The slow economy that began in 2008 has had a magnifying effect on risks in the personal lines insurance market. Although we’ve seen an upward trend in auto sales and homeowner spending in recent months, there’s still a way to go to recover jobs and regenerate business lost as a result of the Great Recession.
According to Deloitte, among others, an unsteady economy, low interest rates, and rising catastrophe and weather-related losses "continue to depress the balance sheets” of some property/casualty insurers.
We’ve learned a lot about the downturn and how it can affect the insurance marketplace. Here are two key lessons that may help insurers manage risk and prepare for future economic events:
- As a result of the recession, the overall risk landscape has changed. Not only have new risks emerged, but risks that existed before loom larger. For example, individuals who lost jobs, took pay cuts, or lost pensions have had fewer discretionary dollars to spend. In particular, they’ve had less money to spend on maintenance of homes and automobiles. Even people who didn’t change their job status have changed their attitudes about how they spend money, not only on luxury goods but on remodels and repairs. In a 2011 published report, the Federal Reserve Bank of New York found that discretionary service spending, including on insurance, had fallen by 7 percent per capita — the largest decline in more than three decades.
- It’s important for homeowners to recognize where potential damage lurks because of aged boilers or worn-out pipes or appliances. The practice of “do it yourself” can save money. However, it can also create additional risks that eventually negatively affect homeowners and insurers — even potentially prompting insureds to rely on their homeowners and auto coverage as “maintenance policies” to fall back on. It’s important for insureds to understand that they should weigh each repair or improvement and determine whether to call a professional. For example, if not done properly, a minor project, such as changing a doorknob that contains a lock, can weaken home security. Fixing a pipe under the kitchen sink can lead to water damage. Some drivers may put off buying new tires or brake pads for their cars, increasing the risk of auto accidents. Providing guidance and education to help insureds identify such potential problems — and understand how best to address them — could help.
Check back soon for the second part of this series. I’ll cover lesser-known risks that have emerged as a result of the slow economy.