A swirling storm of tough economic issues promise to create a difficult start to the year
By Matt Scott
2022 was certainly a tough year for the insurance market.
Rising inflation amidst a series of crises – cost of living, supply chain, energy – put increasing pressure on insurer profitability, while economic uncertainty made the business landscape tough for businesses up and down the country.
And this was added to by what can only be described as a disastrous premiership from the UK’s shortest-serving Prime Minister ever, Liz Truss, and a number of ill-founded economic policies and subsequent u-turns that sent the markets into turmoil.
But what lies ahead as we enter 2023?
Sadly, the UK looks set to enter recession this year, with research from Allianz Trade estimating that the economy will shrink by 0.9% compared to the Eurozone, which it predicted would shrink by 0.4%.
The looming recession will increase the pressure on already faltering businesses, with the same research from Allianz predicting that business insolvencies could increase by as much as 15% this year – and that is on top of a 51% increase experienced over the course of 2022.
Insolvency risk
This means that as many as 27,100 firms are expected to go insolvent over the course of 2023.
Many of these insolvencies are expected to hit the struggling hospitality sector, but construction, training companies and transport and storage businesses are also expected to be hit hard.
This will be tough news to bear for a country that is already struggling with supply chain issues and a swathe of industrial action that is hampering delivery times and restricting the supply and availability of goods.
Coupled with a labour shortage that is persisting off the back of the Covid-19 pandemic and Brexit, this means that insurers are likely to be hit by even greater claims costs over the course of this year.
Read: Broker CEO Forum - ‘Difficult to manage’ economic turmoil will last until 2024 – RSM
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This will be particularly hard felt in the physical damage markets, where extended repair times and the rising costs of parts and labour are expected to persist.
The recessionary economic landscape will also make it tougher for those businesses that are able to remain trading, with business investment expected to fall over the course of the year.
This, in turn, could lead to increasing risk profiles across a number of business sectors, with the cyber insurance market likely to be one of the main victims if investment in risk management and particularly cyber security does fall over the coming months.
For insurers, this could mean an increase in both the frequency and severity of claims at a time when pressure on the bottom line is already mounting.
And with reinsurance renewals already dealing the first blow of the year, it could be a very difficult 12 months indeed.
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