No matter what Uncle Sam does, or how many taxpayer dollars are poured into the financial system, the economy seems determined to tank, taking the stock market (and our retirement funds) along with it. It's clear there are no quick-fixes here, so insurers, agents and risk managers had better fasten their seat belts, because we are in for one incredibly bumpy ride.
Like most, I'm disappointed (and a little scared) to see stocks plummet despite the hundreds of billions being borrowed (thanks, China!) by the U.S. government to revive the credit markets and bail out financial giants like AIG. Yet why should stock values rebound when the underlying economy is obviously so weak, with no turnaround in sight?
After all, everything the Fed and the Treasury have done up until now is targeted at keeping the financial services infrastructure from collapsing under the weight of its own bad loans, misguided bets and poor judgment.
Even if that mission is successful, however, we still have a ton of broader economic issues to attend to.
Home values–which fueled so much of our recent economic growth, while sowing the seeds for our economic collapse–have yet to hit bottom. And far too many people are buried in credit card debt, charging even basic necessities like food and gasoline.
As a result, consumer spending–which accounts for over two-thirds of economic activity–is slowing alarmingly as people put off buying cars, appliances, clothes and the like. We are likely to be traveling and going out to dinner less. And 47 million or so who lack health insurance must spend thousands out of their own pocket for medical care, declare bankruptcy if they can't pay their hospital bills, and simply not go to the doctor unless critically ill.
All of this means less demand for durable goods and services, which will cut into corporate profits, which in turn will force stock prices down again as more companies report drops in earnings or outright losses.
As firms go broke or are forced to shrink their operations, that means more people lose their jobs, cutting economic activity even further. It becomes a vicious cycle.
Agents and insurers are already feeling the pinch. At NU's recent “State of the Independent Agent” roundtable in New York, the three winners in our 2008 Commercial Insurance Agency of the Year award program all cited credit risk as one of their biggest challenges. More clients can't pay their premiums, either because of cash-flow problems or bankruptcy.
With a growing number of companies either falling by the wayside or at least cutting back on payroll, and with tight credit and a lousy economy making new business launches problematic, organic growth for agents and carriers is going to be nearly impossible to achieve.
That means carriers and agents will have to be far more competitive to fight over a shrinking premium pie. With a soft market already cutting into producer and insurer income, a smaller exposure base makes profitability even more illusive.
No doubt this will spur more mergers and acquisitions among both agencies and carriers, as only the strongest and most resourceful firms will survive the difficult years ahead, while we slowly rebuild the foundations of our economy.
This does not have the feel of a blip in an otherwise robust economy. This feels like a major contraction. The only question is, who will be squeezed out?
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