The Mood On Main Street

The recession has taken its toll on contractors, restaurants, retailers, small manufacturers and other Main Street business around the country and most of the survivors will not soon forget the pain of the past few years.

As building projects have come to a standstill, manufacturing orders have dried up, and customers have stayed home, small businesses have been forced to lay off workers and scrutinize every expense to keep their doors open.

Insurance has not been immune to their cost scrutiny. Under pressure to survive, many Main Street buyers have changed their insurance buying habits, according to independent agents.

“Smaller businesses are paying more attention to insurance than they ever have. When you cut payroll and expenses, the cost of insurance sticks out like a sore thumb,” says Florida agent Chip Greene, who runs Greene-Hazel and Associates in Jacksonville, along with his brother, Curtis Hazel.

Even without small business owners doing anything, their insurance costs have been lowered due to smaller payrolls, reduced sales and the prolonged soft market. Small businesses have, in fact, enjoyed much deeper insurance cost cuts than other businesses; theirs have been about $71 billion, or a 17 percent decline from 2007 levels-versus an 8 percent decline for middle and large market, according to Conning Research and Consulting.

But the owners have not been content to just let the slowdown and the soft market dictate their savings; they have found ways to further shave their insurance bills. While few have gone bare, many have reduced coverage, lowered limits, hiked deductibles and turned down ancillary coverages in order to keep their insurance costs under wraps.

Only about 20 percent of agents have seen major increases in policy cancellations or non-payment, but more than half of agents have had customers take cost-saving actions such as increasing deductibles, according to a survey this past summer conducted by Channel Harvest and sponsored by Insurance Journal.

Recent interviews by Insurance Journal with agents around the country confirm that Main Street business customers are demanding more cost-cutting options.

“Overwhelmingly the construction industry and the trades have been the hardest hit. They are trying to buy just enough insurance to meet requirements to work on a job or bid for work and some can’t do it. It’s a tough conversation for agents to have,” said Florida’s Greene. “Some companies are lowering their commercial coverage, say where they once carried $2- to $3 million, now they only carry $1 million. Unfortunately, a lot of carriers are not offering coverage for general contractors and subcontractors.”

“Any way they can lower premiums, they are doing so,” said Ray Gallant, principal of Gallant Insurance Agency in Acton, Mass., citing policyholders who have reduced limits or taken cars off the roads.

A fellow Massachusetts agent, Dennis F. Murphy III, of D. Francis Murphy Insurance Agency Inc. in Hudson, has had similar experiences. “On the commercial side, people are trying to go without coverages – such as commercial umbrella – and are taking vehicles off the road to reduce the size of their fleets,” said Murphy.

In Michigan, one of the states hardest hit by the recession, some policyholders are jettisoning coverages because they can’t afford them. David A. Walker, president, Hartland Insurance Agency Inc. in Hartland, has had customers drop ancillary coverages like employment practices liability and employee benefits. His customers are also reducing limits and raising deductibles.

“They are looking to retain more risk, whether they can or can’t afford it, with higher deductibles,” said Walker.

Bouchard Insurance has four locations in Florida: Clearwater, Sarasota, Fort Myers and Kissimmee. “A lot of our insureds are doing anything they can to reduce the cost of their insurance,” reported Ray Bouchard, president and chief financial officer. “They have cut personal [lines]. They have fewer vehicles so they can cut their commercial liability, auto and workers’ compensation costs. Many are trying to transfer risk by self-insuring or going without certain coverage such as directors and officers coverage. They are just taking more risk in general.”

In Texas, which does not require employers to carry workers’ compensation, that coverage is often the first one to go when times get tough, according to Lloyd Eisenrich, president of both Combined Insurance Agents of America and Weatherby-Eisenrich Insurance Agency Inc. in Andrews. “We see them looking very hard at minimizing coverage and going to bare basics if they can,” he said.

According to Oklahoma’s Brad Berrong, co-owner of Ed Berrong Insurance Agency in Weatherford, another coverage owners try to throw overboard is loss of income. “That’s something they’re looking at, picking off some parts of the policy because they’re looking for some way to get that premium down,” Berrong said.

While not many businesses have dropped all coverages, some have resisted adding protection that their agents recommend.

“Clients are increasingly focused on price and it’s become more difficult to cross-sell necessary coverages, like EPL [employment practices liability], for example,” said Murphy. “We continue to do it and try to do it but some still say, ÔNo, I can do without it; right now I want basic.'”

Some property owners are also resisting paying for replacement cost coverage.

“[T]he real value the market value of property in a lot of cases has gone down but the client doesn’t understand why their insurance isn’t going down. So agents are spending a lot of time explaining replacement cost insurance value compared to building value,” according to Roger Ronk, executive vice president of the Independent Insurance Agents of Indiana.

Eisenrich in Texas has also run into this challenge: “They automatically want to start questioning, ÔYou know this business just isn’t worth what it used to be, I don’t need to insure this building for replacement cost.”

The good news is that even with all the trimming, most Main Street businesses have at least retained the basic business owners policy (BOP) coverages, according to Eisenrich. This is because carving out coverages from BOPs is often impossible and, when doable, the savings are negligible.

“From a coverage standpoint I don’t think most Main Street businesses are seeing a dramatic decrease in the broad spectrum of their coverage. They may be trying to cut back on their level of coverage, carrying lower liability limits, lower business income interruption coverages, that sort of thing. But as far as scuttling coverages, they’re really not able to do that in a BOP policy,” Eisenrich said.

Price Pressure

The cost-cutting habits of today’s small business owners extend beyond reducing limits or raising deductibles. They have also been pressing for the lowest price available on whatever coverages they keep.

“[T]hey are looking for the next best deal, constantly,” said Michigan’s Walker.

But at least they tend to rely upon their agent to do that price shopping for them, so the business stays within the agency.

“They have become more price sensitive because commercial premiums have reduced the last several years, every year; that’s their expectation now. That’s created a situation where agents have done more internal shopping within their carriers for their clients,” said Ronk of the Indiana association.

Not all agents have felt the mood on Main Street shift toward price. Kevin M. Baker, Suhr Risk Services of California Insurance Brokers, San Jose, said his agency has managed to avoid price shoppers even during the recession. “I didn’t feel buying habits change through the last few years. My clients per se didn’t choose us because we had the lowest price at the time they chose us. Our clients chose us because we put in long-term strategies that encompass the total cost of risk management,” said Baker.

That posture has insulated his firm from the pressure to always find the lowest price. “I suspect agents that sold on price were probably hit a lot harder by clients seeking better prices in tough marketplace than we were,” Baker said.

Better Customers

Small business owners who have survived may not be better off financially than they were three or four years ago but many are savvier business people today by virtue of having had to operate in survival mode, according to agents. Today, small business survivors are asking more questions.

“We are getting more educated consumers — for all the wrong reasons — but we are getting educated consumers,” believes Walker. He said insureds do value good service but too often they don’t consider the service component until after they get a price they like.

Bill Jeatran, CEO at RJF Agencies, a Marsh & McLennan Agency company in Minneapolis, understands that Main Street businesses have been under pressure to meet their payrolls and that this has driven many of their insurance decisions the past few years. “I would say in a survival state they didn’t make good business decisions; they would drop coverage or became too price sensitive. But again, they were evaluating it on making payroll,” he said.

However, Jeatran thinks that surviving these times has made them better companies and customers today. “They had to find a more efficient way to do business and it made them more resourceful. The pressure of the recession made them a better company,” argues Jeatran. “Once they weathered through the crisis mode, they did start appreciating the resource and value we could bring to them beyond cheap insurance price.”

According to Jeatran, his agency has actually strengthened some of its relationships and “moved from vendor to advisor status.”

New Normal

Now agents are wondering if the price-oriented mindset that Main Street has embraced during the recession is the new normal, whether “price-first” buying is here to stay.

Walker does not believe this recession is just a cyclical stage after which people will return to their prior ways. “I think it’s a systemic and fundamental change of economy and as a result [there] will be a systemic and fundamental change in buying habits of public. I think it will have long term impact,” the Michigan agent said.

Gallant in Massachusetts tends to agree that at least some aspects of small business owners’ view of insurance may have changed for good. “I think the mentality of customers will be permanent with the low limits and high deductibles,” Gallant said. “They are using more caution in whatever they do. They are asking questions – which is a good thing: That will only make them a better consumer.” More educated buyers “absolutely” value the service of an independent agent, Gallant believes.

His fellow Massachusetts agent, Murphy, has a similar opinion. “I do think it will have a lasting effect because we have trained clients to be more price-conscious than ever,” Murphy said. “We are seeing a lot of people say, ÔI should have been doing this years ago.'”

Plus, Murphy said, insurance company analytics are getting so precise that they can price individual business risks much better than they can price a class of risk.

New Alignment

The emphasis on pricing and the use of the analytics referred to by Murphy could be leading to a new alignment in small business insurance markets, an alignment favoring larger carriers.

According to a recent study by Conning Research & Consulting, the property/casualty small business sector – those accounts with less than 50 employees – has shrunk substantially since 2007, and there has been a dramatic shift in market share on small business accounts from small to mid-sized and large insurers.

While he thinks buyers’ continued focus on price will be challenging, Murphy ultimately isn’t worried.

“We (agents) are only going to get paid for the value that we bring. If we are out there bringing value and cost-containment and consulting services, then we will do fine,” Murphy said.

California’s Baker sees it a bit differently, suggesting there will always be those who shop for price regardless of the economy.

“Buyers that moved around a lot during the recession probably did so because they were shopping or bidding on regular basis before the recession,” said Baker, who believes his agency will be fine, too, because his clients look at his firm as a provider of services, not just insurance.