January 2009

ASK THE EXPERT SUBMISSION – FORENSIC INSIGHT

Question

How could a down economy - coupled with a loss of revenue at city hall or another government agency – affect the insurance industry, both in terms of the premiums paid by businesses and any additional risks the insurance industry might face?

Answer

When a city loses tax revenue due to a downward spiral in the economy and determines that the best way to help rebalance its budget is to reduce public safety services such as fire and police, it runs the risk of creating a domino effect.

At first glance, these budget cuts may be a short-term solution to the city’s dilemma; however, because reduced public safety has the potential to negatively impact emergency response times, the risk for catastrophic damage and loss of life to homes and businesses increases.

Greater risk exposure due to reductions in public safety also has the potential to increase insurance premiums to both homeowners and businesses operating in the area. Additionally, it can also impact the insurance premiums the government entity pays to its carrier.

When homeowners and businesses see that their services are shrinking while their insurance premiums are climbing, it may factor in their decision to move to another area with more adequate services – and lower insurance premiums.

This exodus ultimately leads to an even greater reduction in commercial and residential tax revenue and forces the city to yet again examine whether or not they should reduce services further and risk perpetuating the cycle. Whatever the result, it will not be business as usual in the coming months and years.