service payroll. Between 2008 and 2011 was a very difficult time for our industry. Commissions continued to plummet, and our ability to reduce expenses was very limited. Brokerages with strong new business growth fared much better and were positioned for growth when the market turned.
Fortunately for our industry, the tide turned in 2011. Premium and commission growths have been modest, but regardless, it is providing much-needed relief on the balance sheets of the insurance brokerage industry and is helping to fuel growth for those of us who remained strong through the last market cycle.
Arthur Schuler
Aon Risk Solutions, Executive Vice President, Managing Director.
With the magnitude, complexity and speed of risk increasing around the world, insurance brokerages face financial challenges of difficult economic conditions like many other businesses.
We have to make important decisions, such as: how the cost of risk we manage impacts our clients’ financial results; what decisions our clients are making or considering making in order to keep insurance costs down; what the potential impacts are of these decisions on our clients’ businesses in the short and long term. While these decisions need to be made in good, as well as bad times, the pressure and difficulty associated with making these decisions is heightened during bad times.
During these times, insurance brokers must be good business managers who are aware of our clients’ financial and operational conditions and able to create risk solutions and compensation solutions that best respond to their needs and empower results.
Travis Trask
Barney & Barney, Principal, Managing Director, OC office.
Insurance brokerages largely came through the economic slowdown fairly well. Barney & Barney, which serves California’s wealth-creating industries, continued to grow throughout the financial crisis, although a bit less than the strong growth we’ve experienced for many years.
Between 2008 and mid-2013, Barney & Barney’s revenue grew by 41%, about 10% annually. We added over 200 employees in our offices in Orange County, San Diego and San Francisco.
The biggest exposure to risk we see today is less about insurance brokerages and more about businesses in almost every industry. Our challenge as insurance experts is to continue offering innovative thinking and solutions. Ultimately, our goal is to reduce the burden of risk so clients can focus on creating opportunity within their organization.
In terms of risks to businesses, healthcare reform is the most significant. The Affordable Care Act is the biggest change in employee benefits since the rollout of Medicare. We expect healthcare costs to double between now and 2020. We created our proprietary healthcare reform tool, ATLAS, to help our clients predict, prepare for, and manage the changes over the next five years.
When organizations are feeling the bite of a struggling economy, they also can expect to see fraudulent workers’ compensation claims rise and liability limit selection decrease. Internet and privacy-related liability are also increasing as more and more organizations store information and conduct business virtually. These are all business risks that can and should be managed.
The good news is that the improving economy in California is reducing some of the risks facing businesses. The ability to re-evaluate, change course, and diversify offerings is critical in minimizing risk and seizing opportunity not only for our firm, but also in helping our clients.
Greg Zimmer
Alliant Insurance Services Inc., President, Chief Financial Officer.
The primary assets of Alliant, or those of virtually any insurance brokerage firm, are its people, clients, intellectual property and reputation.
The primary risks facing brokerage firms today are that one or more of these assets can be lost or tarnished over time. Believe it or not, the insurance market is a very dynamic place, and certain sectors of the insurance market are going through unprecedented change. To the extent that our organization does not properly invest in the right people and the right intellectual property, our business could materially suffer over time.
In terms of good times versus bad times, it is really quite simple. In good times, our clients are growing by hiring people and investing in assets. This in turn provides opportunities for Alliant to grow alongside its clients since these assets (people and infrastructure) need to be insured,. In bad times, our clients are exiting businesses, laying off workers, and limiting long-term investments, thus having the opposite effect.
Wade Olson
BB&T Insurance Services Inc., Area Chairman.
In general terms, when the economy is favorable and growing, our customers are investing in more people. They’re investing in new ideas. They’re more willing to look at innovation and be more creative. When they’re adding investments in people, benefits programs can be expanded. As a broker that gets paid to sell and service a product, those are good times for us.
Conversely, when the economy is bad, employers are looking at decreasing investments in people, both in number and what they have to do to retain them. There are fewer benefits and higher costs to employees. All those have a negative [impact] on the industry. It drives claims to be higher than premiums collected by the insurance carrier. As an insurance broker, I have to be able to sell a larger increase in rates and justify that.
The biggest risk element for brokers in the last couple of years has been the Affordable Care Act and understanding what that means.
If I’m a broker that deals with small-business customers, there is the risk of the possibility that health insurance exchanges could take over a lot of the enrollment. That could reduce the compensation levels that brokers in the small market may have access to in the future.
BB&T doesn’t deal much in the small market, and the legislative change wasn’t one that had a large impact on us in terms of revenue. But it does change the demand coming from our customers.
All the employers have to make a decision on whether they want to continue to offer benefits or pay the government a fee to not participate. We’re educating our clients on that. And it’s a risk, in that if the broker doesn’t create a service model that includes that offering, they could lose potential gains from the customer. You’re viewed now as having to be a credible source of information.
What clients are asking is to help them strategically understand their options in the private and public exchanges. They’re asking us to educate not only themselves but their employees on the impact of taxes and subsidies.
So it’s a lot of acknowledgement, a lot of consulting … a lot of work that didn’t use to be there. It requires a different service model to deliver that. We’ve made a decision to make those resources internally, and it has had a favorable impact. Our retention numbers are up, and our new business numbers are up.
