How the Economy Impacts the Insurance Industry
Whenever an economic downturn threatens diverse national or global industries, people start asking questions about recession-proof options. For the insurance industry, the answers depend on multiple factors. Consumers and businesses still need insurance, but with much less money to spend on large policies, it may be more difficult to balance necessity with profitable levels of demand. It helps to start by exploring what happened in historical recessions to figure out how to prepare for one that may be knocking on the door.
With all the information gathered and analyzed, insurance companies will make the necessary adjustments to remain profitable without pricing consumers and smaller businesses out of their policies. This delicate balancing act makes insurance recession-proof now and in the future, but it helps to talk to an unbiased, Trusted Choice independent insurance agent to discuss your options and whether a recession will affect your coverage.
What Affects Insurance Industry Trends?
There is no one answer to this question as the insurance industry can be affected by a number of factors, including economic recession. In particular, it can be difficult for companies to find new customers and compete against larger companies when the market is off its normal path. This can lead to increased costs and lower profits, which could impact the company's bottom line.
Inflation and recession go hand in hand. When the economy is struggling, money becomes tight and costs start to rise. This puts a strain on businesses and consumers alike, as prices for goods and services increase. While inflation can be a normal part of economic growth, when it starts to outpace wage increases, it can become a problem. This is especially true during a recession when people are already struggling to make ends meet. Hard decisions about where to put their money plague many people’s personal financial decisions. Insurance policies are frequently reduced or abandoned if not required by law.
While inflation is often seen as a bad thing, it can also be an opportunity for investors. By buying assets when prices are low, they can sell them later for a profit. Does that mean a recession is a good time to invest in insurance? All the questions surrounding insurance in a recession demand answers that are often much more complicated than they seem on the surface.
Recession's Impact on Insurance
In the last decade, there have been two major recessions. The first recession, which began in 2007 and lasted 18 months, was caused by the bursting of the housing bubble. The second recession, which began in 2020, was caused primarily by the COVID-19 pandemic. The economy virtually shut down for an extended period of time as companies could not keep their doors open. The continuing supply chain disruptions around the world continue to cause challenges today.
Both recessions have had a significant impact on insurance companies. In the first recession, insurance companies experienced a slowdown in growth as people tightened their belts and focused on personal finance. In the second recession, insurance companies experienced even more challenges as people lost their jobs and businesses closed their doors.
Despite these challenges, insurance companies have remained profitable thanks to strong investment returns and cost-cutting measures. Growth did not, of course, match previous years. In 2020, overall data pointed to a small 1.2% increase rather than the 4% annual growth enjoyed in the decade before Covid. [1] However, it is clear that the recessions have had an impact on the industry and that trend could continue in the future if we experience slower growth and higher unemployment.
Direct Outcomes of the Economic Slowdown
Historical data and current trends point to some very specific effects of the current economic slowdown, specifically for insurance companies. Many of these reflect simple common sense. When people and businesses do not have as much money, they do not spend it on things that do not have an immediate impact or day-to-day importance. They take more risks against future possibilities. From the perspective of insurance companies, they also have to face some changes in how they operate in many cases.
Decreased demand is one of the first and most obvious outcomes of a declining or slowing economy in the country and around the world. In times when insurance policies may be more important than ever before, some companies and individuals may reduce coverage or get rid of certain policies altogether. In general, this is a bad idea because if something does happen, they will need to find the money to pay for damages or fund their recovery without help. Also, decreased demand will force the industry itself to become more competitive. This may drive down prices in a way that benefits consumers and companies seeking commercial coverage.
Besides dropping prices to retain existing customers or attract new ones, insurance providers in a recession feel additional pressure to settle claims as quickly and efficiently as possible. This basically means that they will try their best not to pay out more money than is necessary. This has always been a standard mode of operation for insurance brands, of course, but things may get tighter if a recession rolls on and gets worse.
Another potential issue that affects the function of insurance and whether it is a good investment or not comes from new regulations. Governments take action in an attempt to slow the economic downward trend or stop a recession in its tracks before it causes additional problems. It is possible that new rules and regulations will arise that insurers need to pay attention to if they want to remain compliant and stay in business for the long term.
Long-Term Economic Impact on Insurance Industry
Is insurance recession-proof? No industry can withstand all economic downturns and challenges forever. Nevertheless, the continued growth of the insurance industry during one of the most difficult times in recent history does give investors and company stakeholders hope. Although it is still difficult to tell if we will truly enter recession in 2023, how long the economic slowdown will last, and what recovery will truly look like, it is easy to say that it will not spell disaster for insurance companies. When looked at from a long-term perspective, it might be one of the best recession-proof investments around.
That does not mean everything will be smooth sailing or that insurance companies will be able to keep operating in the same fashion going forward. One of the biggest challenges of these firms today is figuring out how to minimize future risks. They do so by changing business models, consolidating to increase efficiency, and changing policy terms to protect themselves as much as their clients. A lot of this involves an increase in automation which is a natural progression from the digitization that has infiltrated all industries in the past decade. Innovative thought and market agility always help protect against risks.
These types of changes may affect consumers' experience working directly with insurance companies. Something as simple as an automated response telephone line or AI web chatbot can reduce an individual's view of the insurance company. Automation always feels less personal, which is something that people value especially when discussing sensitive matters like money, security, and health. Other efficiency-focused tech solutions will occur behind the scenes. There are innumerable software platforms and apps that handle everything from data collection and analysis to customer relationship management. These are the types of changes that will help insurance companies stay profitable no matter what the greater economy does.
Unfortunately, in the event of a recession, individuals and businesses will probably see higher premiums and stricter rules associated with payouts and settlements. Carriers will perform a delicate balancing act between raising premiums to stay in profit and retaining customers who do not have as much personal or commercial income to pay for the same coverage they used to enjoy.
How do insurance companies make themselves as recession-proof as possible? They’ll upgrade systems and introduce new efficiencies to reduce overhead and operational costs. They’ll work with customers, both personal and commercial, to maintain consumer loyalty. In turn, consumers will need to stay informed and flexible while the economy continues to shift and regulations change. In the end, responding quickly to a recession is one of the best ways to weather its storm and come out golden on the other side.
Why Work with a New Jersey Independent Insurance Agent?
By working with a Trusted Choice independent insurance agent, business and personal insurance customers will continue to get unmatched service and more insurance options—even in a recession. A Trusted Choice independent agent will search for policies from multiple insurance companies for you, and help you understand the choices available to you, as well as any changes that affect your coverage. Talk to a New Jersey Trusted Choice independent agent today.
New Jersey independent insurance agents take the time to discuss exactly how much coverage is necessary for your individual needs. Your agent acts as your own personal insurance shopper, offering you more options than one-policy companies. With just one call, they’ll start gathering multiple quotes for you to review so you can be sure you get the right coverage at the right price.
And, because they’re your dedicated agent, they’re not just there at the beginning, they're there to help walk you through the claims process and make sure you’re getting the benefits you're entitled to should an event occur.