Economic Factors Affecting Insurance Industry

Economic Factors Affecting Insurance Industry

Economic factors affecting insurance industry can either enhance or hinder the thriving of insurance firms. The insurance industry is a major player in the economy and this implies economic imbalances can as well be felt in the sector. In fact, the insurance industry relies on the economy for its survival. Thus, if the economy is not doing well, the insurance sector will also be crippled.

The Main Economic Factors Affecting Insurance Industry   

The health of an economy is defined by various elements, which may encourage or hurt growth. This article will outline some of the key economic factors affecting insurance industry. Besides, it will also discuss how those factors can impact the operations of players in the insurance industry.


Inflation is a situation whereby the overall prices of goods and services become too high for many people, causing a decrease in the value of a country’s currency. Besides, it is also a state of uncertainty about the health of the economy characterized by unemployment. As a result of this, many people shy away from obtaining services like insurance. At this point, even government interventions may not have significant impacts since even insurance companies depend on investments from their customers in order to do business. Although, the government can still make efforts towards preventing further inflation.

Inflation is caused by a series of factors and activities like foreign exchange rate, unlimited supply of money by the government, which may not be in the direct control of insurance companies. However, it may have far-reaching consequences on the sustainability of the insurance sector.

The levels of inflation may have varied impacts on the insurance industry. For instance, if the inflation rate is so high, many people may feel threatened to lose their property and may rush to acquire insurance. This will mean more business and revenues to the insurance sector. The general impact of inflation on insurance depends on its relationship with other economic and financial factors.


Generally, deflation is a situation whereby there is a decrease in prices of goods and services. It is caused by the lack of demand across the various sectors of the economy, forcing suppliers to lower their rates or prices in order to attract customers. A fall in the aggregate money supply in the economy is one of the main causes of deflation.

Deflation means the economy is doing well and the value of the currency is competitive in the market. As a result of this, many people are able to spend more, which is good news to insurance companies. When many people start obtaining insurance, the companies will get money to pay claims, attracting more business and revenue.

However, it should be noted that if deflation is allowed to persist in an economy, it may be difficult to change the trend of continuous decrease in prices of commodities, which can impact reduced profits and increased unemployment rates. Central banks should be able to see the signs of growing deflation and tame it before it poisons the various sectors of the economy.

Economic policies

Economic policies can be formulated and implemented depending on the economic situation in order to regulate the activities of financial institutions like insurance companies.  In times when an economy is facing a crisis, the government can implement economic policies to shield consumers from exploitation by insurers while also protecting insurance companies.  An example is the Gramm-Leach-Bliley Act of 1999.


The economy of a country can also affect the level of competition by increasing or decreasing it. For instance, in developing economies, there is a high level of competition since many people are attracted to the lucrative insurance business. In such cases, insurance companies may be forced to consolidate their efforts through mergers and acquisitions in order to survive in the market. This may sometimes decrease the profits margins for many players in the industry.


Going by the key economic factors affecting insurance industry discussed above, manipulating the economy to suit the interests of insurance companies is a nut too hard to crack. However, insurance companies and the government have a role to play in the formulation and harmonization of policies that encourage economic growth.


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