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Looking Forward


Posted on 21 Jan 09

(Excerpted from the National Underwriter, 1/5/09)
The recession that undermined the economy in 2008 is a vicious one, systematically destroying financial markets, institutions, jobs and confidence—all of which impact the prospects for property-casualty insurer growth and profitability in 2009. However, p-c insurers are standing strong amid general weakness in the overall financial services sector.



Insurers are making good on their past commitments and are poised to facilitate the economic recovery to come—particularly if President Obama comes through with the massive stimulus package he has on the drawing board, which could generate welcome business activity, new infrastructure projects and exposure growth for carriers of many lines.



The global economic meltdown of 2008 has often been likened to the Great Depression, but few appreciate the fact that concerted and coordinated efforts by the U.S. Treasury and Federal Reserve and their counterparts around the globe have already prevented the type of financial maelstrom that sucked the planet into a decade of economic despair some 80 years ago.



The stock market meltdown, however, is not unlike the dot.com bust and post-9/11 crash earlier this decade, and several others in the 1970s and 1980s. It is the broad loss of faith in financial institutions, the depletion of personal wealth, and the evaporation of consumer and business confidence that beg comparisons with the 1930s.



While the impact of turmoil in the financial markets affects individual insurers differently, the industry as a whole remains fundamentally strong. The basic function of insurance—the orderly transfer of risk from client to insurer—continues without interruption. This means that insurers today continue to sell and renew policies, pay claims, and develop new products to protect people’s property, businesses and lives.



Still, the industry’s $445 billion in premiums are drawn from every hard-hit Main Street in America. Consider this:



  • Home and auto insurance account for nearly half of total revenues, but new home and car sales have crashed to their lowest levels in decades and show little signs of recovery. The 60 percent plunge in new home construction since 2005 reduces premium growth in the homeowners insurance line by at least $1 billion annually.

  • Insurance sales to businesses yield $225 billion in premium, yet most are scaling back production and employment.

  • Workers’ compensation would appear to be especially vulnerable to the swooning economy, with more than two million jobs lost in 2008, and two million more expected to be lost in 2009 and 2010. A loss of four million jobs would bring growth in the payroll exposure base to a halt and cause the loss of nearly $1.3 billion in workers’ comp premium (or its self-insured equivalent).

  • Other key lines have similarly been hurt by the recession, such as private passenger and commercial auto, commercial property, and inland and ocean marine.



    In the end, the recession that began in December 2007 will cost insurers billions of dollars in lost business opportunities before it is over. The consensus view among economists is that a recovery—an anemic one at that—will not begin until late 2009.



    The reality, however, is that recessionary impacts on p-c insurance premiums have historically been quite modest, especially in comparison to other sectors of the economy—such as construction, manufacturing and retail trade. The bottom line is that while the p-c insurance industry is by no means immune to the macroeconomic forces buffeting the economy today, it is highly resilient.



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