Partisan Divide

October 15, 2012

With less than a month to go before the 2012 elections, one of the most significant macro trends that has emerged is the highly partisan environment.

A study by the Pew Research Center highlights a sharp increase in political polarization and forecasts continued political gridlock. The study found that Americans are more polarized along partisan lines than at any point in the past 25 years.

The exact onset of hyper-partisanship is difficult to pinpoint, but in 2011, New York Times columnist Joe Nocera claimed that the fight over Ronald Reagan’s nomination of Robert Bork to the Supreme Court marked the beginning. Since Bork, we’ve seen contentious confirmation hearings for a number of Supreme Court nominees, including Clarence Thomas, John Roberts, Samuel Alito, Sonia Sotomayor and Elena Kagan.

The 2000 election clearly drew the battle lines between right and left. Although we saw national unity in the aftermath of the 9/11 terror attacks, the partisan gap quickly widened again during the Iraq War and split even wider after 2008’s financial crisis.

Two key macro trends — the 2012 elections and the weak economy — are impacting the property/casualty insurance industry.

When President Obama was elected, many hoped we would see a new national unity emerge. But almost immediately, Democrats in Congress pushed through the financial stimulus and health care reform with little Republican support. The 2010 mid-term elections returned Republicans to the House majority, which has created the gridlock we see today.

This year’s elections have been sharply fought, and they are likely to widen the partisan divide, not reduce it. There is nothing on the horizon to suggest that hyper-partisanship will dissipate.

Economic Challenges

The second macro trend is a historically weak economic recovery that once again is slowing.

In the past several months, slow job growth has come in well below expectations. The current recovery pales in comparison with most other recoveries, including the one following the Great Depression. In the three years following the Great Depression, the economy rebounded with growth rates of 11 percent, 9 percent,and 13 percent. The current recovery began in the second half of 2009, but economic growth in 2010 was only 3 percent, and in 2011, it was 1.7 percent.

The U.S. economy is not growing fast enough to absorb new entrants into the workforce, much less re-employ the nearly 8 million people who lost their jobs during the Great Recession. Believe it or not, the story is about to get worse.

At the end of this year, we are facing what Federal Reserve Chairman Ben Bernanke has called the “fiscal cliff.” This is when large spending cuts will intersect with major tax increases, and together threaten to cripple our historically weak recovery.

The first problem stems from the failure of the 2011 Congressional Super Committee, which was formed in the wake of the federal government’s near default on sovereign debt. The Committee’s inability to reach an agreement on budget cuts last fall has led to “automatic” budget cuts of $1.2 trillion, split between defense and nondefense spending, set to take effect in January 2013.

The second issue is the expiration of the Bush-era tax rates. All of the current tax rates on personal income, capital gains and dividends, and estates are set to expire on December 31. This means every American taxpayer and business is facing an automatic tax increase on New Year’s Day, unless Congress extends the current rates. According to economist Martin Feldstein, “a sustained tax increase of that magnitude would push the U.S. into a new and deep recession.”

These critical issues will not be addressed before the elections. That means Americans will have to rely on lawmakers to fix these major problems during a lame-duck session at the end of the year.

Of course, the Eurozone sovereign debt crisis is deeply concerning because the path it follows could determine whether the United States goes back into recession.

These economic woes have led to a rise in populism and greater scrutiny for everyone in the financial services industry. Even normal business activity for insurers — such as underwriting and claims processes — will be viewed skeptically. Any misstep, real or perceived, will be magnified tenfold.

Property/casualty insurers are facing serious challenges. The economic, political and regulatory challenges posed here have the potential to be just as costly and disruptive to insurers as major natural catastrophes.

Sampson is the president and CEO of the Property Casualty Insurers Association of America (PCI), which represents more than 1,000 homeowners, auto and business insurance companies that write 38.3 percent of the nation’s property/casualty insurance.

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