The Weekly Thought

Will the Covid-19 Pandemic/Post George Floyd Civil Commotion Events Lead to a Softening, Flattening or Continuation of the Insurance Hard Market?

As a quick background, Economic “Panics” are historically followed by significant drops in demand for insurance products. Following the crash of 1929, non-life insurance premium as a percent of GDP declined by over 50% and took 20 years to recover. Post the 1980’s recession, premiums declined almost 20%. Post the 1990’s S&L banking crisis, insurance penetration declined by about 25%, and following the 2008 banking crisis by nearly 20%, globally in each case. 

What happened in each scenario? Quite simply demand dropped in the general economy for goods and services, causing a drop in need for employees to fulfill demand, resulting in drops in insurable exposures (payrolls, sales, property values, shipping volume, miles driven, etc.). Demand for insurance declined causing the so called “pricing power” of the insurance companies to disappear. A classic supply (over) and demand (under) dilemma resulted each time for insurance providers. 

The result each and every time was a softening of the insurance marketplace…price reductions to entice greater demand to take up the slack in the oversupply. 

Will this cycle repeat this time? 

As late as December 2019, many prognosticators predicted the demise of the classic insurance cycle, predicting a “sustainable” hard insurance market. Just about that time rumors were coming out of Wuhan, China regarding some form of a novel coronavirus. Global shutdowns occurred, insurance markets froze solid deep in the hard market territory that began roundabouts mid-2018, Covid-19 claims arose only to be summarily denied by many insurers (topic of a future commentary). Economic stimuli was and is being floated at historic levels by all of the world’s central banks, unemployment is nearly at levels not seen since the Great Depression. Civil unrest is approaching levels not seen since the 1960’s. 

Insurance “pricing power” is evaporating alongside the shuttered business establishments, small and large, many of which may never return. 

Some unique differences may factor in this case. The medium- and long-term effects of the aforementioned stimulus efforts globally, which are unprecedented in scope and scale, are unknown. The unfolding civil commotion events post the George Floyd incident and the probability of many years of Covid-19 claims litigation lead to uncertainty with respect to claims economics, thus compounding the expected financial pressure on insurers. The shape of the economic recovery curve (V-shaped, U shaped, Nike “swoosh shaped,” W shaped, etc.) will be factors affecting the timing of the hoped-for resumption of normal demand, thus fueling insurance demand and the ability to pay premiums. Also, whether or not Covid-19 recurs in successive waves later in 2020 and into 2021 are worries. The run-up to and the results of the 2020 presidential and congressional elections will also weigh heavily. 

“History doesn’t repeat itself, but it often rhymes.” Mark Twain

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