With all the talk of “these uncertain economic times,” is the insurance industry in for a wave of new regulations coming down the pike? History can give us some clues but only time will tell if we’re looking at a repeat of the flood of regulations such as the ones that came after the 2008 housing crisis and market crash.
Is the insurance industry recession proof?
While every industry can experience boom and bust years, insurance tends to fare better than others when times are tough. This is an often-touted benefit of working in insurance, and it’s due to the nature of the products the insurance industry sells. Insurance isn’t a luxury but a requirement for many of the core elements society needs to function.
Even in a recession:
- People still need to buy houses, and mortgages require homeowners’ insurance
- People who use a mortgage to purchase a home may also need private mortgage insurance (PMI)
- People still need financial protection from major illnesses and accidents in the form of health insurance
- People still need assurance that their family will be able to live comfortably if they pass away, meaning they’ll buy life insurance
- People still have to get from one place to another, primarily using cars, meaning auto insurance isn’t optional
The list goes on. Clearly, the world couldn’t continue to function in a normal way without insurance protecting individuals and businesses from risk and financial loss. So, in this way, insurance can be considered a “recession-proof” industry. That doesn’t mean it hasn’t been impacted by past economic downturns, or that it won’t be impacted this time around.
What’s the economy doing in 2023?
If only we had a crystal ball! There’s a lot of analysis and prediction happening out there. On one hand, we’ve got high inflation, supply-chain disruptions, geopolitical conflict, and a pandemic that everyone wants to consider over, while on the other hand we’ve got low unemployment, high wages, and healthy consumer financial positions. It’s really anyone’s guess what will happen next: small recession, big recession, no recession?
Regardless of how things play out, the insurance industry will still be here. The question on everyone’s mind, however, is will a slew of new insurance regulations also be coming? While we can’t predict the future, we can look a bit at the past and see if there are any clues to be found.
Did insurance regulations increase during the last recession?
We can say with certainty that regulations across financial and insurance industries came fast and furious (as well as a bit more slowly) after the 2008 market crash. This isn’t a surprise, since some of the root causes of the financial crisis (also known as The Great Recession) included some bad behavior within the mortgage, banking, and – yes – insurance industries.
AIG’s role in the 2008 financial crisis
Of the names that went down in infamy for its role in the 2008 market crash (Lehman Brothers, Bear Stearns, etc.), American International Group (AIG) may be the most well known of all government bailout recipients that’s still functioning today. In fact, AIG repaid the last of its government bailout money in 2013, including $22 billion in profit.
Most people remember the 2008 financial crisis primarily centered around subprime mortgages. In the simplest terms, these were mortgages sold to people who could neither afford to repay them nor fully understood the terms of what they were signing up for. In other words, a recipe for massive loan defaults.
So how did insurance, and AIG specifically, fall into the mix? A division called AIG Financial Products (AIGFP) had been offering insurance against investment losses for quite a while. This isn’t in and of itself dangerous, as long as the investments being insured aren’t largely losing ones. In the years before 2008, as bundles of subprime mortgages were sold as investments, AIGFP created a new product called credit default swaps to protect investors against defaults on these bundled loans. Unfortunately, due to the nature of the subprime mortgages, this product was one that was highly likely to have to pay out – not, as insurance tries to be, safeguard against an unlikely circumstance.
Predictably, at least with hindsight being 20/20, AIG had to pay out claims on a huge number of their credit default swap policies. This led to such a vast financial loss that AIG faced insolvency. At this point, the U.S. government famously stepped in to bail out AIG and other financial institutions it deemed “too big to fail.” Not surprisingly, with billions and billions of dollars now invested in these financial institutions, the U.S. government felt greater regulation was in order.
The impact of the 2008 financial crisis on insurers
Aside from AIG, insurers weren’t necessarily wrapped up in central components of the financial crisis. The Organization for Economic Co-operation and Development (OECD) reported in 2009 that most insurers held diverse portfolios made up of high-quality investments. It was only when the larger economy began to suffer that life insurers (for example) saw dramatic drops in their portfolios’ values. Despite this, the Government Accountability Office (GOA) reported, the impact of the financial crisis on insurance carriers and policyholders were limited, with a return to their pre-crisis levels of capital by 2009.
So, while the financial crisis didn’t have an enormous impact on insurers and insurance policyholders in an immediate sense, the insurance industry was still subject to regulations that would come out of the crisis as a whole.
New insurance regulations in response to the 2008 market crash
The U.S. government spent at least $475 billion in its Troubled Asset Relief Program (TARP) to bail out major banks and avoid a complete economic meltdown. Along with the money, the U.S. government implemented new regulations on both the insurance and larger financial industries with the hope of avoiding a future repeat of this kind of crisis.
According to a 2009 article in Insurance Journal, lawmakers across the U.S. introduced more than 10,000 new pieces of legislation with potential impacts on the insurance industry in the first seven months of the year. This represented a 70+ percent increase compared to the number of laws proposed in the same period in 2008 and a 50 percent increase compared to 2007.
Some of the most notable legislation with impacts on the insurance industry included:
- The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – This law created the Federal Insurance Office (FIO), housed within the U.S. Department of the Treasury.
- The Nonadmitted and Reinsurance Reform Act – Technically a part of the Dodd-Frank Act, this law stands on its own and created for the first time uniform standards on a national level for surplus lines and non-admitted insurance.
- The Solvency Modernization Initiative (SMI) – Between 2008 and 2011, the National Association of Insurance Commissioners (in response to the financial crisis) began “a self-critical examination of U.S. insurance solvency regulation,” which aimed to address potential weaknesses in the insurance industry’s regulatory structure. A key part of this regulatory initiative was the introduction of The U.S. Own Risk and Solvency Assessment (ORSA), which required insurance companies to conduct internal risk assessments and submit their evaluation of their own current and future risk to regulators.
For an even deeper look at the ways in which regulations coming out of the 2008 financial crisis impacted the insurance industry, the NAIC compiled this reflective report in 2021.
Why do regulations increase during or after an economic downturn?
During a tightening economy or full-on recession, there are factors from both the industry and consumer sides that can put pressure on people and companies to act with less integrity than regulators might like. These conditions can lead to a backlash from regulators as they try to protect consumers and the financial system as a whole.
Increased pressure to hit sales quotas even while consumer spending drops
It’s no secret that insurance producers earn a living by making commissions on the insurance products they sell. While this is a perfectly fair and ethical practice, any commission-based product or service industry is subject to corruption when high sales quotas meet tightening consumer spending.
A prime example is from Wells Fargo, where employees trying to meet quotas were pressured into opening accounts and issuing credit cards without customers’ consent. It may not be a coincidence that this was happening as early as 2002 when the economy was struggling and unemployment was on the rise, through 2011 and beyond, with many people still reeling from the 2008 financial crisis and willing to do almost anything to not lose their job (and, consequently, their home).
Consumers make fear-based decisions
During the 2008 stock market crash, 401(k) accountholders saw dramatic drops as their retirement savings fell by about $2.7 trillion between 2007 and 2009. Contrary to financial logic, many investors feel the urge to withdraw their investments as the market goes down. And unscrupulous salespeople took advantage of this fact by convincing people to liquidate their suffering 401(k)s and IRAs to purchase annuities.
Annuities can be solid fixtures that belong in long-term financial portfolios but, in the 2008 financial crisis, vulnerable investors were sometimes swayed by fear and high-pressure sales tactics to take higher proportions of their money out of the market (at a loss) and purchase a “safer” or “more predictable” annuity product that ultimately wouldn’t return nearly as much as if they’d stayed the course with the stock market. It didn’t hurt that these annuities offered high initial commissions to the brokers who sold them.
This isn’t just a history lesson: As the economy and stock market are once again facing uncertainty, annuity sales are on track to beat the 2008 records. Luckily for consumers, new rules arose out of the 2008 financial crisis – although they took longer than anticipated to go into effect. As recently as 2022, the Department of Labor’s fiduciary rule achieved its final implementation. This regulation was in direct response to historic practices, including those during the financial crisis, allowing large, undisclosed incentives and less-than-transparent fee structures on annuity sales.
Innovation explodes during times of economic uncertainty
It might sound counterintuitive but a recession or economic downturn can be the best time to start a new business. An article from Forbes provides nine of the best reasons this is the case, and even though it’s from 10 years ago, while we were finding our way out of the Great Recession, the wisdom still holds true. Of course, our current economic instability doesn’t include low interest rates and low inflation, but if we end up in a true recession these economic factors may turn more in entrepreneurs’ favor.
In insurance, innovation can mean anything from brand new products that didn’t exist a few years ago (pandemic insurance and cyber insurance, for example) to innovative technologies and brand-new distribution channels like embedded insurance and on-demand insurance. It makes sense that regulations don’t exist for the newest products, which in turn creates a regulatory tidal wave when lawmakers catch up with the latest innovations.
How can insurance agencies and carriers prepare for a possible wave of new regulations?
It’s simple: Make regulatory compliance automatic, streamlined, and baked into everything you do. This might sound like a fantasy, but in 2023 you really can have it all.
Don’t skimp on compliance staff or technology
Massive layoffs are making headlines and companies are paying a heavy price for cutting staff in important areas like cybersecurity and compliance. Every era has a few big names in the news and your organization doesn’t want to be a cautionary tale! The best way to do this is to actually invest more, not less, in the people and systems that keep your organization in compliance.
Choose a compliance solution that does the heavy lifting for you
Keeping expert humans on staff is key. And remember those expert humans don’t want to spend their days on tedious, manual, repetitive tasks. Choosing modern compliance infrastructure that has state-by-state rules baked in lets your people do the work they want to be doing while technology makes compliance a no-brainer.
With a solution like AgentSync, that includes rules that enforce your producer license compliance, from onboarding to offboarding (and everything in between) you can make the most of the staff you have, save costs through operational efficiency, stand out as an organization others want to do business with, and reduce your compliance risk no matter how many new insurance industry regulations come your way. See how with an AgentSync demo today.