Small businesses are thirsty for credit, and that is giving nonmedical benefits sellers a sore throat. Prices for products such as group life, group disability, group dental and group vision are reasonably stable. The Bureau of Labor Statistics says U.S. employers were offering roughly the same mix of those benefits in March 2010 that they were offering two years earlier, before all hell broke loose. But the total number of full-time workers fell to $111 million in 2010, down 6% from 2008.
In the first half of 2010, the shrinking average case size cut group long-term disability (LTD) enrollment 2% and group life enrollment 3%, according to the South Portland, Maine, office of Gen Re.
At dental plans, the shrinking average case size cut enrollment 5.7% in 2009, to 166 million, according to the National Association of Dental Plans, Dallas.
One reason for weak employment is weak sales, and another is worries about taxes and government regulations. But another is the fact that, for the small businesses that generate the bulk of a typical benefits firm's new sales, the credit climate seems to be stuck in October 2008, if not March 1933.
Banks and thrifts with more than $1.1 billion in assets originated just 4.3 million business loans with principal amounts under $100,000 in 2009, down from 9.9 million in 2008 and down from 13 million in 2007. The total lent through those loans plunged to $61 billion, from $115 billion in 2008, according to the Federal Financial Institutions Examination Council.
The real estate crash may have knocked another $24 billion off of small business credit flow, by reducing owners' ability to use homes as collateral, according to researchers at the Federal Reserve Bank of Cleveland.
Benefits producers who belong to United Benefits Advisors, Indianapolis, a group for independent benefits firms, said the effects of the small business credit crunch are obvious.
Today, "getting business credit is difficult even for Triple A risks," said Andrew Torelli, president of e3 Financial Inc., Newport Beach, Calif.
Carol Taylor, a benefits analyst at Beacon Benefit Consulting, Jacksonville, Fla., said the current business climate in Florida is much worse than it was during the recessions in the 1980s and the early 1990s.
"Back then," she recalled, "we actually had startups."
Today, the new business owners Taylor sees struggle to do without employees, or hire only part-time employees, in part because of the fear of trying to meet payroll without having reliable access to credit. In some cases, she has watched owners getting what amounts to short-term, emergency credit from employees by paying employees late.
ODDS AND ENDS
Insurers in the nonmedical benefits market will face many other challenges in 2011, including the aging of baby boomer insureds, the effects of low or volatile interest rates on investment portfolios, management pressure to focus on "core operations," and direct hits by (or collateral damage from) the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Affordable Care Act.
Vincent Wolf, an executive vice president at Cowden Associates Inc., Pittsburgh, is hoping the 2014 implementation date for many Affordable Care Act provisions will create a lull that will give employers time to think about nonmedical benefits. Employers that have been using informal salary continuation arrangements to handle short-term disability claims (STD) might notice, for example, that formal STD programs have done a much better job at holding claims steady during the Great Recession, Wolf said.
Mike Thompson, a partner at PricewaterhouseCoopers L.L.P., New York, expects to see renewed interest in making disability plans more efficient by integrating STD and LTD coverage.
Torelli, whose firm mostly serves high-end service firms, has detected some interest in increasing top monthly disability benefits limits.
Down in Florida, Taylor said she is already getting questions about the Affordable Care Act. Some employers are asking about how few employees they have to have to avoid various act requirements. "Everybody's trying to plan ahead," Taylor said. "Three years is not that far away."
One obvious move is to help an employer put any benefits that can be carved out of the medical plan in a separate plan, even if the same carrier will continue to provide the coverage, Thompson said.
Krys Reid, a principal at Tower Benefit Consultants Inc., Virginia Beach, Va., comes from Canada. His firm has been focusing on nonmedical benefits, and gap-filling medical products, such as critical illness insurance, that fall outside the scope of the Affordable Care Act.
Despite having a government-run health care system, Canada still has many successful benefits brokers, Reid said. "They're simply not selling medical benefits."
Overall, Thompson is cautiously optimistic that employment will grow a little in 2011; Torelli describes 2011 as "promising."
THE 900-POUND GORILLA
IN THE CORNER
How well benefits firms really do in 2011 will probably depend on whether small businesses can get someone, anyone, to open the credit spigot.
The overall small business outlook seems to be improving.
When the National Small Business Association (NSBA), Washington, surveyed small business owners in July 2010, 44% said they expect gross revenue to increase in the next 12 months, up from 30% a year earlier.
Congress has tried to fill the small business credit gap with a provision in the Small Business Jobs Act of 2010 that will provide $30 billion in federal financing for bank small business lending programs.
Federal bank regulatory agencies have issued a joint statement encouraging lenders to consider factors such as strength of management, along with credit scores, when evaluating small business loan applicants.
"Financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for loans made on that basis," the agencies said.
But the agencies provided a long description of what a "comprehensive review of a borrower's financial condition" might entail, and, in October 2010, the Federal Reserve Board's senior loan officer survey suggested that credit conditions are improving much faster for businesses with more than $50 million in annual revenue than for smaller firms. Loan officers were a little more likely to say they had eased credit standards for firms with more than $50 million in annual revenue than for smaller firms, and they were much more likely to say they had eased provisions such as maximum loan maturities for the bigger firms.
PayNet Inc., Chicago, a credit data firm, says small business lending is significantly stronger than it was in mid-2009 but still about 30% to 40% lower than in 2006 and 2007.
The U.S. Small Business Administration (SBA) is supposed to try to ease the crunch in March by adding the Small Loan Advantage and Community Advantage loan programs, which will serve small businesses in underserved communities.
Goldman Sachs Inc., New York, says it will invest $300 million in community development financial institutions, to help those institutions lend more to business owners.
Sam's Club, a division of Wal-Mart Stores Inc., Bentonville, Ark., is working with an SBA lender to offer loans of $5,000 to $25,000 to small business member owners.
Insurers face rules, such as anti-tying rules, that Sam's Club doesn't face. But, for benefits producers, the idea of insurers doing something to revive the small business lending market has some appeal.
"I would love to see them get into the banking business," Reid said.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.