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Thursday, April 4, 2013

Bank Insurance Poised for Resurgance: Three Factors, Part 1

By Jim Campbell, Reagan Consulting, Inc

A year ago, the insurance brokerage industry appeared poised for recovery. The previous years had been challenging as industry performance had fallen to its lowest levels in decades during 2009 and rebounded only slightly. But conditions were beginning to improve. The economic recession had eased and the persistent softness in commercial property & casualty pricing was beginning to relent. Hopes were high that it was finally time for insurance brokers to enjoy the upside of the industry’s cyclicality. Today, those hopes are even higher. Organic growth is returning and profit margins are on the rise. No doubt, there are threats to this recovery, but optimism abounds.

As insurance brokerage performance waned in 2009, so did the banking industry’s enthusiasm for the business. Agency acquisitions by banks fell by more than half that year, and divestitures increased. This pullback, however, reflected more than just the declining performance of brokers. Banks were facing a range of distractions including a housing crisis, capital concerns, regulatory battles and other challenges. Insurance strategies took a back seat. But will the current recovery and budding optimism in insurance brokerage inspire banks to reengage? The answer to this question will likely be determined by three others, which we will review in three parts.

  • Is the insurance brokerage recovery sustainable?
  • Will banks align insurance strategies with objectives?
  • Can community banks effectively execute insurance strategies?

Is the insurance brokerage recovery sustainable?

Organic growth for insurance brokers has bounced off 2009 lows and continues to improve. According to the Reagan Consulting Organic Growth & Profitability Survey, the 2012 median organic growth rate was 6.1%, the highest since 2006. All major lines contributed with commercial lines leading the way at a 7.6 percent organic growth rate. Profit margins have also improved.

Looking ahead, however, the sustainability of this recovery is less than certain. Its direction will be determined largely by two external factors: 1) the economy and 2) property & casualty pricing.

Looking ahead, however, the sustainability of this recovery is less than certain. Its direction will be determined largely by two external factors: 1) the economy and 2) property & casualty pricing.

The Economy. Recovery for the U.S. economy – already weak by historical standards – may be losing steam. After slowing in recent quarters, GDP growth turned negative for the fourth quarter of 2012. Brokers should take note as industry performance is affected by the overall economy, although on a 6-to-9 month lag. This lag occurs because changes to insurance premiums aren’t immediate, but follow premium audits and policy renewals. Therefore, brokers feel the effects of both an economic downturn and a recovery on a slight delay. If GDP growth continues to deteriorate, brokers may see their performance recovery stall.

P&C Pricing. The persistent soft market has finally eased. After eight years of softening, during which property & casualty insurance premium rates steadily declined, pricing has stabilized and is even firming. According to data recently published by the Council of Insurance Agents & Brokers (CIAB), commercial property & casualty pricing increased by an average of 5% in the fourth quarter. Hard markets are illusive and unpredictable. If we are now in such a market, the strength and duration are anyone’s guess. But if even modest firming continues, brokers will likely experience sustained positive growth, even if the economy dips into a mild recession.

Both the general economic cycle and property & casualty pricing cycle influence insurance brokerage performance. Although the two are not necessarily correlated, both cycles have been down in recent years. However, if we experience either meaningful economic recovery or sustained price firming, expect agency performance to continue to improve. And if both occur, look for agency growth rates, profit margins and values to get a significant boost over the next several years.

Read Part 2: Will banks align insurance strategies with objectives?

Join a Best Practices Panel discussion of the topic.
Jim Campbell will lead a Community Bankers Best Practices Panel, hosted by chair Brian Duffy, RSI Insurance. This event will be held Thursday, May 16 at 2:00 EST. Register now.