Many of you may think, “Is insurance recession proof?” The year 2023 has finally arrived and the world faces the potential risk of an economic downturn. Is the insurance industry geared up to meet the challenges posed by the prospect of dealing with a recession? Well, possibly not as much as is wanted. Few companies may have determined any course for action to be taken for facing a financial crisis in one or the other form. Experts have already warned way back in 2022 that an economic recession is on the cards in 2023. It is also expected that tens of thousands or possibly millions are going to lose their jobs this year.
What then could be the economic impact on insurance industry? Have insurance companies tested different scenarios which can pose greater degree of financial risks propelled by the fast changing ground realities due to an impending realities economic recession? Well, it is needless to say that some advance preparation can help the insurance industry to tackle problems much better. And one of the methods to prepare the path towards financial reconstruction or reengineering is scenario testing. The biggest beneficiary of the scenario testing exercise is the insurance industry which is already grappling to deal with the problems caused by the COVID-19 pandemic.
The overall picture of the insurance industry during recession may appear grim in 2023. To that effect, casualty/property (P&C) insurance providers across the United States, regardless of their sizes, may benefit if they do scenario testing as it will enable them to have get some idea regarding how work stress may impact financial performance which is vital to stay afloat in the nearby future as well as in devising and implementing strategies for maintaining economic stability. Besides, this is also important to serve clients customers better and boost business profitability over the long term. Different types of scenario testing models can be effectively used for studying the outcome of economic recession.
The National Association of Mutual Insurance Companies (NAMIC) has released the report for “Scenario Testing Of Our Mutual Future”. The US P&C insurance industry is at present well capitalized, a harsh economic recession might expose it to potential risks. Of the five different possible scenarios which were evaluated, the study showed huge depletion (about 15% more than the baseline model) in surplus for the insurance industry at large.
Investments in equities and other high-risk assets on companies’ balance sheets have shown a steady increase ever since the great economic downturn of 2008. And by the end of the year 2020, the insurance industry’s high risk asset investments were found to be the highest in the last 25 years. In companies’ balance sheets, about 79 cents were invested in either public or private equities from each dollar of statutory surplus. This amounted to 36% of total cash and asset investments were held by the insurance industry in the U.S. It implies that if Mutual companies don’t monitor their asset investments with precautions then as per the scenario testing results, they are exposed to risk of a economic recession.
1. Premiums charged by the insurers - severe recession can lead to negative premium effect
2. Financially sensitive commercial business lines can come under more pressure as drastic decline in sales is expected
3. Insurance industry also faces the risk of premium sapping and increase of moral hazards from financially battered policyholders
Thus, the road ahead for the insurance industry seems to be bumpy. NAMIC will continue to do relevant scenario testing and study impacts of economic recession. All NAMIC member US P&C insurance companies will be provided results of the tests so that every active P&C insurance company can make a practical assessment of impact posed by an economic recession on its overall business profitability. This might help insurers to make some critical decisions pertaining to their scope of business and thus, survive rough weather conditions propelled by the markets.Buy now