How Changes in The Economy Affects The Insurance Industry

If there's one thing insurance companies must be good at, it's assessing risk. Risk assessment management is at the core of how the insurance industry works, and that applies not just to policies and claims, but also to protecting their own business and assets from potential risks. But one thing no one can truly control is a downturn in the economy. When that happens, how will it affect the insurance industry and its customers? Read on for some answers. 

 

How An Economic Downturn Affects the Insurance Industry

 

Here are some of the primary impacts of an economic downturn:

 

Demand for insurance drops. When the economy slows down, money often grows tight. Individuals and businesses have less money to spend on things, and that often includes insurance. Some might opt to opt for less coverage, or simply forgo insurance altogether. In this case, the advantage lies with the customers: less demand means providers must compete with one another, and customers can take advantage of lower rates.

 

However, if you're a policyholder, you should keep in mind that price isn't the only factor to consider when shopping around for insurance. For example, if you're a homeowner, it’s recommended to looking at the following other factors when you compare homeowner’s insurance:

 

• First, while cost isn't the only thing, you should still pay attention to it. The best policy in the world doesn't do you any good if it won't fit inside your budget. And be wary of ultra-low premiums too -- if something seems too good to be true, it probably is.

• Compare the available coverage. You need a policy that will cover all the things that need protection. You may want to talk to your insurer to make sure the policy provides all the coverage you need.

• Also, make sure to consider your deductibles. A lower deductible means higher payments, but less to pay out of pocket if disaster should occur.

• Finally, don't be afraid to compare companies. Not only do prices often vary wildly by company, but some insurers may have different regulations or requirements. Also, it pays to make sure the company you go with has a solid reputation.

 

Claims will be more stringently analyzed. Insurance companies have to turn a profit too, and during an economic downturn, it grows more difficult for them, just as it does with any other company. Insurance companies often invest premiums in order to maintain financial stability, but during a recession, the returns on those investments may be lower. This in turn leads to less cash flow for the company, which means claims must be more carefully analyzed and painstakingly processed in order to minimize any losses.

 

Insurance companies will face more regulation. As you might expect, when insurance companies start turning an eye toward saving money by declining or minimizing claims as much as possible, it's the policyholders who will most likely suffer for it. At times like these, the government often steps in when it comes to scrutinizing and monitoring financial institutions, and stricter consumer protection laws are introduced in order to keep consumers from being exploited. Insurance companies might find themselves dealing with extra government involvement, as well as more complex rules and elaborate procedures. This, ironically, could mean more time and money spent on compliance with these regulations.

 

Reinsurance

 

Another common practice of insurance companies when economic downturns arise is called reinsurance. Reinsurance is when several different insurance companies minimize their own financial risk by purchasing policies from other insurers. It's essentially "insuring the insurers." This spreads the risk around between the participating companies. The goal behind reinsurance is that no single insurance company stands to lose too much in case of a large disaster, major event, or recession.

 

How Insurance Companies Drive the Economy

 

Now that we've covered how insurance companies can be impacted by an economic downturn, let's dig into how insurance companies can drive the economy in many ways.

 

First of all, the insurance industry employs a lot of people -- around 2.8 million, a number that has been increasing by about 300,000 people per decade. While these job figures are subject to lack of job growth just like any other field, it's still a significant job sector.

 

Another way insurance companies have a positive impact on the economy is by helping protect businesses from going under due to catastrophic losses. Fewer businesses failing means a more stable economy, which helps bring downturns to an end faster.

 

The insurance industry also protects the supply chain, without which, home and car owners could struggle to get materials and supplies to repair their property (whether it be cars or homes).

 

Finally, insurance companies often invest premiums in the stock market (as mentioned above), including government bonds, which contributes to the investment market.