Brokers gain in rough economy

Brokers frightened of a recession should bear in mind that the worst decade for the British economy since the last war - the 1970s - were boom times for the broking sector.

We know that a property and casualty insurer is a mutual fund with an expensive hobby. When the mutual fund does badly then the expensive hobby has to pay its way. Although Munich Re recently claimed that there is $100bn of excess capacity in the reinsurance market to be soaked up before rates can harden, we must expect that the hit to assets over the last two months has eaten into this number significantly. The majority of delegates at Monte Carlo in September believed that a hardening was due at the end of 2009, however, now we ought to think that this will happen sooner and be firmer.

Most brokers still rely on commission rather than fees principally, so any hardening in rates flows directly through the profit and loss account. Although volume-related commissions tend to decline in a hardening market, as insurers decide that they can afford more choice regarding the business that they are attracting, we would expect this to be offset by the increase in premium levels.(Admittedly, if you have built your business model on servicing the insurance needs of buy-to-let operators then the next couple of years are unlikely to be the most remunerative of your career.)

Losses rise sharply in a recession as buildings mysteriously catch fire and the gains from theft and fraud improve relative to an honest wage. The cost of many insurance programmes are driven more by the replacement or rebuilding cost of assets than they are by the profitability of the business that owns them. Even where revenue drives an insurance programme's costs - as with many liability and business interruption classes - premium increases tend to delay and offset this effect. Finally, staff costs fall as unemployment rises and occupancy costs drop, as do marketing costs.

Peter Allen, partner, Grant Thornton.