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.
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.