Will the Recession Cause a Hard Insurance Market?

Will the Recession Cause a Hard Insurance Market? - 4/6/2009

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HEADLINES \| SETTLEMENTS AND DISMISSALS \| COURT FILINGS LINKS TO OTHER NEWS \| NEWS ARCHIVE	HEADLINES ARCHIVED SETTLEMENTS AND DISMISSALS ARCHIVED

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Will the Recession Cause a Hard Insurance Market?
Kevin LaCroix

The D & O Diary. April 6, 2009
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EXCERPT: The global financial crisis has produced challenges across the entire economy, but the financial sector, where all the problems arguably began, has been particularly hard hit. While the most investment firms and other banking institutions may have experienced the most dramatic consequences, insurance companies have also been swept up in the whirlwind. The extent of the recession’s impact on insurance companies and the resulting consequences for the insurance marketplace are the subjects of an April 2009 paper from insurance industry data firm Advisen entitled "The Impact of the Economic Crisis on the P&C Insurance Industry". According to the paper, the various economic forces at play will likely shrink insurers’ policyholder surplus, thus diminishing the supply of insurance. These circumstances ordinarily would produce a so-called "hard" market, characterized by rising prices for insurance. However, the reduction in economic activity as a result of the current recession could also reduce the demand for insurance, which in turn could complicate the insurance cycle’s transition and "make for a very turbulent 2009" for the insurance industry. The major cause for the reduction in the demand for insurance, which according to the paper could delay the transition to a hard market, is "shrinking exposure units." An exposure unit is the basis for calculating premium – for example, the size of an employer’s workforce will determine the employer’s workers comp and EPL insurance premiums. Many of the exposure units that are critical for determining pricing for a variety of insurance lines – such as sales, real estate square footage, number and mileage of vehicles, payroll, and property values – are all likely to shrink in the months ahead, as a result of the recession. The shrinking exposure base will produce a fall-off in insurers’ top-line revenue. In addition, insurance demand will also likely be further eroded as businesses close or fail.

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