How the Economy Affects Life Insurance Providers

Elaine Brookes Steve Case

Author: Steve Case - Insurance Expert

Reviewed & Fact Checked By: Elaine Brookes

Updated: 31st December 2023

The economy goes through good and bad times and these changes affect many industries. Such changes can affect anyone, even including the insurance companies themselves.

the economy photoThe insurance industry offers products designed to manage risk, which is linked to economic factors.

Actuarial science applies mathematical and statistical methods to the assessment of risk within this industry. This practice traditionally relied on assumptions but that began to change a few decades ago. Modern actuarial science practices combine established models with financial theories.

Life Insurance Companies Are Affected by Macroeconomic Factors

A life insurance policyholder makes premium payments for cover. The insurance provider invests this money but returns are not guaranteed and are determined by the state of the economy. When the economy is struggling, insurers must assume more risk. In exchange they increase premiums for life insurance policies.

An insurance provider in a dire economic situation may have to remove itself from a market or even relocate its operations. These actions reduce revenues and negatively affect the local economy, worsening the economic situation.

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Unemployment rates tend to increase during economic downturns because companies attempt to save money through redundancies. As a result, more people experience financial struggles. Some of them attempt to earn quick money through illegal practices such as filing fraudulent claims with insurance providers.

This may happen when a life insurance policy features a critical illness benefit. The policyholder may fake a critical illness and get an unethical doctor to support this false claim.

Life insurance demand is also affected by macroeconomic factors. Investors who are used to attractive returns when the economy is booming might not think that life insurance is worthwhile. When the economy declines, many people experience lack of funds and must limit their spending.

People will most likely use their limited money to pay the mortgage, buy groceries, or keep electricity running. Buying life insurance does not make the list because it does not provide immediate financial benefit.

Insurance is About Risk Management

The primary aspect of insurance is management of risk. An individual buys life insurance to limit the financial risk of beneficiaries. If the economy is suffering, many insurance providers are not willing or able to take risks. As a result, they may be unwilling to insure someone with an increased risk factor such as a health issue.

Unless the applicant is young, in peak health, and financially secure the life insurance application may be denied.