The Effects of an Economic Recession on Insurance

Introduction

A recession is a period of economic downturn in which a region's GDP and value of goods and services drops. Consumers may witness or experience increased unemployment inflation. This can result in people becoming more financially aware and careful with money spending. From clients to insurers, the effects of a recession impact a number of players in the insurance industry. It is necessary to understand how these players respond during difficult times and acknowledge the risks posed, in order for everyone involved to be able to successfully overcome related challenges.

Insurance Business

Economic recessions produce significant challenges for companies. During periods of recession, insurance companies could experience a drop in premium collections due to consumers cutting back on - or shrinking - their coverages. With increased costs and decreased revenues, companies may choose to remove insurance coverage in efforts to reduce costs. Doing so can negatively impact an organization's total cost of risk. In order for insurance companies to stay in business, it is crucial to be prepared during bad economic times.

Home & Auto Insurance

With increasing costs associated with renting or owning property, insurance companies increase interest rates as a response. Many Canadian provinces were shown to experience a dramatic increase in home insurance rates in the latest CPI or consumer price index (September 2022). Considering the increasing financial strain, it has also has made way for trends in increasing home and auto insurance theft.

One report has shown an increase in home break-and-enters during financial crises (Wiser 2009). The dark effects of recessions, such as this case, indicate the need for comprehensive home insurance to protect tenants and homeowners against burglaries.

Consumers decrease spending in times of recession, and seek ways to cut costs as many places as possible to save money. Some drivers choose to reduce their coverage amounts to lower their premiums. Others may find themselves selling their cars and stop driving altogether to eliminate the need for paying for insurance.

As tempting as it is to reduce coverage amounts, an accident to one's vehicle may result in larger monetary losses. Due to this fall in demand, it is common practice for insurers to compete for low rates in attempts to gain new customers and prevent existing customers from switching to another insurer. Although this scenario does not apply in provinces of BC, QC, SK and MB.

Life Insurance

Clients generally prioritize life insurance over home and auto insurance due to high consideration of personal wellbeing, so life insurers may not experience a similar drastic decrease in customers. Historically, a spike in life insurance sales during recessions take place. Moreover, the life insurance industry is among the safest industries during such crisis.

While insurance providers are able to change their premium rate before a final agreement, these rates remain static regardless of an economic downturn, and customers are thus able to avoid climbing rates.

While insurers might not want to raise premiums to cause clients to switch to a competitor, interest rates can still increase which ultimately ends up affecting policyholders.

Dealing With Challenges

Recessions are inevitable in every economy, but its effects can be reduced by anticipating the challenges beforehand. Here are some ways people can protect themselves from damage or loss, while also saving money on insurance.

Find Appropriate Coverage

With a vast number of insurance providers, there are consequently many different plans that may be adjusted to fit both lifestyle and budget. Speak with an insurance broker to find the best coverage for you.

Strengthen Emergency Savings

Reduced salaries and layoffs due to job cuts are a usual occurrence during recessions. Therefore, it is imperative that sufficient sums of money are put towards potential emergencies during times of financial stability. It may be of great benefit for one to expand their options and seek other sources of income to put towards a safety net, while limiting unnecessary purchases.

Focus on Debt Repayment

In times of financial strain, it can be difficult to pay off every debt, so it may be wise to focus on repaying the debts that can negatively affect your credit score if non-payment or late payment occurs. It is important for one to pay their mortgage or rent to avoid eviction or foreclosure, and be on top of any credit card balances (minimum payment at least), to prevent bad credit.

Do Not Over-Insure

The same way under-insurance can have consequential effects, over-insurance can result in policyholders paying amounts that exceed the property value. Overspending can significantly hinder other financial goals (i.e. down-payment, investments, tuition, etc.), and may pose a serious risk to one's financial stability.

Summary

Overall, being properly insured provides stability and a financial safety-net - even more so during an economic downturn. While premium rates may increase or decrease in a recession depending on the type of insurance, it is best to be prepared and anticipate how all aspects of the insurance industry can be impacted at periods of economic difficulty, in order to better manage one's funds. Being well-prepared for the challenges of a recession may reduce stress and anxiety, and ultimately strengthen personal and/or business wealth.