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How an Economic Slowdown Could Impact Insurance Carriers And Agents

After strong economic growth in 2021, rising inflation has swung economic conversations toward concerns about an upcoming slowdown, if not an outright recession. For insurance carriers and agencies, economic uncertainty hearkens back to the late 2000s — and it threatens record growth in some areas of property and casualty coverage.

Carriers and agents that weathered the 2008 recession learned several lessons from the experience. Many of these lessons can be applied to offer more resilience and stronger customer relationships in the face of economic uncertainty today.

Signs of Slowing Economic Growth

Analysts differ in their predictions about the timing or severity of an economic slowdown. Most do agree on one thing: A recession is coming.

“The signs of an impending recession are becoming more evident, with consumer confidence falling, the housing market showing signs of a downturn, and the Federal Reserve tightening aggressively,” writes Michael Cormier in PropertyCasualty360.

Signs of recessionary inflation are already evident in Europe. Energy shortages resulting from European reliance on Russian oil and gas supplies are causing high inflation coupled with low or negative economic growth, writes Kassandra Jimenez-Sanchez in Reinsurance News. Recessionary inflation may be the worst of both worlds for insurers: Customers pare back their coverage, reducing premiums, while claims costs climb.

Inflation frequently affects claims costs. Post-pandemic inflation, however, has had an outsized effect on claims. “The costs of construction materials, auto parts, rental cars, and medical and legal services are increasing at an even higher rate than overall consumer prices,” write insurance advisory directors Ugo Okpewho and Scott Cederburg at BDO. These costs, which frequently figure in the overall costs of a claim, mean that claims prices have risen faster than overall inflation — placing additional pressure on both carriers and their customers.

Fernando Casanova Aizpun and fellow researchers at Swiss Re offer several predictions for the future of insurance in an era of high inflation and the threat of an economic slowdown. These include:

  • Insurance growth will slow in the coming years due to both economic slowdowns and inflation rates.
  • Property and auto insurance will feel the first wave of impacts from lagging economic growth and high inflation.
  • Distinguishing between nominal and real growth is a must. Hardening rates in commercial insurance will produce nominal growth rates that look good, but that conceal slower real growth rates affected by inflation.
  • Despite these struggles, the insurance industry as a whole will keep growing. Rate hardening is likely to continue, expanding into insurance markets that remained soft in 2022. Overall, though, insurance is likely to keep growing.

As interest rates increase, insurers can also expect to see their investments offer promising returns. These investments provide an important buffer against economic uncertainty, especially in the form of slower growth during a period of high inflation.

A recession spells trouble for insurers. Recessionary inflation packs a double punch. Still, insurance carriers and agencies can push back against these concerns.

To respond effectively to an economic slowdown, “brokers and agents must be responsive to the needs of clients in industries that are less [resilient]. And they need to understand how recessionary conditions relate to other challenges they face,” writes David Tobenkin, a contributing writer for Leader’s Edge.

The 2008 recession taught many businesses and professionals the importance of preparing for economic change. The insurance industry’s lessons from previous economic slowdowns provide guidance for uncertainties ahead.

Think Twice Before Cutting Your Marketing Budget

When a recession hits, a carrier’s or agency’s marketing budget is often one of the first expenses cut. Yet “reducing efforts to generate new revenue often exacerbates the effect of a recession,” writes Brad Nevins in an article at PropertyCasualty360.

This exacerbation effect may be even worse for insurance than for other industries. Unlike many purchases, insurance is essential — and often mandatory. Individuals and businesses still need coverage, regardless of the economic climate. By reducing advertising and outreach efforts, insurance carriers and agencies withdraw from potential customers at the precise moment those customers are reconsidering their coverage and seeking new solutions.

Instead, take the time to focus on the ideal insurance customer — including how they will likely behave in the face of high inflation and threats of recession.

“Concentrate on securing clients who will not only be purchasing policies from your agency but also advocating for your business, especially when market conditions become unfavorable,” writes Chris Farfaras in Independent Agent Magazine.

Farfaras recommends that insurance agents reexamine their marketing messages: Does your marketing communicate the value of your services to your clients? Are you making it clear that you’re here as a partner through tough economic times? Focus on overall value to help customers see your agency as a resource, rather than a transactional stop.

Show Customers the Value of Insurance in Tough Economic Times

When an economic slowdown occurs, many businesses and households respond by looking for ways to cut costs. Driven by uncertainty and apprehension, these insurance customers may cut their insurance coverage at precisely the moment they need coverage the most.

“Some customers see insurance as transactional and miss value there,” says Matthew Moore, executive vice president and president of underwriting at Liberty Mutual Global Risk Solutions. To push back against this misapprehension of insurance’s value, Moore recommends carriers and agents reach out by:

  • Providing up-to-date information on coverage and valuations. Make sure customers know whether their current coverage is adequate, given inflation. Offer the help they need if the coverage won’t meet their needs.
  • Communicating regularly. Customers are more likely to see insurance as transactional if they only talk to carriers or agents when they need to perform a transaction. Regular communication contextualizes the insurance relationship as a business partnership, rather than a transactional touchpoint.
  • Managing risk effectively. Risk control, risk transfer and risk engineering all offer ways to help meet customers’ needs within their recession-burdened price points.
  • Offering consultancy and risk advisory services. Another way to deepen the insurance relationship beyond transactional events is to provide consulting and risk advisory services.

Insurance includes “the duty of an insurer to form a genuine partnership with a customer to improve the risk environment,” says Moore. This partnership offers a more resilient relationship — one that responds effectively to real-time changes and keeps customer, carrier and agent connected.

To Come Out Ahead, Reassess Risk and Costs

An economic slowdown may have a silver lining for insurance carriers. Inflation tends to drive up the cost of insurance claims by making repairs and replacements more expensive, write Anja Vischer and Thomas Holzheu at Swiss Re. While an economic slowdown will change customer behavior, it may also ease pressure on claims costs — giving insurers more leeway to offer customers more appealing quotes.

To take advantage of inflation reversals, carriers will need to take a proactive approach to underwriting. Insurance Information Institute Vice President, Head of Economics and Analytics Department, Senior Economist and Data Scientist Michel Léonard recommends that risk managers communicate with insurance leadership as follows:

  • Explain the economic changes in the industry.
  • Provide examples of what other risk managers are doing to address changes.
  • Offer the results of data analysis and evaluation of alternatives to the proposed plan.

“And do this sooner than later—no one likes a surprise,” Léonard writes.

The pandemic disrupted economic predictions as it imperiled health and upended everyday life. As we enter 2023, we continue to deal with pandemic-related upheavals, including the risk of an upcoming recession. Carriers and agents who plan ahead will weather these changes with more resilience than their competitors.

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