Economic Headwinds

U.S. Insurers To Navigate A More Precarious Economy In 2023

Lower rates create more fallout for life insurers

The U.S. economy is headed towards mild recession next spring, yielding different outcomes for all major insurance sectors according to analysts during Fitch Ratings’ 2022 North American Insurance Conference.

Insurers face a multitude of headwinds in the coming months, among them sharply dropping GDP growth and near-double digit inflation in the U.S. and Europe. The increasingly difficult task of managing inflationary shock will cascade to insurance.

Managing Director Jim Auden said that P/C insurers have built a resiliency to volatility that has served them well through natural disasters, the global financial crisis and, most recently, a global pandemic. However, this ‘lessons learned’ approach will be put to an entirely different test that includes rising inflation, ballooning cyber risk premiums and more hurricanes making landfall over the last year. That said, market panelists agree that the P/C sector, while not ‘recession-proof’, is ‘recession-resistant’.

Broader inflation and rising rates will have a more muted effect for health insurers, though ‘pharma inflation’ is a concern with panelists pointing to rising prescription drug costs and, more alarmingly, hospital staffing shortages. Senior Director Brad Ellis said other wildcards top of mind among health insurers headed into 2023 include the redetermination of Medicaid, re-emergence of the flu and future COVID-19 variants and the RSV outbreak that has squeezed capacity at many children’s hospitals.

By contrast, rising rates creates more fallout for life insurers. While rising rates have created more investment portfolio opportunities, Senior Director Jamie Tucker they have also introduced headwinds brought on by a more volatile economic environment. With the ‘great financial repression’ of 2021 yielding to the more aggressive monetary tightening environment of the past year, panelists said that wage inflation, consumer balance sheets and more concrete signs of dis-inflation will be primary focuses for the fallout of 2023.