Ciara Izuchukwu looks at the impending recession’s potential impacts for the insurance industry, and how companies can ensure they are well positioned to ride it out
Since 2010, companies have enjoyed a period of economic growth, which has been boosted by technological improvements. Innovation has changed customer preferences and provided new communication avenues, leading to increased demand. However, this growth now seems to be plateauing. 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 for a recession.
A recession is a significant decline in economic activity that is spread across the economy and lasts for more than a few months. According to the World Economic Forum, indications that we are experiencing a global slowdown are not only evident but also multiplying. Manufacturing is declining in Germany, Japan and the US, and even China, which consistently has a high annual manufacturing output, is slowing down. Other recession indicators include elevated 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% increase in the Consumer Prices Index during 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 have knock-on effects for the insurance industry.
A fall in demand for insurance products will perhaps be the first and most obvious impact. While general insurance products are less elastic, as they provide customers with services that they need, optional add-on features may become less popular as people look to cut costs. The insurance market will likely become much more competitive, not only in terms of price, but also in attracting and retaining customers through better customer service – for example, personalised digital experiences.
In its Household Insurance premium tracker, the Association of British Insurers showed that the average price of home insurance has dropped by 7%, and the average cost of content-related insurance by 11%. Additionally, its Motor Insurance tracker found that the average price paid for motor insurance had dropped by 5% – the lowest number in seven years. Though this fall is likely to be fleeting, it will alleviate some of the pressure on customers that has come from the increased cost of living.
As assets lose their value, the returns that insurers make by investing their premiums will fall, so insurers will need to look at other avenues to recover invested money. This may result in more insurers challenging the effectiveness of operations, such as claims settlements, in order to reduce costs, or taking out loans or financial reinsurance to ensure they have the required levels of solvency. In late April, developments in the government’s Solvency II reform laid out its plan to give insurers greater access to their investments. This may help insurers to mitigate losses and increase innovation.
Insurers should consider ways to cut down on unnecessary expenses, but rather than cutting head count or asset divestitures, they should consider increasing operational efficiency and taking a second look at business models. Technology, people, products and decisions that result in sustainable growth should be continually invested in, and more time should be spent considering the different risks being taken on. Constant consideration should be given to customers’ future needs and the market segments that are likely to dominate.
It is important that leadership navigates the next economic phase carefully. If it is complacent, an insurer may fall victim to poorly performing processes, leaving it unable to compete with other players. On the other hand, investing in the wrong assets, technologies or strategies to win more business can lead to insurers taking on more risk than they can handle, and expanding their expenses beyond what is sustainable.
The slowdown of the economy is happening; insurers need to find ways to reduce its impacts and ensure the industry is well placed to take advance of a post-recession period of growth.
Ciara Izuchukwu is a student editor
Image credit | Simon-Scarsbrook