82% of Insurers Say a Recession Is Coming. How Bad Might It Be?

The U.S. economy is primed for a recession in 2020 or 2021, so says 82% of the investment chiefs at the world’s largest insurance companies.

The U.S. economy is primed for a recession in 2020 or 2021, so says 82% of the investment chiefs at the world’s largest insurance companies.

The data comes from a new study by Goldman Sachs Asset Management (GSAM) called “Cautiously Opportunistic,” which interviewed 307 chief investment officers, chief financial officers and senior professionals responsible for $13 trillion in balance sheets at global insurance companies.

By the Numbers

From the report, 35% cited an economic recession is their top macroeconomic worry, up from 24% in 2018. That beat out all other concerns including credit and market volatility (20%), political events (13%) and recession in China (9%).

Only 7% are concerned about rising interest rates (down 30% from last year).

85% said they believe we’re in the late stage of the current credit cycle (up from 34% last year).

38% of insurance investors are most concerned with credit quality deterioration in their portfolios (up from 23% last year).

62% expect the 10-year U.S. Treasury yield to remain in the 2.5 to 3.0% range by year-end, a break from previous years where insurers predicted an upward trend.

46% invest in Insurtech. The most common reason is to improve operational efficiency.

From the Study

Michael Siegel, GSAM’s global head of insurance asset management said: “Insurers predict a U.S. recession is coming, just not this year.

“As a result, they are continuing to commit capital but are more selective in the risks they are taking. Insurers plan to continue the recent trend of allocating to less liquid asset classes including private equity, infrastructure debt and middle market loans.

“Globally, insurers continue to move out of local government debt and into the U.S. and European investment grade corporate bond markets along with allocations to real assets and private equity.”

Is Anyone Else Predicting a Recession?

Sadly, yes.

The latest survey by the National Association for Business Economics found that half of the nation’s business economists believe we’re headed for a recession in 2020. Three-fourths predict a downturn by the end of 2021. Only 11% say we make it through 2021 without a recession.

Duke University surveyed 1,500 CFOs, finding that 67% believe the U.S. recession will begin by the third quarter of 2020, and 84% say it’ll start by the first quarter of 2021.

Others predict a recession but say it won’t be nearly as bad as the crippling recession of 2008.

UCLA’s Anderson Forecast predicts slower economic growth when “the waning effects of fiscal stimulus combine with the partial normalization of interest rates and weakness among global trading partners.”

UCLA Anderson senior economist David Shulman said, “After growing at a 3.1% clip on a fourth-quarter-to-fourth-quarter basis in 2018, growth will slow to 1.7% in 2019 to a near-recession pace of 1.1% in 2020. However, by mid-2021, growth is forecast to be around 2%.”

Asset-management firm Guggenheim expects the S&P 500 to sink by 40 to 50%, reports MarketWatch.

Guggenheim agrees the coming recession will be milder than past ones because of the lack of lingering problems in the housing market and a well-capitalized banking system, which makes the economy more resilient.

What Does It All Mean?

Insurance companies will certainly be preparing their portfolios and investing in tech solutions.

Victoria Treyger, general partner and managing director at Felicis Ventures, who invests in Insurtech and other Fintechs, told Forbes “a recession would drive faster adoption of financial technology and spur further innovation in the sector.

“The true Fintech companies have demonstrated that they create significant value over existing solutions. Since this value, captured in lower fraud rates, higher approval rates, better authorization rates drop straight to the bottom lines, the best Fintech companies will do well through a recession while the rest of the market will see consolidation,”she said.

In the interim, insurers plan to continue putting money into private equity funds and infrastructure bonds, according to Siegel.

“Insurers plan to continue the recent trend of allocating to less-liquid asset classes including private equity, infrastructure debt and middle-market loans,” Siegel told the Financial News.

“Globally, insurers continue to move out of local government debt and into the U.S. and European investment-grade corporate bond markets, along with allocations to real assets and private equity.” &

Jared Shelly is a journalist based in Philadelphia. He can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.