EY ITEM Club Forecast: Outlook for Financial Services Winter 2014

Forecast for Insurance

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Life and non-life premium growth was more resilient than expected in 2013, and a firm but protracted recovery path is forecast for both. The boost in property transactions to 1.3m by 2017 should increase demand for insurance products. Even though profits will reach £191b this year, they are not expected to exceed their 2007 peak until 2017.

“The harsh truth is that economic improvements alone - however welcome - will not be enough to galvanize the business models that served the industry well during the last decade. However, the recovery might still throw a lifeline to insurers, by giving them a window to develop their customer engagement capabilities.”
Mark Robertson
Partner, UK insurance
Read Mark’s full insurance viewpoint

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EY - Mark Robertson
Mark Robertson
Partner,
UK insurance

The green shoots of the UK’s economic recovery are unlikely to herald a cyclical upturn for insurers in the UK this year. Instead, insurers will be focusing on ways to protect and enhance their profitability, with only a handful significantly growing their revenues.

While predictions for gross written premiums have been revized upwards since the last forecast, UK insurers are expected to see modest top line growth. Although this is better news than will be the case for many European counterparts in 2014, this development is likely to be met with a cautious welcome by the industry.

The UK’s recovery remains largely consumer driven and this could have some impact on the industry’s profitability prospects. Retail business in the non-life sector may see uplift in protection sales as households’ levels of disposable income increase and spend focuses more on cars and other big ticket items. Increased sales in the UK housing market may kick start life insurance sales, although gender neutrality and the removal of "I minus E" tax breaks are slowing new business based on churn. ↓ [... more]

Unfortunately, the modest top line growth is not being matched by a rapid rebound in profitability. The insurance industry is beginning to reach capacity in terms of products offered in the retail space. The challenge will be to tailor products to customers’ individual needs, but this level of tailoring is likely to take some time to develop and, if introduced too early, could eat into elusive profit margins.

In the life industry, unbundling and the RDR continue to put pressure on savings margins, and, in the short term, auto-enrolment is unlikely to generate much in the way of profitable business. Meanwhile major non-life markets such as retail motor insurance continue to be characterized by over capacity with premium price-cutting leading to ever-elusive profitability. A number of external factors are contributing to extensive bottom-line pressures for the UK non-life sector; regulators are challenging the fairness to customers of the extensive use of schemes and managing general agents; and HMRC is also revizing the VAT treatment for a number of previously exempt aspects of motor claims, especially tied repair shops. Specialty and reinsurance markets are also seeing premiums come under exceptional pressure, as a range of investors flood the market with capital.

The harsh truth is that economic improvements alone – however welcome – will not be enough to galvanize the business models that served the industry well during the last decade. However, the recovery might still throw a lifeline to insurers, by giving them a window to develop their customer engagement capabilities. This in turn will help them to achieve the more intelligent, targeted and profitable underwriting that will be crucial to long-term success.

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Insurance highlights:

  • Life premium growth was more resilient in 2013 than previously expected, pointing to a firmer outlook for life insurance. We expect total life gross premiums to reach £191b in 2014, but not exceed their 2007 peak until 2017.
  • A similar recovery path is forecast for general insurance. This year, non-life premiums are expected to reach £59.6b, an increase of 6.2% from 2013.
  • The number of property transactions reached 1m last year for the first time in six years. Transactions are forecast to rise to 1.3m by 2017, boosting demand for general and life insurance.
  • Insurance profits are likely to be constrained by low rate rises and a competitive environment. In 2014, we expect insurance profits to reach £5.4b, but not exceed their 2007 peak until they reach £7.7b in 2017.