Independent brokers; macroeconomic challenges and forward planning

During uncertain macroeconomic and geopolitical times, the importance of strategic planning to anticipate risk and opportunity cannot be overstated. Michael Gregory, Head of Underwriting Strategy at RSA, discusses how – through forward-thinking, broker/insurer collaboration – independent brokers and their clients can prepare themselves to get through this period and be ready for the green shoots of growth to come.

6 June 2023

The current cost of living crisis is taking its toll on individuals and families across the UK – more than three-quarters (77%) of UK adults have expressed concern about the effect of rising energy prices and prices for goods such as food, for example*. And this, naturally, has an impact on how and where they spend their money.

This challenging economic backdrop impacts individual sectors in different ways and often at different rates. As stagnant growth embeds across the UK, independent brokers are mindful of the need not only to help their clients understand the risks and opportunities they face now, but also to guard against further shocks, taking advantage of opportunities that may present themselves as and when the economy begins to recover.

Understanding the macroeconomic environment

Our recent survey of independent brokers – the results of which we’re releasing at this year’s BIBA Conference in Manchester – shows that economic uncertainty is also on the minds of Brokers (RSA Broker Pulse Survey, Q1 2023), with 54% citing it as a common concern or challenge they were hearing from clients. The survey more importantly suggests brokers would welcome additional support from their insurers in understanding the macroeconomic environment, with 85% wanting more and only 10% thinking insurers are doing enough to help them navigate an uncertain environment.

While independent brokers are clearly concerned about the effects that recession will have on their own books of business and their client’s business health, working together with insurers to understand these challenges and prepare for the future can help ready them for what lies ahead.

Where are we now?

The UK is currently in a period of stagnant growth that we expect could last for five to six quarters and the economy is unlikely to return to sustained pre-pandemic growth levels until the third quarter of 2024.

Over the course of the worst of the COVID-19 pandemic, the UK’s gross domestic product (GDP) fell by some 20% and the UK is the only one of the G7 countries whose economic output is yet to sustainably rebound to pre-crisis levels. 

Unemployment levels – currently at about 3.7% – could rise to as much as 5% as labour costs continue to increase and interest rates constrain business investment.

For context, the current period of stagnant growth is likely to last about as long as the slump that followed the 2008 global financial crisis; however, the signs so far are that it will not be as deep. 

UK inflation, however, is currently of a magnitude that this country has not experienced since the 1980s, and the Bank of England will likely need to retain interest rates at – or above – the level of 4.5% for at least the remainder of this year.

The effect on SMEs and their brokers

Small to medium-sized enterprises tend to be disproportionately affected by periods of stagnant growth, in large part because they typically cater to the economic sectors that fuel consumer demand. As consumer demand dips and unemployment rises, the impact will be felt heavily by SMEs, and particularly by those firms that may not have much diversification in terms of product offering or geographic scope.

This is true for both independent brokers and the sectors and clients that they serve.

Sectors like transportation and storage, manufacturing, wholesale retail and construction historically have borne the brunt of recessions.

But while this may sound worrying, it is not all doom and gloom. The UK has proved itself to be remarkably resilient during previous periods of recession, and certain sectors in particular are forecast to rebound strongly after this current crisis has passed.

To plan strategically for the future, brokers need not only to understand the effects that the current recession is having on their clients, but also to examine where future growth might come from, and how companies might evolve their business to be fit for the future.

Resilience and rebuilding

Of course, for the insurance sector, these challenged and uncertain times are taking place against the backdrop of a hard market for insurance and reinsurance. The increased frequency and severity of extreme weather events, coupled with the effects of inflation and other factors, means that reinsurance rates have spiked and insurers need to maintain discipline to ensure that risks are adequately priced and that the insurance sector itself proves resilient.

Brokers, therefore, need not only to understand the effects of the macroeconomic situation as it impacts their clients, but to balance this with the need to obtain appropriate insurance coverage and risk transfer.

Navigating this delicate balance may seem daunting. However, the insurance industry not only has experience in dealing with the effects of stagnant economic growth and hard markets, it’s also in a unique position to be able to work with its own clients to understand both their risks and opportunities and those of their clients too.

Past experiences have shown that UK businesses are resilient and able and willing to adapt to new challenges. There will be some difficult months ahead, but with strategic planning, forward-thinking and broker/insurer collaboration, independent brokers and their clients can prepare themselves to get through this period and be ready for the green shoots to come.

This article was first published in Insurance Business UK.