Examining the Effects, Planning Ahead Insurance and the Recession

The economic crisis has affected many individuals, businesses and markets—the real estate and job markets, to name just two particularly nasty examples. Until now, one of the few industries that didn’t seem as deeply impacted was the insurance industry, but that is soon to change, according to certain experts in the field, who say that indicators show that insurance premiums are most likely set to rise over the next year.

Soft vs. Hard Market

According to Paul E. Felsen, president of Felsen Insurance Services, Inc. in Denville, New Jersey, “Premiums will probably or, I should say, they should go up in the next 12 months because the insurance companies continue to lose money.”

To understand why this is likely, you have to understand what the insurance industry calls its “soft” and “hard” markets, and you have to look back over the last decade and take into consideration the serious events that have befallen the industry. The insurance industry works in cycles. When it’s a soft market in the industry, insurance companies make money and the premiums paid by policyholders can reach record lows. A soft market also means more competition among insurers, which drives prices further down for policyholders.

By contrast, in a hard market it’s the opposite scenario: insurance companies aren’t making money. They are paying out more for more claims, and their own investment portfolios take big hits if the stock market takes a plunge. As a result, insurance premiums rise.

“The strange thing,” says Felsen, “is that most people thought that insurance pricing will start to firm up or go up in 2009, and so far in the first half of the year that has not been the case. I wouldn’t say the market is soft, but we’re not seeing dramatic increases just yet.”


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