Insurance has long been thought of as a recession-proof industry. Why? Because despite their financial situation, people will typically continue to purchase home, auto, life and health insurance. So today, with the current economy teetering on the brink of a possible recession, is it safe to say that insurance companies shouldn’t have concerns?

The National Association of Mutual Insurance Companies (NAMIC) and Guy Carpenter have released the Scenario Testing Our Mutual Future report that shows how a harsh economic recession may expose the industry to potential risks that could be difficult to bounce back from.

The report states that an impending recession could possibly impact three main areas of the insurance industry:

Premiums. A severe recession could result in insurers facing negative premiums as the number of claims rise and costs for labor and materials to repair homes and vehicles increase.

Moral hazards. In insurance, a moral hazard occurs when a policyholder is motivated to take a risk they wouldn’t otherwise take if they were uninsured. A recession could result in more policyholders forgoing regular maintenance of homes and vehicles due to the costs, which, in turn, would impact claims and premiums.

Commercial businesses. A drastic decline in sales in financially sensitive commercial business lines could face increased economic pressure, resulting in fewer carriers willing to offer coverage for certain business lines.

According to the NAMIC report, advanced preparation is what is needed to help the insurance industry proactively address these and other financial issues brought on by a recession. The report goes on to note that if insurance companies could simply test out different scenarios, showing how greater degrees of financial risks brought on by an economic recession could affect the industry, they would then be in a better position to tackle impending economic realities.

This type of scenario testing looks at potential future events and operating environments, and can help the industry measure its stability in weathering the economic challenges brought on by a recession.

“Property and casualty insurers of all sizes may benefit from scenario testing, helping them understand how different stresses can affect their financial performance … which is critical to their ability to serve policyholders.” Source: Guy Carpenter.

So yes, while a recession could significantly impact the overall picture of the insurance industry, scenario testing could very well be the tool that helps insurers better understand how to manage financial performance and “devise and implement strategies for maintaining economic stability.”

About FastrackCE

FastrackCE can help insurance professionals get their life, health, and property and casualty continuing education credits done in one place and at their convenience. We offer online insurance continuing education courses in most states, covering a broad range of topics including most of the state-mandated courses such as in ethics, flood, long-term care and annuity training.