Recession, Soft Market Forcing Western Agents, Brokers to Refocus

Whether the nation is in a true recession may still be up for debate, but it’s difficult to ignore the signs of economic slowdown throughout the West — and its effect on the insurance industry. New home construction is grinding to a halt, and states such as California, Nevada and Arizona have seen home prices plummet. Business credit is tight, causing hardship for many firms. And insurance agencies of all sizes are feeling the effects, as personal and commercial lines accounts react to changing financial conditions.

“I’m not an economist, so I don’t know if we can say that we are officially in a recession, but there certainly seems to be real concern about the economy in general and an overall caution in the marketplace,” said Paul Hering, managing principal and CEO for San Diego-based B&B Co. (formerly Barney & Barney LLC/Saylor & Hill). “Of course, the P/C insurance industry has been in the midst of a very soft market for some time now, so whether there is a recession or not, we have had to deal with this soft market.”

Tom Williams, chairman and CEO of InterWest Insurance Services Inc., echoed Hering’s assessment. “I listen to the political pundits describe what a recession is, and if we’re not in it, then we’re getting close to it,” he said. “I don’t see a significant difference with what’s happening in Northern California versus in the south; we do business in both ends. California was particularly hard hit with the whole mortgage thing.”

Hering said that if financial conditions worsen, other industries beyond construction will feel the impact. “In a broader recession, there could be other industries that suffer — hospitality, tourism, etc. — where we have a strong presence,” he said. “We also write a lot of business in the technology and life science, as well as health care sectors, but these seem to be fairly robust at the moment.”

Smaller agencies are also dealing with the challenges of a tight economy. In Brookings, Ore., Debbie Krambeal, president of Cal-Or Insurance Specialists, reported that her community is suffering from both reduced tourism and fewer California retirees moving in.

“We’re in a small, rural area on the border between California and Oregon,” said Krambeal, who is a past president and the current state national director for the Independent Agents and Brokers of Oregon. “You have to drive to get here. We’re two hours from a major airport. People aren’t travelling as far for trips because of fuel prices.”

Krambeal said the drop in tourism revenue from Californians has hit the local service industry hard. “People are losing their jobs or not getting as many hours,” she said. “More people are going into foreclosure. I do believe it’s affecting the whole state. It may not have hit Portland as much, but it probably will.”

Equally troubling for Krambeal’s region is the slowdown of incoming retirees. The California homes that once sold for record prices are sitting on the market, often at reduced prices, trapping retirees who in past years flocked to southern Oregon.

Even Las Vegas is feeling the pressure. Producer Pam Brown of H.J. Richie & Associates, a commercial lines agency in North Las Vegas, believes the recession is here. “You can see it in the prices for milk and gas,” said Brown, a 30-year insurance industry veteran and the incoming president of the Independent Insurance Agents of Nevada. “Everyone is struggling to keep up with it. Nevada is in the top 10 in [home] foreclosures. The subcontractors are laying off people or closing doors, and the residential subs such as the drywall people are going into commercial, and the commercial subs are being underbid. It’s a vicious circle.”

The commercial lines agent reports that some enterprising builders are turning to the apartment market, filling the growing need for housing for those who can no longer afford a mortgage. Although she said the large projects on the Las Vegas strip are still faring well, Brown predicted at least a temporary slowdown of high-rise condominium projects because fewer outside people appear willing to spend the money to maintain a year-round address in the gambling mecca.

In neighboring Arizona, Jeff LaScala of Sun State Insurance Agency described how the tightening of credit has sent repercussions through his entire community. “Everything is tied to the construction industry,” said LaScala, who is president of the Greater Phoenix chapter of the Independent Insurance Agents & Brokers. “In real estate transactions — pre-existing or new — you ‘touch’ a realtor, mortgage company, title company, appraisal firm, home inspector, pest control, insurance agency and perhaps a cleaning company, and that’s just from the transaction. If the house needs work, you may hire a general laborer to mow the lawn, repair the roof, patch the sheetrock, etc. That single transaction can affect as many as many as 15 different types of trades.”

LaScala said “the dust kicked up” by real estate transactions makes it easier for all types of firms to get out and talk to prospective clients, including insurance agents. “When houses are selling and moving, people have the opportunity to shop their coverage, making contact with an agent, perhaps not only to insure the new home, but to review the auto or to add an umbrella. The activity is extremely important. This stagnant [climate] is the biggest problem with a recession.”

Recession Hits Home

Like most agents, Krambeal is aggressively seeking as many credits as possible at renewal, but even that isn’t enough for many cash-strapped Oregon clients. “I see the stress in people,” she said. “They really don’t care that the premium went down last year. It’s the stress of trying to keep your business. On the personal lines side, we’re seeing people checking around more on prices and wanting us to check around for them.”

Krambeal related a recent client meeting with an Oregon motel owner. “They have seen a big slowdown, so they wanted to reduce their premium,” she said. “They raised their deductible to $10,000 — it was $1,000 — and are self-insuring on some exposures.” She added that the client took that action despite the fact that the premium was already down $1,500 from the previous year because of the soft market.

In Las Vegas, Brown’s commercial clients are also struggling to reduce expenses. “Risk managers are looking for areas they can let go,” the agent said. “I think we’ll see lots of individuals letting health insurance go, and their auto insurance. Personal lines agents may see it much faster than the rest of us. In commercial lines, businesses are looking at their benefit plans to reduce costs. It’s going to just keep trickling down.”

Although LaScala’s Phoenix agency is not a heavy writer of construction accounts, the housing bust is having an impact. One of LaScala’s construction clients paid premiums last year based on a $10 million payroll. The year-end audit showed the firm’s payroll had shrunk to $8 million, making the policyholder due for a 20 percent refund. The premium refund and commission charge back will get rolled into the client’s new policies, reducing revenue and commission from the account for the coming year.

Another agency client, a small builder, received a $6,000 premium refund. The builder had paid for permits for 23 houses he decided not to build. “He still owns the land,” LaScala said. “The policy we put in place was for the builder’s risk/construction. The builder decided to let the permits lapse. In talking to him, he said it was cheaper to lose the money he’d already paid for the permits, which was about $10,000 each. He said if the economy comes around, he can still build the homes. But if he built the homes now, he would not have been able to service the loans and would have lost the land. They’ve billed me for roughly $600. We don’t do a lot a lot of business with them, so I will probably end up writing a check.”

Large agencies and brokerages in California are also feeling the pinch. Between 30 percent to 45 percent of the average commercial agency’s writings are in workers’ compensation, according to Williams of InterWest. “There have been a series of cuts in rates and workers’ comp — the rates are reduced more than 50 percent over the last three to four years,” he said. “Insurance companies are still making money, even with the lowered pricing, for a variety of reasons — better risk management, better selection of customers, better loss control. As long as they’re making money they’re not going to raise the prices. From the brokers’ standpoint we’ve all taken a pretty significant lick.”

With most casualty lines geared in some way to payroll, that means reduced revenue for agents. “I’ve described to my staff that as a broker, we’re kind of in the middle of a perfect storm,” Williams said. “Insurance companies are making money and have reduced rates. At same time, we have the recession largely brought on by the subprime mortgage situation, and there’s less construction to insure.”

Williams is telling his staff that the soft market will likely last another year — at least. “We’ve continued to grow, but we’re not growing at 20 percent,” he said. “We’re growing at 5 or 7 percent. In the rising market, firms like us were doing 15 to 20 percent in terms of profitability and growth. That’s not happening anymore. Profits for the most part have been cut in half.”

In the midst of the challenging market, Williams finds himself the target of repeated offers by investors. “They believe the insurance industry is very stable and that the brokerage industry is stable and a good place to make money,” he said. “We get offers about every month. A lot of the money is people who’ve never invested in insurance. It’s new money, and those people need someone they can trust, who knows how to run an operation. The money tends to come more in that manner, to agencies that are established and who have leadership. Our attitude until now is that we are owned by our own employees and we never wanted outside input. People like us use that money for the most part to do other acquisitions.”

Survival Tips for a Tough Market

More work for less commission hardly sounds like a formula for insurance business prosperity, but agents and brokers in the West insist there are opportunities in this combination of soft market/recessionary economy.

“Not unlike the stock market where the objective is to buy low and sell high, in our business when times are tough, good things can happen,” B&B’s Hering said. “We continue to recruit top talent into our organization, and more people are looking right now than ever before. Any firm that can make it in challenging times will be well-positioned to truly prosper when the market turns and the economy strengthens.”

Hering expects his firm’s recent merger with Saylor & Hill to benefit his company through diversification. “We will now have three offices statewide with good geographic spread. We also believe there is a great opportunity for us in the Bay Area to grow the business. Our market share in San Diego is so significant that to continue to meet our growth objectives, we need to look to new markets.”

While the CEO says his firm is not taking any specific steps directly related to a possible recession, it is watching expenses closely. “Above all, we need to continue to demonstrate that we understand our client’s businesses and appreciate the challenges they face,” Hering said.

All across the West, agents and brokers are reassessing how they do business and looking for ways to do it better. For LaScala’s Phoenix agency, which once had as much as 90 percent of its writings in personal lines, that means focusing on commercial lines. “[In] the past five years, we’ve added two to three people per year,” LaScala said. “The last three hires all have been for commercial lines. Luckily, we weren’t that heavy into construction.”

With the local housing market ailing, LaScala is targeting other market segments. “One thing Phoenix has is a lot of restaurants,” he said. “Our new division is focusing strictly on commercial — restaurants, automotive repair shops, etc. We have a delivery program, so we’re writing more commercial auto, too.”

In addition, LaScala’s firm recently hired a marketing firm to help direct a major redo of its Web site. The new site focuses on customer contact via live chat and e-mail. The approach is particularly geared toward Generation Xers, who LaScala noted will be the ones buying houses when the economy improves.

InterWest is also studying the market for opportunities. Williams said the key is to find out who is not in a recession. “Anything related to green is an area we’re looking at hard — contractors who focus on green, the whole bio industry,” he said. “It’s a good time because of the money being poured into that field.”

Part of InterWest’s strategy has been to position itself as a knowledge source. “We just put on a round of meetings where we brought in an insurance company that has a real expertise in the greening of America and a couple of other entities promoting green products, and we brought in a bunch of contractors,” Williams said. “We said, ‘Here’s what insurance companies can do for you in that area.’ We got excellent feedback from contractors. It gives us a chance to present ourselves in a positive light, and we’re promoting something we know is good for the future. It’s something I have a personal interest in.”

In Las Vegas, Brown’s commercial lines agency is working to provide a consistently high level of client service. “If you don’t prove your worth, you’ll be the first one led to the exit door,” she said. “When clients’ incomes are low, they look for savings elsewhere. In the hard market, our clients were limited. Just a few companies were writing, and if a client went to another agent, he’d get a quote from that same company or two. Now, companies are coming in out of the woodwork. You think, ‘I can’t believe this company will write this.’ You really have to stay on top of your game and aggressively look for new markets.”

Currently, H.J. Richie is looking much stronger into program business. “Because we’re so construction-driven,” Brown said, “we’re looking into program business, such as for excavators or landscapers.”

Brown’s agency is also scrutinizing carrier financials closer and tightening client collections practices. “When money is tight, insurance is the last bill you pay,” the agent said. “In the hard market you could carry people a little longer. In the soft market you can’t afford to do that.”