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In the slow lane: a recession’s implications for insurance

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Ciara Izuchukwu examines the potential impacts of the impending recession on the insurance industry and how companies can ensure they are well positioned to weather it

Since 2010, businesses have experienced a period of economic growth, driven by technological improvements. Innovation has changed customer preferences and provided new communication channels, leading to an increase in demand. However, this growth now appears to be leveling off. With the war in Ukraine and the aftermath of the COVID-19 pandemic to contend with, the insurance industry has entered a turbulent era – and we could be heading into a recession.

A recession is a significant decline in economic activity that extends throughout the economy and lasts for more than a few months. According to the World Economic Forum, the indications that we are experiencing a global slowdown are not only evident but also growing. Manufacturing is declining in Germany, Japan and the United States, and even China, which has consistently high annual manufacturing output, is slowing. Other indicators of recession include high inflation; in the UK it hit a 40-year high in May 2022, and the Office for National Statistics noted in its July report that there had been an 8.8% rise in the price index consumption over the past 12 months. This means that the value of people’s disposable income is falling – and in an economy where every penny counts, this will impact the insurance industry.

A decline in demand for insurance products will perhaps be the first and most obvious impact. Although general insurance products are less elastic because they provide customers with the services they need, optional add-on features may become less popular as people look to cut costs. The insurance market is likely to become much more competitive, not only in terms of price, but also in attracting and retaining customers through better customer service – for example, personalized digital experiences.

In its household insurance premium tracker, the Association of British Insurers showed that the average price of home insurance fell by 7% and the average cost of contents insurance by 11%. Additionally, its car insurance tracker found that the average price paid for car insurance fell 5% – the lowest number in seven years. While this decline is likely to be temporary, it will alleviate some of the pressure on customers from the rising cost of living.

As assets lose value, the returns insurers make from investing their premiums will fall, so insurers will have to look for other ways to recoup the money invested. This may cause more insurers to question the efficiency of operations, such as claims settlement, to reduce costs, or to take out loans or financial reinsurance to ensure they have the levels of solvency required. At the end of April, the government’s Solvency II reform developments presented its plan to give insurers better access to their investments. This can help insurers mitigate losses and increase innovation.

Insurers should consider ways to reduce unnecessary expenses, but rather than downsizing or divesting assets, they should consider increasing operational efficiency and reviewing business models. The technology, people, products and decisions that result in sustainable growth need to be continuously invested, and more time needs to be spent considering the various risks taken. Constant attention should be paid to future customer needs and market segments that are likely to dominate.

It is important that leaders navigate the next economic phase with caution. If complacent, an insurer may fall victim to underperforming processes, making it unable to compete with other players. On the other hand, investing in the wrong assets, technologies or strategies to win more business can cause insurers to take on more risk than they can handle and increase spending beyond what is sustainable. .

The economic downturn is underway; insurers must find ways to reduce its impacts and ensure the industry is well positioned to anticipate a period of post-recession growth.

Ciara Izuchukwu is a student editor

Image credit | Simon Scarsbrook

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