On the New Year’s Eve just passed, 1,147 vehicles were torched on the streets of France, almost a third more than the year before. Brits too, are more partial to burning cars in times of economic strife, according to Andrew Torrance, head of British operations at Allianz, an insurer. There was an alarming rise in fires during both of the past two slowdowns (see chart). Arson is just one of the behavioural changes that drive up claims against insurance companies when economic growth stalls. Other types of crime rise. People and companies become more litigious. Firms offering credit protection are exposed to bankruptcies. At the same time, demand falls. For property insurers, say, there are fewer new factories and houses to insure. And life insurers struggle to sell policies when people are penny-pinching.
This combination of higher claims and lower new business written would appear to be toxic for underwriters. But as you might expect from the insurance industry, it is a lot more complicated than that, because recessions also tend to depress some types of claims. People drive less, reducing the number of motor accidents. The industries that often shrink most in a recession—construction and manufacturing—are among the most dangerous for workers. That means fewer payouts for insurers that have written protection against injuries. And for commercial and industrial property, though damage to premises rises, the cost of finding alternative facilities is lower.
Moreover, says Robert Hartwig, of the Insurance Information Institute, an American trade body, most existing non-life policies are nondiscretionary. In developed countries if you want to drive a car, employ a worker, or buy a house with a mortgage, you usually need insurance. At the same time, the credit crisis has eaten into insurance firms’ capital—although the industry has managed its assets better than the banks have. Less surplus capital should improve underwriting discipline, pushing up rates. By most accounts this process has begun.
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