Part 1: Economic uncertainty

Economic and recession risks

Macroeconomic issues such as the state of the economy, global conflict and fuel prices have a major influence on the way that businesses perform. And, with higher operating costs and plenty of economic uncertainty in evidence, insurers are watching closely how this affects Directors and Officers claims. 

Economic conditions have been relatively benign in the UK for many years, with the Bank of England able to keep inflation below the 2% target set by the government in the 1990s. This brought stability for prices and wages but also low interest rates to enable business growth.

Inflation returns

However, everything started to change in 2022. Post-pandemic supply chain bottlenecks coupled with higher energy and transportation costs pushed prices upwards. This was compounded by trade barriers such as Brexit and US import tariffs on Chinese goods, which added further costs to goods, affecting consumers and businesses alike.

In February 2022, the war in Ukraine caused further price shocks for a wide range of commodities including energy, food, and construction materials. By October 2022, figures from the Office for National Statistics show that UK inflation had reached a 41-year high of 11.1%. 1

Similar inflationary pressures can be seen all around the world too. In October 2022, inflation in the Eurozone hit a record high of 10.7%, while in the US, consumer price inflation reached a 40-year high of 9.1% in June 2022.

'In October 2022, UK inflation had reached a 41-year high of 11.1%.'

Business challenge

High inflation is challenging for businesses. As the cost of producing goods or delivering services increases, it can be difficult to set prices. Custom may also dry up as price rises outstrip wage increases. It also pushes up interest rates.

In the UK, 2022 started with the Bank of England base rate at 0.25%, a rate it had held throughout the pandemic. Eight base rate increases were made that year to control inflation, with further ones in February and March 2023 bringing the rate to 4.25%.2

The higher cost of borrowing can mean that many businesses will put expansion plans on hold, especially given all the economic uncertainty.

This also raises fears of a recession. Although the UK narrowly avoided a recession in January, with the economy expanding by 0.3% after a decline of 0.5% in December, it is still a possibility. Nearly 2.5 million working days were lost between June and December 20223 as a result of industrial action.

london skyline at morning

The global picture is equally bleak. Allianz Research expects Eurozone growth to plunge to -0.8% in 2023 due to soaring energy prices, with negative confidence creating a shock on real disposable incomes and corporate margins.

It also expects the US will see a -0.7% fall in GDP, due to rapidly tightening monetary and financial conditions. This is likely to significantly cool the housing market and consumer spending.

Insurer reaction

As challenging economic conditions fuel insolvencies and Directors and Officers claims, insurers are monitoring these areas closely. The UK is already seeing an uptick in the number of registered company insolvencies, with 1,783 businesses declared insolvent in February 2023.4

Allianz research shows that the sectors most at risk of a liquidity and profitability squeeze are: construction, transportation, telecoms, machinery and equipment, retail, household equipment, electronics, automotive and textiles.

To survive, a business must be able to offset higher wage bills, energy and borrowing costs with increases in productivity.

“Companies may start looking at how they can reduce costs or ‘trim the fat’ in an effort to maintain or improve their financial performance in what is a very challenging economic climate. Identifying areas where they can improve operational performance or save money may prove more vital than ever as we continue to navigate the current economic downturn,” says Joe Roberts, Speciality Lines Underwriting Manager, Allianz.