In the first and second quarter of 2022, the U.S. economy experienced two consecutive quarters of declines in gross domestic product (GDP), which met the definition of a recession. But after GDP rose slightly in the third quarter and unemployment remained low, the economic alarm bells muted. Unfortunately, though, economic forecasters predict that the worst is yet to come—and history shows that independent agencies should avoid banking on the distribution model's “recession-proof" moniker.

Between 2008 and 2009, 37% of agencies experienced a drop in revenue and 21% experienced no change, according to the 2010 Agency Universe Study (AUS) by the Big “I" and Future One, which also found that declines were substantially worse in commercial lines than personal lines and impacted larger agencies than small ones. In comparison, amid the economic earthquake wrought by the COVID-19 pandemic, 25% of agencies saw revenue decreases between 2020 and 2021, according to the 2022 AUS.

In 2023, the state of play is somewhat different. Spiraling inflation and hard markets are just two of many differing uncertainties. Yet, after 2022 Big “I" Best Practices agencies posted organic growth of 9.2%, the bouncebackability of the independent agency model is clear. Further, by incorporating the lessons from the past and contextualizing them in today's economic, business and consumer environments, independent agents can be more prepared than ever to handle the impending recession.

During the webinar “How Agencies Are Navigating the Economic Uncertainty of 2022," Doug Mohr, vice president of industry relations & partnerships at Vertafore, noted that “recession-resistant" might be a better term to describe the industry before asking a panel of independent agents how the current economic landscape is different from 2008.

Juan Padron, principal and partner of Safeguard Insurance in McAllen, Texas, said his agency was more personal lines-focused during the last recession, and his agency experienced some good years between 2008 and 2010. However, the difference now is that “so many things have piled up," he said. “Not only the pandemic, but now there's a war going on … there are more sources of uncertainty."

Another panelist, R. Dean Giem, president & CEO at Paradox Insurance Agency in Kalispell, Montana, is currently working to build a book of business through a major economic transition for the third time—first in 2000 when the dotcom bubble burst, then in 2008 during the financial crisis, and then through the pandemic.

He said those experiences have made him better prepared for the next crisis and agents must be “nimble and flexible" in their approach to their book and relationships with their clients and carriers.

But despite record results and a strong track record of weathering storm after storm, “many agency owners are anxious about the future. They look around at an industry that is changing more rapidly than they've ever experienced and wonder what things will look like 5-10 years from now," said the 2022 Best Practices report.

While the Great Recession in 2008 and the onset of the COVID-19 pandemic in 2020 shook the foundations of the global economy, some forecasters expect the severity of the next economic dip to be more akin to briefer and milder economic downturns, such as those experienced when the dotcom bubble burst or after 9/11.

However, in the post-pandemic world, nothing can be taken for granted. Whether 2023 brings a short, shallow slump or a deep, drawn-out downturn, here are eight ways to recession-proof your agency for the challenges of the year ahead and beyond:

1) Diversification

Is the insurance industry and the independent agency channel recession-proof? “The reality is that an agency follows the fortunes of its clients," explains Steven Germundson, partner at OPTIS Partners, noting that “there's not a magic bullet" to surviving the ebb and flow of economic cycles but, above all, “there needs to be a serious commitment to running the business like a business and making good solid business decisions."

“Spreading your book of business across diverse industries or market segments not only protects the downside risk in the agency, but it also allows the agency to participate in the growth of the economy during positive market cycles," wrote Tony Caldwell in the August issue of Independent Agent. “Well-chosen niches can pave the way for agencies to accelerate above-average growth when those market segments experience success."

For example, despite slowing growth in U.S. health care costs, health care-related business growth continues to reliably outstrip gross domestic product (GDP). “For agents, specialization in this segment could translate to a higher growth rate in liability and workers compensation premiums, as well as commissions via a solid, recession-resistant growth area in any community," Caldwell wrote.

However, diversification is “a very strategic move that takes time and it has to prove itself," Germundson notes.

One example is Gunn-Mowery in Lemoyne, Pennsylvania, which Greg Gunn, CEO and president, said started to diversify “pretty heavily" in 2000. This put the business on a strong financial footing for the 2008 crash. “We didn't grow as fast, but we didn't go backward either," he says.

Today, Gunn-Mowery is 50% commercial lines, 30% benefits and 20% personal lines. However, in the early 2000s, it was heavily construction oriented. When the Great Recession gripped the economy, new construction halted. “But the fact that we diversified, and we weren't all in with construction meant that we survived it pretty well," Gunn says.

While it is not a short-term path to recession-proofing, there are two ways to diversify your book: “build it or buy it," Germundson says. “Even then, it depends on your expertise, geography and passions."

Germundson also points out that building a diversified business means “you have to staff up," he says. “In this environment, that in itself is difficult, but then you have to pay the wages that the marketplace is commanding. Unless you've got some capacity and some connections to an insurance market or an industry, most will look at buying a book to diversify."

The virtual world has made building a book much easier, particularly when expanding geography. “You can market anywhere, and we have agents that operate from coast to coast," says Jeff Rommel, personal lines sales leader, Nationwide. “I think that provides an element of diversification that helps with resilience."

“Agents can go to the markets where there are growth opportunities and can slow down where the opportunities aren't as great as they once were," Rommel says. “The adaptability of independent agents right now is key."

“Nobody wants to be a one-trick pony in anything," agrees Eric Coleman, senior vice president of small business insurance, Nationwide. “Having just a single thing that you're good at limits your ability to grow, but it also narrows your options when that particular segment of business is harmed by something like a recession."

“I encourage agents to have as wide of a berth as they possibly can in the expertise that they have," he says. “And then be able to intersect with the marketplace digitally, as well as the old-fashioned way that a lot of us grew up in."

2) Carrier Relationships

In October, State Auto ceased writing all personal lines insurance. Elsewhere, Arrowhead General Agency announced that QBE would not be continuing the Core Commercial program, which would affect 30,000 insureds and accounted for $165 million in premiums, according to an email sent to agents.

Meanwhile, in two examples of evolving carrier appetites in the hard market, the president and CEO of W.R. Berkley revealed that the company was reducing its appetite for professional liability, but increasing its appetite for property-cat reinsurance. Soon after, Allstate announced it will no longer write new home and condo business in California. In addition, it plans to exit commercial insurance in five states.

The combination of a hard market and looming recession is adding strain to carriers, which is resulting in a swell of changes. As carriers exit certain lines of business, agents may be forced to remarket large chunks of their book.

“When we've had that happen, we've communicated with the carrier to try to figure out if we could find a win for both of us," Gunn explains. “We'll say, 'maybe we can help you get you out faster if you allow us to move accounts midterm.' It doesn't always work, but sometimes there are win-win scenarios where you can both get what you need to be accomplished."

Crucially, when a client is nonrenewed by a company backing out of a market, “we start looking for a new carrier right away," Gunn says. “It's important for us to be proactive because you want to tell your client right away, but you don't want them to panic. Make sure you are actively working to find a solution when you tell your client that the carrier is pulling out."

The average independent agency is appointed with six commercial lines carriers, according to the 2022 AUS, with larger agencies leveraging more. However, agents must be strategic about the lines of business they write in relation to their carrier appointments.

“When we market to new lines of business, we go after a line of business which our top three companies are all really good at it," explains Tom Ahart, CEO and chairman of Ahart, Frinzi & Smith in Phillipsburg, New Jersey. “If one decides they want to get out, it's highly unlikely that they're all going get out at the same time, which has been very successful for us."

“It's also really important to have a good relationship with wholesalers," Ahart continues. “As companies get out of certain markets, you'll find that there aren't many voluntary companies that are running that line anymore, and it's really important to have access somewhere else."

Yet, while a carrier exiting a market is “very upsetting because you're losing a lot of your book, and it's very difficult to replace, you can and should keep that relationship strong by going after new business that is within their appetite," Ahart says.

3) Cash Flow

Ahart has ridden the waves of various economic cycles throughout his 40-year career, but the 2008 recession hit his agency particularly hard because “we'd just expanded and added an office in Virginia," he recalls. “We were basically starting from scratch with financing, and when the recession occurred, it put a crunch on cash flow."

A defining characteristic of the 2008 crash was “the credit crunch," which refers to the decline in lending activity by financial institutions. Whatever the financial condition of your agency, “you have to make sure you have enough excess cash to be able to handle everything without having to go borrow money, because it's very tough to do that during a recession," Ahart says.

Meanwhile, reducing the time agencies spend on collecting premiums, notifying customers, reconciling accounts and calculating premiums will not only help agencies manage their cash flow more efficiently and remain resilient during a recession, but it will also free up staff to concentrate on looking after business. Additionally, modernizing the payment process will help agencies keep up with other online competitors and improve customer satisfaction amid increasing digital expectations.

“Electronic payments shorten collection time, reduce check processing tasks and speed up deposits so you can settle your payments fast and drive a more profitable book of business," says Allan Lacoste, chief payments officer at Applied Systems, which launched digital payments solution Applied Pay in October 2022.

“Time spent notifying customers of payment due dates and reconciling transactions back to core agency management systems are a thing of the past," he says. “Automated accounts receivable reconciliation reduces workload inefficiencies and eliminates the need for specialized personnel to manage payments."

With economic trouble ahead, many business owners are already planning for pressure on their cash flow. Last year, 58% of small business owners have looked for ways to reduce business expenses, according to a recent Agency Forward survey by Nationwide, with 38% saying they have used personal savings to support their business and 22% saying they canceled or postponed a major business investment.

Meanwhile, 48% of small businesses expect their insurance premiums to increase over the next six months, according to Nationwide, and 24% expect more budget cutting ahead as times get tougher. Alarmingly, 51% said they are likely to decrease coverage or limits to reduce expenses in a recession.

Premium financing could provide a solution to both keeping businesses liquid and ensuring they have adequate protection.

“Higher premiums mean the customers can choose to purchase less or to not purchase at all. But the best way to keep someone insured with the right coverage when the prices are rising is to give them a monthly payment that they can afford," says Todd Greenbaum, CEO of Input 1, which provides digital billing services and payment solutions to the insurance industry.

“When you create an affordability component, it means that you're going to be able to sell more insurance," Greenbaum says. “If you structure it correctly, someone may be able to buy a higher level of insurance because it's now stretched out over the policy term. It's all about cash flow."

In December, the Federal Reserve boosted its benchmark rate a half-point to a range of 4.25% to 4.5%. As the Fed continues to combat inflation, it forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023.

For premium financing, “interest rates can be deceiving," Greenbaum points out. “Just give them the monthly payment they can afford and let them get back to dealing with the recessionary impact on their business."

Premium financing is not a new way of collecting premiums, but the digital revolution has empowered agents to turn it into a simple, seamless experience, providing another opportunity to the client experience and allow both clients and agents to focus on their business.

“Whether you're dealing with distressed customers or fewer customers, you need speed and efficiency—no friction," Greenbaum says, noting that digitalizing payments can facilitate digital touchpoints, cross-selling opportunities, automated payment reminders and personalized service and communications. “Figuring out a way to remove all of the reasons why financing is complicated and stressful enables insureds to keep their insurance in-force, so you get back to running your business."

“Make it easy for them. Get out of their way. Let them get back to running their business," he adds. “Insurance should not be in the forefront of your client's mind unless they have a claim. Otherwise, it should be very forgettable."

4) Technology

After a staggering $9.96 billion and $10.37 billion was poured into InsurTech in 2019 and 2020, respectively, investment in InsurTech fell by an astonishing 79.6% in 2021, according to GlobalData, which also found that 2022 showed little sign of growth.

While recessions are unlikely to have such significant effects on independent insurance agency investment, inflation and increasing overheads will eat into net profits. However, unlike InsurTech investors, 61% of independent agencies planned on making investments in technology last year, according to the "2022 Independent Agent Magazine Readership Survey" conducted by Readex. If those dollars are invested in the right places, it could protect revenue streams as the economy falters, as well as underpin growth in the long term.

“To maintain net income, independent agencies will need to attain the productivity benefits that technology has promised but has rarely delivered in this sector," says Tasos Chatzimichailidis, chief insurance executive, COVU, an InsurTech designed to help independent insurance agents better manage their business.

Back in 2018, only 16% of digital transformation investment successfully improved business performance and created sustainable changes for the long term, according to McKinsey. Yet, in some instances, the boom in investment, simply means that it is more difficult than ever for agencies to find the best solution for their needs.

To choose the best solution, “having a clear understanding of the people and process implications and dependencies within a technology implementation is critical," Chatzimichailidis says. “This is the time to act, but agency leaders need a holistic plan for how to achieve ROI."

“The ROI calculation is rather simple, but each variable or data point needs to be accurate," Chatzimichailidis adds. He recommends starting with defining how much time is saved, as well as how staff time will be used once the technology is implemented, and dividing that by the cost of the technology combined with the cost of embedding the technology.

In addition to ROI, “agencies should look at how technology can shift the business model," he adds. “This holistic approach drives positive outcomes and goes beyond just adoption of new tools."

To do that, agencies must have a management system that can support multiple lines of business, both personal and commercial p-c and benefits, and provides operational agility to shift focus and cross-sell into more profitable lines of business.

“One digitally connected system can manage the entire process including identifying opportunities to grow and market, quoting and binding the policy, managing online payments, servicing the policy online, and triggering renewal workflows to begin the entire process again," he says. “Having both the front and back office connected in a single system creates efficiencies and ensures one source of truth on customers and prospects alike." 

Highly digital agencies grew faster than their less digital counterparts in 2021, according to the Liberty Mutual and Safeco Insurance “2022 Agency Growth Study," which divided agencies into three groups: low, medium and high digital adopters, based on the number of digital tools they used. In 2021, low and medium digital adopters grew their revenue an average of 10% year over year, but high digital adopters grew 17% year over year.

“Quite simply, since the start of the pandemic, the strongest agencies have one thing in common: They have invested to become digital agencies," says Anupam Gupta, chief product officer at Applied Systems. “Agencies looking to accelerate out of the recession need to focus on investing in and building the growth engine fueled by technology now."

5) Hiring

While 79% of business leaders expect a recession this year, only one-third are feeling “very prepared," according to Aon's “2022 Executive Risk Survey," based on 800 interviews with C-suite and senior executives from companies with over 500 employees.

Regardless of their perceived level of preparedness, these companies are split on the impulse to slow hiring, according to the report, with half saying that they will slow or freeze hiring. However, it's a slightly different picture for small businesses. The Nationwide survey found that 38% have already paused or plan to pause hiring, and roughly 4 in 10 report they are not planning to offer raises or bonuses to their workers this year.

Despite posting two consecutive quarters of negative GDP during the first half of 2022, the U.S. employment market has remained strong, which is illustrated by the fact that 28% of small businesses still plan on hiring new workers in the next six months, according to Nationwide. However, a deeper recession this year will add another layer of complexity for agencies looking to hire or retain staff amid a fierce battle for talent.

“In times of uncertainty, many individuals put off career moves in exchange for the stability of their current positions. We recently experienced this in the earlier stages of the pandemic," says Brett Carter, managing director, The Jacobson Group. “However, this lack of movement then served as a catalyst for the Great Reshuffle of talent in 2022."

“Employed candidates may be more hesitant to take on new positions during a recession, especially if they are not actively looking," Carter says. “Agencies will need to be able to communicate a sense of stability, as well as a commitment to potential new hires' success and longevity with the organization."

If agencies fail to communicate stability, “top talent may start exploring their options if they feel their current company or role is unstable or unable to meet their professional goals," Carter says. “This creates a two-fold opportunity to retain current high performers and focus on their long-term career paths, while also presenting a chance to potentially bring in individuals with new skill sets and areas of expertise who may otherwise not be available."

Meanwhile, at the end of the third quarter of 2022, wages for private-sector workers were up 5.2% from the previous 12 months, albeit slowing from 5.7% in the middle of the year. These increases were still outstripped by inflation, which has hovered around 8% for over a year.

If finding, hiring and retaining workers wasn't a big enough challenge, the wage-price spiral piles on more anguish for agencies aiming to hire workers, particularly as they seek to offer a competitive compensation package without going overboard on fixed costs.

“Regardless of the state of the economy, it's important to be creative and flexible in your total rewards plans," Carter says. “Ensure employees are being paid a competitive salary, offer as much flexibility as possible and understand what each individual values in terms of compensation."

“This could be additional vacation days, the ability to create their own schedule or full-time remote work, among many other things," he adds. “Understand what matters to each employee and strive to meet their needs to the best of your ability."

6) Communication

In September 2008, AIG's credit rating was downgraded by Fitch, Standard & Poor, and Moody's to below a AA- rating, which represented a major moment in the financial crisis. AIG lost $99.2 billion before the Federal Reserve Bank of New York stepped in with an $85 billion loan to keep the company from going under.

While he watches ratings carefully, Gunn doesn't make a huge distinction between A ratings if a carrier is downgraded by a single step, “but if they drop from an A- to a B+, that's a cause for alarm," he says. When AIG's rating dropped, Gunn alerted his clients and “some of them wanted to stay and some of them wanted to leave," but the lesson is that “you need to be proactively communicating and talking to your clients about what's going on."

Compared to 2008, today's hard market adds a new dimension to the next recession. In 2023, most casualty lines will see an increase, according to “State of the Market" by Risk Strategies, which notes that auto insurance rates are expected to rise 5%-10%, general liability rates will rise 2%-5% and umbrella rates will rise 5%-10%.

However, consumers value good communication from their agent over price, which means “it's important agents reach out proactively to all clients to explain rate changes," says Torey Maerz, CEO of ClientCircle, formerly known as Rocket Referrals. “Customers are less likely to leave if they understand why their bill has gone up."

“As you identify customers who are going to see an increase in premiums, we recommend segmenting them into lists and reaching out to each customer group in a unique way—by calling, setting up email and text campaigns, and even via regular mail," Maerz says. “Talk about expected changes, offer to look at alternatives and suggest bundling policies."

“The more confident, proactive, helpful and empathetic you are, the better you will do," he adds. “Don't be quiet. Keep sharing useful content and advice."

Reaching out to clients to offer reassurance is a three-step process, according to Rommel. “First you've got to reach out to understand what pressures the customer is facing, because each one is different," he says. Second, “educate the customer about what's going on. There's so much noise out there that you can help them understand all the things that are going on."

The third step is “providing solutions," he adds. “There might be a few different options, but if you're walking them through it, this is when an independent agent has enormous value—and a 1-800 number has very little."

7) Renewals

Among Best Practices agencies of all sizes, revenue growth from commercial property-casualty renewal business is at least 96%, according to the 2022 Best Practices Study. For personal lines it is at least 92%. In comparison, the overall independent agency renewal rate is 84%, according to Reagan Consulting.

The value of renewal business is no secret—and a few considerations make it hard to disagree. First, the cost of acquiring a new customer is largely considered to be five times the cost to renew one, according to various sources. Second, increasing your renewal rate by 5% can increase profits by at least 25%, if not more, according to a 2014 study by Bain & Company.

Third, renewals add to client lifetime value (CLV), which is calculated by deducting the cost it took to acquire and renew a customer each year from the revenue they deliver to the agency. In theory, the more times a client renews, the higher their CLV.

However, in a recession, consumers tend to reevaluate their expenses to reduce spending and may see insurance as an expense they can lower or cut out altogether, especially if they see an increase in their rates.

“Even if the rates remain steady, personal circumstances affecting income may force your clients to look for ways to save money. One of their options is to shop around to find a better price," Maerz says. “This is especially likely to happen if you haven't built trust with your clients during your time as their agent. If they don't feel like they have a relationship with you or that you provide valuable expertise, they won't have many reasons to stick around."

Importantly, for clients who are net promoters, their CLV is even higher, more than twice that of a passive customer and about five times that of a detractor, according to Bain & Co, which also notes that, while higher value mostly occurs through longer retention, value can be boosted further by cross-selling and referrals.

Holding multiple policies creates loyalty and increase the likelihood of renewals, explains April Pitz, director of RLI and personal umbrella markets at the Big “I," who identifies two areas in your personal lines book that are primed for cross-selling opportunities: umbrellas and home business insurance.

“It was often thought that only the wealthy needed the additional liability protection of a personal umbrella," Pitz says. “The majority of consumers were never offered that coverage because the chance of an 'average Joe' being sued was considered to be very low."

However, simply getting involved in a car accident, a house guest falling down the stairs or even revenge for leaving a poor online review could quickly erode personal liability limits. “At a time when consumers are looking to agents to help save them money, a personal umbrella is an affordable way to help safeguard their financial stability," Pitz says. “Agents should be offering every customer the additional liability protection of a personal umbrella."

Meanwhile, more than 15 million businesses operate out of people's homes, according to the U.S. Small Business Administration. If the next recession is met by a similar level of layoffs that saw unemployment reach 10% in October 2009 and 14.7% in April 2020, the home business sector—fueled by a preference to work from home—is likely to grow.

“Unfortunately, most of those businesses are uninsured or underinsured because agents often don't ask about home-based business exposures and consumers assume their homeowners policy provides adequate coverage," Pitz says.

At renewal, agents should ask about home-based business exposures. “Doing so helps protect the customer's interests and guards against an agency errors & omissions claim," Pitz adds. “It also gets the agency in at ground level on selling coverage to a new business that could grow significantly over time."

In addition to cross-selling, “don't forget to actively work on win-backs," Maerz says. “Clients who left you in the past may be shopping around again. As people's needs change in a recession, you may be able to quote them a new policy."

8) New Opportunities

“Never let a crisis go to waste." While it is unclear who first said the phrase, it can apply to independent agents during an economic downturn. By targeting the right lines of business and partnering with the carriers that are competitive and have the appetite, “a recession presents some great opportunities," Ahart says, particularly when a buyer is faced with a choice between an independent agent and a captive agent.

Further, with technology enabling a hybrid work environment and expansion into new geographies, agencies can both grow their business and attract talent.

Coming off the back of a global pandemic when “we all thought we were going down the tubes, we navigated it and we learned a couple things," Gunn says. “One is don't panic because there's really a lot of opportunity to grow."

Are independent agencies recession-proof? “I think it's more recession-resilient," Rommel says. “We've had experience with a lot of unique crises over the years, but every time the independent agency world finds a way to survive and then ultimately thrive. When times get tough, that's when the best independent agents tend to rise."

Will Jones is IA editor-in-chief.