Independent brokers; macroeconomic challenges and forward planning

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.

Navigating the future

Looking at past recessions can help us to understand which sectors are likely to recover most strongly and quickly and which may take longer to rebound and return to growth. In the UK, after the 2008 recession, professional financial services recovered quickly, for example. In the US, however, the Tech sector saw significant investment and growth.

At RSA, we’re able to monitor thousands of factors and metrics, including proprietary and partner indices, to gain an understanding of which sectors are set to be impacted most heavily by the current period of stagnant growth and also to predict where future risks – and critically, opportunities for growth – may present themselves.

Monitoring where government funding is going is important to understanding which sectors are likely to see growth in the medium term. Private investment tends to follow public; therefore, if brokers can consolidate their positions or gain footholds in those areas that are seeing investment or are likely to see growth as the economy begins to recover, then they will likely be better placed to weather the challenging months ahead – and to help their clients to do so too.

Newer sectors such as renewable energy and certain areas of life sciences likely will see continued public and private investment. Other areas will also grow and prosper, and we look forward to working with broker partners to isolate and target growth in these areas.

It’s also vital to think about the future shape of the UK economy as a whole. As an insurer with clients of all sizes across the UK, and operations across the globe, including via our Global Network that writes business in more than 170 countries, we’re uniquely placed to spot and understand trends that may affect UK businesses large, mid-sized and small.

The lessons of the pandemic, for example, which saw major supply-chain crunches – particularly in the mid-market – coupled with the effects of Brexit on the ability of companies to move goods across borders, and geopolitical factors such as the conflict in Ukraine, are also likely to lead to an increase in a trend known as ‘friendshoring’.

Friendshoring, or ‘allyshoring’ as it is sometimes referred to, involves companies shifting manufacturing or sourcing of goods and materials to territories that are thought to have a similar – ‘friendly’ – geopolitical stance or locked into healthy trade agreements. This is likely to reduce the risk of supply-chain challenges and will mean that many SMEs in the UK will source goods and materials differently, and produce them in new areas, for example.

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.