If banks are freed from some of the restrictions placed on their lending and business practices by Dodd-Frank, it could be good news for some commercial insurance brokerages that serve them, says Eileen Yuen, a managing director at Arthur J. Gallagher & Co.
Like many observers, Yuen doesn’t believe a total repeal of the law is likely. But she adds, “We might expect to see some of the regulations relaxed in the form of new legislation, particularly with regard to deregulating financial institutions.”
The potential for deregulation coupled with tax reform could give a boost to banks, which would increase lending and therefore improve cash flow, Yuen says. That, she says, could lead to an uptick in merger and acquisition deals among banks.
“From an insurance perspective,” she says, “this means we as brokers may see a rise in purchases of reps and warranties coverage—more transactions mean a greater focus on indemnification, and we can help clients attend to this through a transactional risk product like reps and warranties.” Reps and warranties insurance provides coverage for a breach of a representation or a warranty in a purchase or merger agreement.
“We’ll also be paying close attention to how insurers may respond to a greater volume of M&A transactions,” Yuen says. “Will more deals translate to more claims? If so, we’ll watch for a tightening in underwriting for acquisitive institutions, more prevalent dedicated M&A retentions, and potential changes in other terms as well. Of course, as the legislation shifts, we must keep an eye on how regulatory change might need to be addressed from a coverage perspective.”
Since Dodd-Frank took effect, “there’s been a very direct tightening of the banking system,” says John Ward, founder of Cincinnatus Partners, an Ohio-based private equity firm specializing in the insurance industry. Lending has dried up for small business, which has contributed to the dampening of economic growth, he says.
“That’s had an impact on agents and brokers because their business depends on the headwinds and tail winds. Headwinds hamper organic growth, tailwinds help it,” Ward says. “Whatever dismantling or rollback will have a big positive impact because there seems to be a renewed commitment to a pro-growth economic agenda that will only help” agents and brokers.
Ward projects many smaller agencies will see a “pickup” in their internal perpetuation plans as the reins of lending are loosened.
The impact on captive insurers and the brokers who serve them is less clear, particularly if changes are made to the Nonadmitted and Reinsurance Reform Act provision in the law, says Mark Morris, senior vice president for risk finance at Lockton. The NRRA was really designed to streamline collection of premium taxes on non-admitted insurance transactions, and in most states captives fall under that definition.
“There has been an impact on some captive domiciles in terms of whether the taxes would apply and, if so, what the magnitude of those taxes would be,” Morris says. In some cases, the tax question discourages companies from forming captives or encourages them to move existing captives to another jurisdiction.
Due to the complexity of Dodd-Frank and potential impending changes, “this is where we as brokers earn our stripes,” he says. “It’s made consulting more complex because of all the nuances that have changed recently.”