Despite Challenges, New Year Will Bring Strong, Stable Industry: Hartwig

By | November 4, 2020

Despite a year of unprecedented challenges and uncertainty and a halting global economic recovery, the insurance industry remains strong, stable, sound and secure. Though below pre-COVID forecasts, major indicators point to positive rates of growth and a positive return on equity for 2020, which will be welcomed by an industry that has grappled with exposures related to COVID-19, hurricanes, wildfires and outbreaks of civil unrest across the country.

COVID-19 has had material impacts throughout the property and casualty side of the business, resulting in a material deceleration in premium growth. It has also produced a sharp decline in the industry’s capacity on a global scale.

Certain types of insurance were hit harder than others. Workers compensation experienced a sharp decrease in payroll exposure — resulting directly from the loss of 22 million jobs as businesses were forced to shut down. Personal and commercial auto also experienced reduced exposure because people and businesses were driving less and transporting fewer goods, while aviation and marine insurance saw reduced exposures due to travel restrictions and the economic slowdown.

At the same time, aggressive actions by the Federal Reserve Board have pushed down interest rates and will have a long-term effect on the industry’s ability to generate material growth in investment earnings.

Robert Hartwig

Despite shrinking by more than one-third during the first and second quarters of 2020, the global economy is making a strong comeback. In the end, the relatively short duration of the 2020 recession will leave the economy in considerably better shape than the financial crisis of 2008 and 2009 and leave the insurance industry on solid financial ground with new learnings setting us on a course toward innovation and change.

A Pandemic, Natural Disasters and Civil Unrest

By mid-2021, we can expect the industry to work through most of the immediate economic and financial impacts of COVID-19. That said, there will be ongoing litigation issues arising from business interruption coverage disputes that could last for years. While early court decisions have generally been decided in favor of insurers, there are roughly 1,100 outstanding COVID-related lawsuits.

In 2020 we are certain to surpass the insurance CAT losses of 2019. With the continuing wildfires in the West and significant claims arising from civil unrest, these losses will likely reach several billion dollars. Generally, prices rise after large scale CAT activity to reflect increased rates and higher prices for reinsurers.

Storms and wildfires will calm as the seasons change, and a vaccine will eventually come for COVID-19. But, there is no season or vaccine for civil unrest. Political uncertainty lies ahead of us and that’s a wild card in terms of civil unrest in the future.

What It All Means for the Industry?

With a contentious presidential election looming, many may be wondering what a change in the White House could mean for the insurance industry. According to my research examining the past 70 years, there is no correlation between return on equity (ROE) for the p/c insurance industry and the political party of the president – primarily because hurricanes, earthquakes, wildfires and tornadoes don’t care who is in the White House.

These changes do, however, present opportunities for learning and innovation for the industry. Once the COVID-related litigation, legislation and regulatory changes are resolved, we will see a burst of innovation with many insurers and reinsurers coming to market with a variety of pandemic-related solutions. Just look back to the Terrorism Risk Insurance Act (TRIA) passed after 9/11; insurers were spurred to develop terrorism-related solutions for businesses.

Beyond the changes we will see in terms of new products and innovation, we’ll also see changes to the makeup of the insurance workforce. We are seeing efforts, long standing in many companies and within organizations like the Insurance Industry Charitable Foundation, to build an increasingly diverse workforce and inclusive workplace.

From my perspective at the University of South Carolina, I see universities actively working to increase minority enrollment across the industry. At USC, which has one of the country’s largest risk management and insurance programs, African-American freshman enrollment is projected to grow by 28 percent over last year, and it has more than doubled since 2016. At the same time, Hispanic freshman enrollment is up 55% since 2016. As a result of initiatives like these, insurers and brokers seeking to recruit new talent in the years ahead will have access to an increasingly diverse pool of young talent.

Despite the challenges of 2020, the industry should enter 2021 financially strong, stable and secure. Ours is an industry that is accustomed to operating as if every day were to be a doomsday. Time and time again when we are hit by large scale events, we emerge with our financial strength intact and will for years to come.

About Robert Hartwig

Dr. Robert Hartwig is Clinical Associate Professor of Risk Management, Insurance and Finance in the Darla Moore School of Business at the University of South Carolina and Director of the school’s Center for Risk and Uncertainty Management. More from Robert Hartwig

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