Fears of a major recession have receded somewhat since the winter, but economic turbulence is still expected. What can we learn from the last downturn about the importance of legal expenses insurance?
Economic headlines remain mixed as the UK heads into the summer, but the picture is undoubtedly more positive than it was last November. The Bank of England had just warned that the UK could experience its longest recession since the 1930s. Interest rates were pushed up by 0.75% to 3%, reaching their highest level since the Major government. A mooted freeze on government spending led to gloomy predictions that the UK would be the worst-performing economy in the G7.
Staring down these conditions, legal expenses insurance (LEI) underwriters with experience of the last recession knew they needed to be proactive, says Robert Nicholls, Director of LEI at Markel. “I first experienced the impact of a recession during the credit crunch of 2007/08. Higher interest rates brought the era of cheap lending to an end, strangling economic activity, but unemployment rates did not peak until the end of 2009 and into 2010. When we analysed our own performance at this time, our employment claims increased by over 50%.
“The reality is that these things take time to cascade into insurance. When the economy takes a fall, customers change their spending habits due to lack of cash. As businesses lose profits, restructuring takes place and employees are made redundant”.
The industry has learned lessons since the last recession, says Nicholls. “Around 2008 to 2011, the LEI market was still growing. Competition was low, and we had an adequate margin to cover the increase in claims. While we knew that recession and unemployment was a poor risk, we believed it was a sales opportunity to further our growth.
“By the time the pandemic hit in 2020, however, our market, now mature and having been in the midst of a long soft market for years, had just experienced a doubling in claims following the abolishment of employment tribunal fees in 2017. The product was ‘in the red’, and we needed to understand the impact to the book of a GDP that some were predicting might contract by as much as 35%.”
Learning from the past
This change in conditions served as a cue to analyse the patterns of the past. “Was there a spike in the credit crunch? Was the sales theory we used to grow our business actually causing a spike in claims?” Nicholls and his team plotted the unemployment rate, which peaked in Q4 2009 into Q1 2010, against their own claims data, and noticed a spike throughout that period, which reached its peak in 2011. They observed a 50% increase in claim notifications, but on a 12-month lag against the unemployment data.
“A senior underwriting colleague asked me what I planned to do”, Nicholls recalled. “They said ‘no one is going to thank you for writing loss-making business’… yet our market had just imposed rate due to the doubling in claims from employment tribunals. No distributor was going to thank me for raising the rate based on a perceived economic risk.”
Nicholls and his team decided to research the businesses that it would be impacted, before creating their first economy-based LEI risk appetite, considering sectors that they could show would be impacted the most. “There’s no single source with all the answers, but there is lots of material out there that can help you understand the sectors being impacted”, Nicholls found. This, along with the furlough scheme, got him and his team “through a sticky period.”
More recently, the economic picture has steadied somewhat. However, the Office for Budget Responsibility was, as of March 2023, still forecasting an increase in the unemployment rate to 4.4% by 2024, from a base in Q4 2022 of 3.7%. “Our expected outcome for claims will be lower, but we know there will be an increase”.
“If I was an intermediary”, says Nicholls, “I’d go back to the days where we sold the bad story to our distributors, and I would remind brokers of the importance of having a product that provides not just insurance protection, but the very best in service provision, to help their businesses navigate what will still be choppy economic waters.”