Did commissions fall during the
last recession? They sure did,
according to the new data from
the Internal Revenue Service that illustrates
the steep challenge agencies faced in
the recession and explains some permanent
changes in the distribution channel.
Commissions that sole proprietor
agencies and brokerages have deducted
on their tax returns fell to $1.7 billion in
2009, down from the roughly $1.8 billion
recorded in both 2007 and 2008, indicates
the IRS data.
This information appears in the annual
IRS publication, Sole Proprietorship
Returns, for years 2007 through 2009.
The 2009 figures, all of which are estimates
based on sample tax returns, just
came out this August.
These findings confirm widely circulated
anecdotes about carriers cutting
compensation in health insurance,
annuities and some life policies. The cuts
are said to be part of overall cost control
measures, instituted due to the recession.
Product sales may have slowed to a
point during the recession where commissions
suffered in comparison to prerecession
years when sales were more
brisk. The commission decline occurred
even as sales or "business receipts"
went for a roller-coaster ride. Receipts
increased to $27.6 billion in 2008 from
$26.3 billion the year before but then
dropped down to $26.8 billion in 2009.
"The numbers are showing that, as
margins were squeezed due to recessionary
pressures, the cost of doing business
for agents continued to increase," says
NAIFA President Terry K. Headley.
Top line revenues became more compressed,
so carriers and agents cut back,
In short, sole practitioner agencies and
brokerages were having a very "difficult
time," says Headley, president of Headley
Financial Group, Omaha.
How They Responded
The IRS numbers hint at answers to key
questions about how insurance agencies
and brokerages responded to the tough
conditions they faced. Here are three for
1. Did sole proprietor agencies and
brokerages suffer so much that some
just didn't file tax returns? The answer
is no. The data shows that the number of
these returns actually rose steadily during
the three-year period-increasing
from 328 million in 2007 to 338 million
in 2008 and 353 million in 2009.
Headley says this growth could be a
reflection that more advisors who were
in agencies-such as career agencies or
larger life agencies-decided to go out
and start their own independent practices.
If that were the case, more agencies
and brokerages would have started filing
taxes as sole proprietors, he explains.
However, an opposite trend may have
been at work as well. This involves
agents deciding to convert from sole
proprietorships to LLC and S Corporation
status. NAIFA started noticing
the trend about three or four years ago,
Headley says. Agents have done this to
avoid the self-employment tax on earnings
that sole proprietors must pay and
thus recognize more net income, he says.
It is possible that the IRS tax return
numbers are reflecting both more agents
signing up to be sole practitioners and
more agents leaving that status to become
LLCs and S Corporations. However, the
data does not show this one way or the
2. Did agents stop advertising during
this period? In general, yes, but with a
zig and a zag. In 2007, for instance, they
reported advertising expenses of $759
million. But the very next year, during
the heart of the recession, deductions
for advertising expenses plunged to $54
Since many consumers were nervous
about making long term purchases at the
time, the agents may have just decided to
stop advertising that year, Headley posits.
Worth noting, however, is that
expensing for advertising picked back
up again in 2009-to $733 million,
according to the IRS data. Perhaps the
sole proprietors were starting to believe
that the worst of the recession was
3. Did sole proprietor, home-office
business deductions for agencies and
brokerages rise? You betcha, but not in
a predictable way. One might expect that,
due to the recession, more agents and
brokerages would have closed their small
rental offices and started selling from
their homes or their cars. That would be
an expense-cutting move. However, what
actually happened is that home-office
business deductions plunged to $75 million
in 2008 from $160 million the year
before. Then, in 2009, they jumped back
up, this time to $164 million.
The 2008 falloff could be a glitch in the
data. Or, it might be a sign that many sole
proprietor agencies just didn't do enough
business from the home in that darkest
hour of the recession to justify taking
deductions for the office at home.
The Biggest Question
How did these agencies and brokerages
fare overall? Their net income
suggests they found ways to bounce
back. Despite falling commissions, rising
expenses and possibly reshuffling
their business status, they reported an
uptick in profits in 2009-to $10.2 billion-
from 2008's $10 billion.
Of course, the 2009 number is not as
high as 2007's $10.3 billion. But then the
recession did not really get started until December 2007. For much of that year,
agencies and brokerages were selling in
a fairly stable environment.
A point to keep in mind is that the IRS
data for "insurance agencies and brokerages"
is not a defined set of agencies and
brokerages, as the industry knows them.
For instance, the IRS materials do not
indicate whether that category includes
property and casualty agencies as well as
life, health and annuity agencies.
Another category, "insurance agents,
brokers, and related activities," refers to
the above category ("insurance agencies
and brokerages"), as well as firms
in employee benefits and several other
areas (but again, P/C is not mentioned).
The IRS says it uses the North American
Industry Classification System
(NAICS) Code to classify its data. A
search of the NAICS databank reveals
that "insurance agencies and brokerages"
comprise "establishments primarily
engaged in acting as agents (i.e., brokers)
in selling annuities and insurance
policies." But the description does not say
which "insurance policies" it means.
Some P/C observers are treating the
"insurance agencies and brokerages"
data as applicable to their side of the
industry, while some life-annuity practitioners
believe it is more reflective of
their own side of the business. (The latter
is a more likely possibility since the
insurance data is couched in a section of
the report - called "Finance and Insurance"-
that also includes data for investment
firms, which often will "go with"
Those caveats aside, the fact that
agency/brokerage profits returned to
nearly pre-recession levels in 2009 may
be an indication that sole proprietor
producers have found ways to adjust to
the demands of the new environment.
Future IRS reports will indicate whether,
and to what extent, this proves true.
"The landscape has changed dramatically,"
Headley says. "It's a different environment."