How Are Life Insurance Companies Affected by Economic Changes?
When the economy experiences changes, many industries feel the effects.
The management of risk, a major aspect of the insurance industry, is tied to economic factors.
Actuarial science involves the application of statistical and mathematical methods to risk assessment within the insurance industry.
Traditionally, actuarial science relied upon assumptions but by the late 1980s, the discipline began incorporating financial theory into established models.
Macroeconomic Factors Affecting Life Insurance Companies
Life insurance policyholders paid premiums to their insurance companies. This money is invested and if the economy is not performing well, the investment may provide less return. Insurers are forced to take on more risk and to help compensate for this, they increase the premiums that policyholders must pay.
If an insurance company finds itself in economic distress, it may be forced to pull out of a market or relocate to another area. This decreases revenues and has a negative effect on the local economy, perpetuating the economic issues.
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When the economy takes a downturn, unemployment rates increase as companies tighten their belts. This leaves more people struggling financially. Some of these individuals look for ways to make quick money and, unfortunately, filing fraudulent insurance claims is one way they do it.
Though this can be difficult to do with a life insurance policy, if the policy contains a critical illness benefit, it is possible. An individual can claim to have a critical illness and convince an unscrupulous medical provider to substantiate this claim.
Macroeconomic factors also affect the demand for life insurance. People whose investments are performing well during a positive economy may not recognise the need to purchase life insurance. On the other hand, when the economy is performing poorly, many people find themselves short on money and they must make careful decisions about how to spend it.
A person is more likely to apply available funds to a mortgage payment, utility bill, or groceries than to spend it on purchasing a life insurance policy that provides no immediate benefit.
Insurance Deals with Managing Risk
Managing risk is the main concept behind insurance. A person purchases a life insurance policy to minimise the financial risk experienced by surviving loved ones. When the economy is in trouble, fewer insurance companies are able or willing to take risks.
That means that these providers may be more hesitant to insure an individual with a particular health condition or other risk factor. People who are not young, financially secure, and in optimal health may experience difficulty having their life insurance applications approved.