Buying habits

As the casualties of the credit crunch continue to mount consumers may not be the only ones tightening their belts. Commercial insurance buyers are examining their insurance spend.

Will the hairier business environment spook them enough to buy more cover? Or will rising insurance premiums encourage them to look for alternative means to protect their companies.

The answers are not clear cut. As the world’s economies edge closer to recession risk managers may become tempted to cut back on their insurance spend, choosing instead to self-insure more risks.

Partly that’s because they have less money to spend themselves, coupled with the impact of hardening premium rates and conditions as insurers seek to address the impact of declining investment returns.

When investment returns are high insurers can afford to write unprofitable business at competitive rates. But with stocks plunging around the world many buyers fear a shift to a harder insurance market, which may depress premium spend further.

The insurers reckon they have learned lessons from the past. Most of the A rated companies have good risk management and financing departments. And stocks and shares no longer make up a significant proportion of their investment portfolios.

Buyers hope that this, combined with a lot of capacity in the market, will prevent a sharp increase in rates. Evan Greenberg, the chief executive of insurance giant ACE, said recently the soft market would continue for at least another year. Worryingly, the credit crunch may well continue for just as long, if not longer.

In today’s volatile markets companies may become keener to find ways of transferring the risk off their own balance sheet. Good news for insurers.

“The ABI reported recently that the number of companies taking out credit insurance increased by 10% during 2008 compare to last year.

The ABI reported recently that the number of companies taking out credit insurance increased by 10% during 2008 compare to last year.

The financial lines arena could also see a boost, given the potential for shareholder litigation stemming from the turmoil in the financial markets.

As more financial institutions crumble and economic dangers are played out for the world to see, boardrooms are likely to become more risk averse—they may also choose to forego risky investments.

The likely withdrawal of billions of dollars of AIG capital from the market combined with lower investment returns across the board almost certainly spells an end to falling commercial insurance prices. Thus strengthening the argument for risk retention.

Yet just as higher insurance premiums are a turn-off for buyers they can be a major incentive for potential investors. While recession could initially drive premiums higher, in the longer term as investment money seeps in at the reinsurance level there is a downward pressure on rates that, in turn, get passed onto the insurance market.

Judging solely on the loss of confidence in financial institutions and their risk management systems, it’s reasonable to assume that one lasting impact of the crisis will be a return to a more layered approach to insurance buying where companies seek to spread the risk across a number of different carriers.