Risk insight: Economic outlook

There is a positive feeling in the air as people start to see some glimpses of normality: restaurants, pubs, clubs and for a lucky few, even a foreign holiday is on the horizon. UK GDP is increasing, and there are signs of a strong UK economic recovery from employment levels. There is confidence in the positive outlook, however, analysis of other important statistics tell a very different story.

Bankruptcies are down 40% from this time last year. Although positive, this is abnormal considering the past 18 months and many have pointed to Government support schemes to explain the artificial figure. 1.5 million businesses have reportedly borrowed £46.5 billion under the bounce back loan scheme. There is a staggering amount of unpaid rent from the eviction ban. Citizens Advice estimates “half a million private-sector renters were behind with rent”. This is a large amount of money out of landlords’ pockets and puts many renters at risk of eviction in the future. Government debt is also extremely high with BBC News reporting that for the financial year of April 2020 to April 2021 it is said to be at a whopping £355billion. This is the “highest figure ever seen outside wartime.”– BBC News.

The Government support package has been brilliant, but there is potential for further recessionary pressure in the coming months and the risk of economic turbulence is strong. Many zombie firms have been kept afloat by government support and as other support trails to a close, such as furlough due end in September 2021, there could be extra pressure on the economy and the insurance industry.

How do recessionary pressures affect the insurance market?

Aside from the state of the market currently, recessionary pressures can lead to an environment where claims increase. This can be through fraudulent claims, Business Interruption, and private medical as people could be pushed be out of work. Increased claims and uncertainty in the strength of the economy causes insurers to consider rising claims costs in their capital reserves, increasing premiums.

When consumer spending is low, interest rates are set low to encourage consumer spending and investment to boost the economy. With an interest rate of 0.1%, this is an even lower base rate than the rate set in the 2008 crash. Low interest rates also cause pressure on insurers to underwrite more profitably.

Market Update

The previous soft market and high competition has decreased the capital available to insure new risks. Coupled up with the significant claim’s inflation, it is causing higher premiums and, in some instances, a reduction in cover.

Although premiums have been rising across the board, there is and has been considerable pressure and increases in PI, Property, and most recently Cyber.

Property is being affected by losses and pay-outs from the FCA Test Case verdict with risk placement often needing to now be layered or a split subscription.

Since moving to an almost totally virtual world, the frequency of cyber-attacks has increased, pushing up demand for Cyber insurance. Globally, Cyber insurance premium has increased by 32% year-on-year.

PI has been a particular concern for brokers with rates rising so quickly there are examples of firms struggling to obtain cover at all. Read more about this class of business here. - https://specialistrisk.com/news/professional-indemnity-market-update

What can you be doing to help obtain cover?

There are a number of things brokers can be doing to obtain cover in these difficult classes. With a potential for further recessionary pressures, it is now more important than ever to be prepared:

Read the 7 things you can do to continue to grow in the current market here.

Alternatively, speak to our specialists about renewals you are concerned about:

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