Wider economic events hit insurance brokers hard over the past few months, but it remains unclear how much the coronavirus pandemic will affect industry revenue for the remainder of 2020.
While the knock-on effects of a slump in business activity, sky-high unemployment and the absence of a COVID-19 vaccine will be a drag on brokerage results, the compulsory nature of many insurance purchases and the continued rise in insurance rates will offset some of the downturn, brokerage executives and analysts say.
And investors remain interested in the brokerage sector, which will likely drive continued consolidation despite a sharp drop in deals so far this year.
Meanwhile, insurance brokerages, like numerous other companies, are considering how to react to added scrutiny of corporate diversity practices following the nationwide protests sparked by the killing of George Floyd in Minneapolis in May (see story).
The severe shock that coronavirus-related lockdowns have had on the global economy has been felt by insurance brokers as businesses close, reduce operations and lay off workers, which reduces demand for property/casualty, workers compensation and employee benefits insurance products, and in turn hits brokers’ commissions and fees.
The COVID-19 lockdowns “will most definitely negatively affect organic growth, so our focus is on what we can take control of,” including new business, client retention, cost management and mergers and acquisitions activity, said Marc Cohen, CEO of Hub International Ltd.
Brokerage revenue is dependent on GDP growth, so economic recovery will be “an important factor in future revenue growth,” said John Doyle, CEO of Marsh LLC.
The economic downturn has affected different parts of the brokerage business in different ways, said John Haley, CEO of Willis Towers Watson PLC.
Most insurance and reinsurance coverage is required for businesses to operate, he said. Other areas, however, such as “talents and rewards consulting,” is “among the most discretionary of all the services that we provide.”
Brokers with large employee benefits businesses could be hit by increased unemployment numbers, said Stephen Guijarro, director in New York with S&P Global Ratings Inc.
“Employee benefits is geared off the number of employees there,” so some brokers could take a “significant hit” in premiums, he said.
Brokers are concerned about employee benefits business due to the rise in unemployment, said Paulette Truman, vice president-senior analyst at Moody’s Corp. in New York.
“We hear that across the board,” she said.
In addition to falling insurance premium volume this year, brokers may be affected by other issues, said Bruce Ballentine, vice president-senior credit officer at Moody’s.
“The brokers will also be hurt by return premium provisions in some commercial lines” in which there are downward adjustments in premiums in various lines, he said.
And some accounting processes may affect when brokers recognize revenue changes, said J. Paul Newsome Jr., Chicago-based managing director at investment brokerage Piper Sandler Cos. For example, deferred premium payments, which many insurers allowed, he said.
“If (brokers) book it in the second quarter as revenue, then you would not expect to see as much impact on organic growth, but if they take the hit on revenue right away there will be a bigger hit on organic growth,” Mr. Newsome said.
The reduction in revenue will be tempered by the variable cost structure of brokers, where producers’ commissions fall when production falls, Mr. Ballentine said.
And brokers can retain much of their business as policyholders stick with their existing service providers during the lockdowns, said Joe Marinucci, senior director at S&P.
In addition, “the thing they have working for them through this period of strain is pricing, which is rather firm,” Mr. Marinucci said.
Prices are rising in numerous lines, brokerage executives say.
“We do see right now a near-term upward rate pressure,” said Mike Sicard, CEO of USI Insurance Services LLC in Valhalla, New York. “Our near-term expectation would be to continue to see rates increase,” which could be further pressured by the advent of catastrophe season and insured losses from the pandemic.
“You are definitely seeing a firming of rates across the market,” said Eric Andersen, president of Aon PLC.
Rate increases began in some areas of the market at the beginning of 2019 and have spread to many others.
“In the fourth quarter of 2019, we saw rate increases broadened to include the middle-market and small-business segments, and that has extended through the first half of 2020, both in the U.S. and Canada,” said Mr. Cohen of Hub.
In addition, some clients are looking to buy additional coverage, said J. Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co. For example, more companies are interested in cyber liability insurance as cyberattacks have risen during the pandemic.
In addition, brokers are taking advantage of historically low interest rates to issue debt.
Brokers have been able to issue debt throughout the crisis and have taken advantage of the low interest rate environment, said Mike Zaremski, senior analyst, equity research-property/casualty insurance in New York for Credit Suisse Services (USA) LLC.
Some brokers are using debt to put more cash on their balance sheets for contingency, and some are borrowing to finance continued acquisitions, said Mr. Ballentine of Moody’s.
“We are more wary of (debt to finance acquisitions), if that is the main purpose, and even more wary if the purpose is to send money to shareholders,” he said.
Acquisitions, which slowed during the first half of the year are continuing (see story).
“Brokers are not stopping their acquisitions, but they are scrutinizing them more, trimming the prices that they pay, putting more of the consideration into a deferred component,” Mr. Ballentine said.
It’s too early to tell whether the pandemic will affect the sale prices of brokers and agents, said J. Powell Brown, president and CEO of Brown & Brown Inc., which has been an acquisitive broker for decades.
But structures of deals may change to reflect the uncertain economic environment, with less money being paid upfront and more of the overall sum paid depending on future revenues, he said.
Angela Childers, Judy Greenwald, Matthew Lerner and Claire Wilkinson contributed to this report.
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