EY ITEM Club Financial Services Spring Forecast 2014

EY ITEM Club Forecast: Outlook for Financial Services Spring 2014

Forecast for Insurance

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Falling unemployment, plus improvements in the housing market and consumer activity should provide a boost for the general insurance sector. By 2017 non-life premiums are expected to finally exceed their 2007 peak, reaching £69b. A dip in life premium growth is expected in 2015 (a modest 2.1%) due to uncertainty in light of recent policy and regulatory announcements. However, we expect life premiums to recover to 3-4% growth over 2015-18 as insurers adjust to the changed annuity market.

“Firms that can build trust by supporting investors through accumulation and drawdown will be most likely to emerge as winners. ”
Mark Robertson
Partner, UK insurance
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EY - Mark Robertson
Mark Robertson
Partner,
UK insurance

With the economic recovery gathering pace, the UK looks increasingly likely to enjoy a period of steady growth. Despite the FCA’s thematic review of general insurance add-on products, retail  general insurers should benefit from forecast improvements in consumer activity and the housing market. However, profitability looks challenged, particularly in specialty lines where there is   overcapacity. Unless insurers can leverage the data within their portfolios to reduce costs and match exposures to risk appetites, a period of consolidation for scale seems likely.

In contrast, life insurers’ outlook has been thrown into uncertainty by the announcement of changes to annuitization in the budget and the FCA’s review of the treatment of long-standing customers. The strong market reactions of recent weeks reflect a widespread view that these changes could be the most far‑reaching that the UK life industry has seen in a generation. ↓ [... more]

As ever, the devil will be in the detail and that detail has still to be defined. However, two likely impacts are already clear. One is that the UK individual annuities market will shrink. How far will depend partly on the guidance customers receive, which could well point many toward an annuity, and partly on how well providers can improve the perceived value of annuities compared with alternative products. Another impact is that life companies will face increasing competition for customers who do not annuitize from asset managers and advisory firms with wealth management capabilities.

At this stage it is hard to say what impact the reforms will have on life insurers’ profitability. New business from annuities will fall, but insurers should be able to retain a large portion of those assets in pension and drawdown products. However, those products – and future annuities – are likely to have lower margins than today's annuities.

All in all, it would be a mistake to view the proposed changes in a purely negative light. In the long term, greater flexibility over drawdown should reverse the effects of recent years’ tinkering and help to make retirement saving more attractive. The planned changes will also give life insurers an opportunity to transform sales-based customer interactions into trust based relationships. Firms that can build trust by supporting investors through accumulation and drawdown will be most likely to emerge.

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Insurance highlights:

  • Total life gross premiums are expected to reach £192b in 2014 but not exceed their 2007 peak until 2018.
  • We expect the unemployment rate to fall to 6.8% by the end of 2014, creating opportunities for general insurance.
  • The number of property transactions reached 1 million in 2013 for the first time in six years. Transactions are forecast to rise to 1.3 million by 2018, boosting demand for general and life insurance.
  • Insurance profits are expected to rise to £5.6b this year, from £4.4b in 2013. But profit growth is likely to slow in future years.