Were you in business back in December of 2007 when the “Great Recession” hit? I was, and it was painful. It was the longest lasting recession since World War II. GDP fell by 4.3% and housing prices plummeted by 30%, according to the Federal Reserve.
Just the other day, while searching old files for an unrelated issue, I came across a letter I wrote to shareholders of my privately held PEO company back in September 2009. In the letter I report that as a result of the recession we lost over 17% of our revenue.
Like many business owners, I didn’t see it coming, and I wasn’t prepared for it. Fortunately, we recovered our losses and went on to double our revenues over the next two years and beyond as the economy recovered.
Since then, I’ve taken a much greater interest in economics. I’ve been paying more attention to key indicators and expanded my knowledge by listening to podcasts, watching YouTube, and reading blogs. I’ve tried to stay on top of what’s going on, to understand what may be on the economic horizon and how my business will be affected, so I can plan accordingly.
The next recession will be here soon, and it will be worse than then the last one, largely because of the actions taken by governments around the world to artificially soften the blow of the Great Recession. Instead of allowing all the mal-investments to work their way out of the system naturally, our government flooded the economy with newly printed money and set interest rates at near-zero (see chart below).
The signs are everywhere that another, possibly much worse, recession is on our doorstep. Here are just three of them.
- Consumer debt is at an all-time high.
- Housing is slowing down.
- Inflation is growing.
Consumer debt is money owed by individuals for revolving loans (like credit cards) and non-revolving loans (like student loans and mortgages). As of September 2018, the Federal Reserve reports total consumer debt at over $3.9 trillion!
For the past 10 years, interest rates have been at their lowest point in history. Combine that with the massive infusion of newly printed money by the Federal Reserve (quantitative easing – QE), and you have a recipe for ballooning debt.
Much of the economic “growth” over the past four years has come from consumer borrowing, rather than spending previously accumulated wealth. Obviously, this practice is not sustainable, especially as interest rates rise. Once you stop borrowing, either because you’ve maxed out your credit, you can no longer afford to make the payments, or the interest just becomes too expensive, economic growth comes to a halt.
This chart shows you the historical “fed funds rate” which banks base their short-term consumer loan interest rates on. While not all debt is bad, debt fueled by cheap money is more likely to result in both businesses and individuals making poor purchasing decisions.
Just look at how low the interest rate has been since the Great Recession… and for how long. It’s crazy!
New home purchases have been declining despite reintroduction of nutty 2006 style borrowing incentives and super low interest rates. The shrinking demand for new housing is showing up in every industry indicator.
- Sales of existing homes is down.
- New home sales are falling month over month.
- Homebuilding permits are declining.
- Homebuilder stock prices are declining.
“The S&P Supercomposite Homebuilding Index is down 21% year-to-date and on pace to be the largest annual drop since 2008.”- Palisade Research – Adem Tumerkan September 25, 2018
Home prices are out of control and inflation adjusted incomes aren’t keeping up. I’ve seen this first hand here in Arizona where my wife and I looked to buy a home in August. We had just returned from a six-month road trip and we were renting before we left but we didn’t want to rent again, so we started home shopping. There was no shortage of options, but we quickly realized the prices were back to 2007 levels!
Now that mortgage interest rates are rising, the cost of ownership is even more unaffordable, and the housing market is reeling as a result.
The official measure of inflation, the consumer price index, published by the Bureau of Labor Statistics, has been manipulated to paint a much rosier picture than reality. The formula has changed several times since 1980, to the point where it is simply a ridiculous propaganda tool.
According to John Williams at shadowstats.com, the 2018 inflation rate is actually 10%, not the fluffy feel-good rate published by the BLS’s of around 3.5%. The difference is that William’s calculation uses the BLS’s methodology from 1980…. That’s it. That’s the only difference. Don’t be fooled! The reason the formula has been changed twice since then is because the federal government wants to pull the wool over your eyes and make you think they have inflation in check.
The best measure for inflation is the price of gold. Schiff Gold provides the following eye-opener; an infographic showing the difference between two savings scenarios (when you click the link, you need to scroll down a bit to find the infographic I’m talking about here):
Here’s my synopsis of the infographic:
- You store $3,500 cash in a safety deposit box in 1967 and take it out in 2017.
- Your friend stores $3,500 worth of gold (100 oz) in a safety deposit box in 1967 and takes it out in 2017.
The two of you go on a spending spree, here’s what each of you could buy:
- You could buy 1,500 gallons of gas with your cash. Your friend could buy 54,350 gallons with his gold.
- You could buy 2% of a new house with your cash while your friend could buy 63% with his gold.
- You could buy 470 burritos with your cash, but your friend could buy 16,700 with his gold.
- You could buy 10 round-trip flights from NYC to LAX with your $3,500 in cash, and your friend could buy 357 of these round-trip flights.
Basically, $3,500 in cash 50 years ago is still $3,500, but it buys a lot less than it did back then. On the other hand, $3,500 in gold 50 years ago is worth $125,000 today. That’s inflation. The dollar has lost some serious purchasing power whereas gold has retained it.
Insurance Becomes Less of a Priority:
When times get tough, people look for any way to reduce costs and unfortunately, insurance is an easy target. Lowering limits to save some money on premium, or even canceling coverage outright – are easy ways to reduce expenses without causing any lifestyle changes.
Whether you write P&C, Life and Health, commercial lines or personal lines, premiums during a recession go down. They did in 2008 and 2009, and they will again when the next one hits.
So, how can you prepare your agency for this upcoming recession and… dare I say it, even grow your business at the same time? By helping your clients prepare – by giving them information and options.
You’ve heard the saying, “The best defense is a good offense”, and that’s exactly what you need to be doing now, before your clients start suffering the financial impact of the recession and cancel their insurance. You can get out in front of the problem by implementing a communications campaign that starts the conversation about what’s on the horizon and offering tips on how to prepare.
Start emailing your clients now, two or three times a week (I know that sounds like a lot… but do it!), with a short message about the upcoming recession, why it’s important they create a response plan for their business and/or for themselves personally, and how to prepare. This will take a bit of research and writing on your part, but it will be a rewarding exercise. You’ll learn as you do the work, and your clients will see you as both knowledgeable and caring about their success.
During a recession a lot of things are happening that affect insurance. Business revenues are down, locations are closed, employees are let go, assets are sold, and operating expenses get scrutinized. For individuals, they might lose their job, have their hours reduced, get transferred, need to sell a car, downsize their housing expenses, and like businesses, take a good hard look at their living expenses.
This is a good time to review your clients’ coverage needs and come up with a plan for how you can help them lower their premiums. If you have sold a policy where the premium is based on an estimate, and split into monthly installments, you need to have the premium re-rated and the payments adjusted.
For example, a products liability policy where the premium is based on sales will need to be re-priced, so your client isn’t overpaying. If your client has financed some non-standard premiums, you’ll need to contact the insurance company and the premium finance company to have the payments adjusted.
If you’re writing workers’ compensation insurance, then a recession is the perfect time to consider placing your client with a PEO. The flexibility is unparalleled. A PEO can help your client save money by leveraging the PEO’s HR, payroll, risk management, and employee benefits admin staff, and reducing your HR costs (yes, I’m talking about laying people off). Not to mention the savings that can come from replacing your current employee benefits with the coverage offered by the PEO.
Speaking of employee benefits, health insurance might be the first coverage to get hit. Employers will want to shop around for lower costs and employees might need to cancel their coverage.
You should become familiar with the other health care options like direct primary care and healthshare organizations. This is a good idea regardless, as both solutions have been growing by leaps and bounds. Just be aware that your E&O insurance doesn’t cover you for claims involving your placement of clients with these non-insurance solutions.
Your cross-selling opportunities will increase as a result of your ongoing communications and by demonstrating your interest in your client’s insurance costs. You’re not just in this for the commission, you genuinely care about their business and personal financial well-being.
This next recession has all the ingredients necessary to be worse that the Great Recession of 2008 because the federal government jumped in and artificially arrested the correction by printing gobs of money and waiving the magic interest rate wand to drop the rate to almost zero.
Turn the next recession from a wealth reduction to a wealth creation event by preparing your agency for it now. Help your clients understand, and weather the storm. They will refer their friends, give you more of their business, and look at you as their business advocate; and not just another vendor selling something they are forced to purchase.