The Recession and Its Possible Implications for Insurance 2023

Key Takeaways

• The Fed’s tightening has contributed to recession fears, and most insurers expect at least three rate hikes. Over 60% of leading insurers expect the U.S.A. to go into recession by 2025, a Goldman Sachs survey found.
• Most insurers, managing $13 trillion in assets, saw inflation as a concern in the next year.
• Swiss Re predicted that the combined ratio for the U.S. property and casualty (P&C) industry will be above 100% in 2022
• Average replacement prices had increased by 16.3% as of May 12, 2022—nearly double the increase in the consumer price index.
• S&P Global Market Intelligence anticipates inflation to push the U.S. combined ratio beyond 100% for the first time in five years in 2022

Are we heading toward a recession in 2023?

Well, you might have a lot to unpack with all the talks about the economic downturn and the increase in the inflation rate. With this, you might also be concerned about the challenges and opportunities of recession for insurance in 2023. But here’s an overview of what it will mean to the insurance industry.

What Can Recession Mean to the Insurers?

A recession is a substantial decline in economic activity that spread in the economy. According to the World Economic Forum, signs of a global economic downturn are apparent and even multiplying. That means the value of people’s disposable income is declining – further having knock-on effects on the insurance industry.

Over the past few years, most insurance carriers in the U.S.A. demonstrated exceptional flexibility and resilience in overcoming various barriers, precisely due to the pandemic and the economic downturn from the Russia-Ukraine conflict. Massive efforts were taken to improve the systems and capabilities, where agile talent and technology strategies definitely paid off. Nevertheless, a decline in insurance product demand may be a recession’s first and most obvious impact.

However, the journey is dotted with multiple hurdles, such as rising inflation, interest rates, loss costs, the looming threats of recession, climate change, and geopolitical upheaval. On top of that, we can speculate a tight competition from Insurtech companies and even noninsurance businesses like e-tailers and manufacturers, to name a few. While general insurance products are less elastic, providing customers with the required services and optional add-on features may seem less popular as people look forward to cutting costs. Thus, there is no time for insurance companies to be glad about the adaptations they’ve had to make.

Now, although we are less likely to face a recession in the U.S.A. in 2023 with the preventive measures, a yearly study by Goldman Sachs Group Inc. of insurance executives in charge of more than $13 trillion in assets found that they anticipate a recession in the upcoming 3 years in the United States. Also, a survey by Allianz Life Insurance Company of North America showed that 66% of Americans worry that a recession is right around the corner, up from 48% who said the same a year ago.

Significant Challenges for The Insurers

With some of the most significant property-casualty rate increases in recent years, raising revenue has been easy for most non-life insurers. However, not all product lines and individual country markets saw the same growth rates.

For instance, commercial lines generally experienced stronger growth than personal lines, and homeowners’ premiums typically increased more quickly and significantly than personal auto premiums—trends likely to persist into 2023, given the persistent macroeconomic, geopolitical, and competitive conditions.

“In the long run, there’s a gradual increase of investment yields, so that’s a positive impact [for the insurance industry]. But the immediate impact is that bond portfolios are losing value on a market-to-market valuation, so there’s some stress on insurance companies’ balance sheets with equity indices down and interest rates up,” Holzheu chief economist, Americas at Swiss Re noted.

Skyrocketing Costs

The expense of claims would present the biggest obstacle for the insurance sector. The profitability of underwriting will continue to be under pressure from the growing cost of goods. Swiss Re predicted that the combined ratio for the U.S. property and casualty (P&C) industry will be above 100% in 2022 due to inflation in its prediction for July 2022.

Likewise, average replacement prices had increased by 16.3% as of May 12, 2022—nearly double the increase in the consumer price index. This is in addition to the ongoing effects of social inflation. It increases insurance claims costs due to the rise in the frequency of lawsuits, broader definitions of liability, and a trend toward more pro-plaintiff legal decisions, including higher compensatory awards from juries, particularly in the United States.

Auto Insurance

The worst-affected industry will continue to be auto insurance. The pandemic’s effects on supply chains will continue to increase the price of old autos and replacement parts. According to Holzheu, increased material costs and supply chain interruptions will drive up the price of auto repairs and, as a result, insurance claims costs.

Casualty Insurance

In the same research by Swiss Re, Holzheu identified a tight labor market, healthcare costs, and pay inflation as the three main factors influencing claims costs in the casualty lines. As insurers try to keep up with rising costs, rate hikes are expected to continue.

Impact of Catastrophic Weather Events and Cyber Risk

Despite significant increases in written premiums, catastrophic weather events and cyber risk were the main causes of the US$3.8 billion net underwriting loss reported by U.S. non-life insurers in 2021. These consequences ought to last through this year and even into 2023. Notwithstanding projected direct written premium growth of 9.8%, S&P Global Market Intelligence anticipates inflation to push the U.S. combined ratio beyond 100% for the first time in five years in 2023.

4 Major Opportunities for Insurance Companies in Times of Recession

There are numerous opportunities to increase top and bottom-line results through organic growth and improved operational efficiencies, even in a challenging environment like a recession or economic downturn.

Need for Dynamic Shift in the Insurance Industry

Cyber insurance is in more demand today. With many customers polled by Deloitte Global requesting new policies, more flexible terms, pricing, payment choices, and more comprehensive loss control services, the small-business insurance industry appears to be ready for reinvention. However, carriers should exercise caution given that ransomware incidence increased by 235% in 2021 compared to 2019, and average ransom payments increased by 370% over the same two-year period.

Improve Technology Infrastructure

Many carriers prosper from the technology advancement being led by InsurTech companies, especially the point solutions provided by enabling startups in customer-facing areas like underwriting, claims, and online distribution platforms. In order to increase client-centricity, insurers should begin connecting their systems and data while utilizing cloud capabilities. Focusing on micro improvements while employing business-specific industry cloud applications may be a terrific next step.

Also, given claims that self-driving technology is still primarily experimental, predictions that the emergence of autonomous vehicles would redirect billions of premiums into product and professional liability coverages are likely to materialize sometime soon. This is because the technology and software controlling the car, not the driver, may be to blame in accidents.

However, as more vehicles enter the road, auto insurers should consider creating split coverage, perhaps in the style of hybrid policies already marketed to ride-share drivers, where personal auto coverage applies when driving for pleasure. At the same time, a different commercial coverage kicks in when going for pay. The same split-up policies might be promoted when autonomous systems are active, and drivers are in control.

Consider E.S.G as a Differentiator

Consider Environmental, Social, and Governance (E.S.G.) as a core feature of the business model. E.S.G. issues increasingly affect how all companies do business. Likewise, consider climate risk, where evidence is mounting that P&C insurers will soon need to revisit their business models. But, while many insurers have begun incorporating climate-risk considerations in their investment processes, new product launches and underwriting processes remain unchanged.

Find Your New Niche

The market for intangible assets, or non-physical possessions with monetary worth, is also growing and generating new exposures to cover. This includes cryptocurrency and NFTs to virtual activities on the metaverse. According to research by Aon and Ponemon, only 17% of these assets are now insured. Hence, finding your niche for crypto insurance can also benefit the future insurance business.