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Here, Adam Jones, our Senior Actuarial Consultant, shares his insights around how rising living costs and a potential recession are affecting the insurance sector…

In recent years, insurance companies have enjoyed economic growth as digital transformation and evolving customer preferences have provided new possibilities, leading to increased demand for products.

However, this growth now seems to be slowing as a result of world events, such as the war in Ukraine and post-pandemic recovery to contend with. This, coupled with the escalating cost-of-living crisis, an uncertain housing market and threat of recession means that the insurance industry could be heading into troubled waters.

As the value of people’s disposable income falls, we’re finding that consumers are cutting costs where they can to reduce their outgoings. This means that the demand for insurance products could well be impacted first and foremost.

What types of insurance are being impacted?

At a time when people are struggling to make ends meet while diverting their spending to essentials only, direct debits for high premiums such as insurance cover they might not deem a necessity can often be the first thing to go. However, this means that people are now taking huge risks on insurance products that they wouldn’t ordinarily do and it could ultimately result in them being left out of pocket.

The knock-on effect of this is that insurers are having to strip back their basics or standard offerings to decrease costs and appear more attractive on price comparison sites. As a result, customers aren’t paying for the additional products and missing out on key cover.

The prospects for housing transactions, as well as car sales, are also significant for general insurers and contribute to a forecast reduction in demand during the next year. In the first eight months of 2022, housing transactions were slightly above the pre-Covid norm. However, rising mortgage rates and a weakening economic picture will dampen demand for house sales next year, which will have a knock-on effect for home insurance.

What’s more, motor insurance, which is largely driven by new car sales, has remained weak in 2022. The diminishing outlook for real disposable household incomes and higher interest rates suggest that new car purchases will remain low and will also affect personal insurance, exacerbating a fall in demand.

While cost-of-living pressures may cause some consumers to cancel or lower their life insurance coverage, an increase in the size of the pension-age population may provide some offset. The Office for National Statistics predicts that the UK population aged 60 or over will grow from 16.7 million in 2021 to 19.6 million by the end of this decade.

The life insurance sector has also been bolstered by continued growth in workplace pensions, which has increased the number of working British adults paying into a pension pot. This now stands at 79%, or 22.6 million employees, in April 2021 – up slightly from 78% in 2020. However, the second quarter of 2022 saw £3.6 billion withdrawn from pensions, representing a 23% year-on-year increase.

And while general insurance products are more rigid in their offering as they provide customers with the cover they really need, optional add-on features may become less popular as people look to trim costs wherever they can. This might include cancelling policies for critical illness and life insurance.

How can the insurance sector seek ways to survive?

The insurance market will likely become much more competitive, not only in terms of price but also in attracting and retaining customers through better customer service.

As assets, such as cars, lose their value, the returns that insurers make by investing their premiums will fall, so they will need to look at other avenues to recover invested money.

This may result in more insurers challenging the effectiveness of operations, such as claims settlements, or taking out loans or financial reinsurance to ensure they have the required levels of solvency.

In late April this year, developments in the government’s Solvency II reform laid out its plan to give insurers greater access to their investments. This may help insurers to mitigate losses and increase innovation.

Insurers should consider ways to cut down on unnecessary expenses, but rather than cutting headcount or asset divestitures, they should consider increasing operational efficiency and taking a second look at business models. Technology, people, products and decisions that result in sustainable growth should be continually invested in, and more time should be spent considering the different risks being taken on. Constant consideration should be given to customers’ future needs and the market segments that are likely to dominate.

Leadership must navigate the next economic phase carefully. If it is complacent, an insurer may fall victim to poorly performing processes, leaving it unable to compete with other players. On the other hand, investing in the wrong assets, technologies or strategies to win more business can lead to insurers taking on more risk than they can handle, and expanding their expenses beyond what is sustainable.

To conclude

Due to the slowdown of the economy, insurers need to find ways to reduce its impact and ensure the industry is well-placed to take advantage of a post-recession period of growth.

On a more positive note, the need for insurance will always remain a necessity and in demand, which means the need for actuaries will remain high. There isn’t a replacement for the actuarial field, so recruitment across this area will be ever-present.

As we’ve seen in previous recessions, insurers don’t tend to fail during periods of economic decline. This is why M&A activity, which has been particularly strong over the past decade, should continue on its upwards trajectory, further helping with overall market recovery.

For further actuarial insights, please don’t hesitate to get in touch with Adam: ajones@merje.com.