EY ITEM Club
Outlook for Financial Services Spring 2015
Forecast for Insurance
“The projected acceleration in UK economic growth is positive news for the insurance industry as a whole and for general insurers in particular. But while strong GDP growth and equity prices may have been enough to boost insurance profits in the past, history is unlikely to repeat itself exactly in the coming years. Each sub-sector faces specific challenges that will limit its ability to translate positive economic indicators into performance improvement across the industry.”
Partner, UK insurance
Read Mark’s full insurance viewpoint
The projected acceleration in UK economic growth is positive news for the insurance industry as a whole and for general insurers in particular. But while strong GDP growth and equity prices may have been enough to boost insurance profits in the past, history is unlikely to repeat itself exactly in the coming years. Each sub-sector faces specific challenges that will limit its ability to translate positive economic indicators into performance improvement across the industry. ↓ [... more]
Consolidation in specialty insurance
Specialty insurance continues to have a glut of globally mobile capital looking for a home. As niche focused strategies start to unravel and pressures on premiums, expenses and talent continue, merger and acquisition (M&A) activity is expected to pick up, with the industry seeking scale from consolidation.
The key question, though, is: how much of this activity is cyclical and how much structural? An underlying shift across the market is that the matching adjustments under Solvency II are making reinsurance less attractive, driving repatriation of some risks by insurers and growing use of alternative risk transfer models.
Uncertain future for life and pensions
Meanwhile, the growth outlook for life and pensions (L&P) providers remains relatively flat in the short term, despite strong fundamental long–term demand. The muted prospects reflect the fact that L&P providers have probably never been as uncertain about the future behavior of both customers and regulators.
Wealth and asset managers are looking to invade L&P’s home turf as a result of the incoming pension reform, and the sector is also seeing M&A activity as companies seek volume to cover high cost bases, or seek financial engineering solutions to improve performance. But, looking further ahead, there are massive opportunities for L&P companies that succeed in building deeper and wider customer relationships that echo those traditionally owned by banks. Those that lack the imagination to do this may ultimately find themselves frozen out and consolidated.
General insurers well placed
For their part, general insurers stand to reap the greatest benefit from the renewed momentum of the wider UK economy. However, the intense competition and overcapacity in the sector mean that boosting margins will demand real focus and discipline. In retail property and casualty, for example, insurers with a strong distribution franchise and brand should be able to maintain margins through strategies that might include, for example, using telematics to build customer loyalty and fend off the commoditizing effect of the aggregators. But other players with “me–too” brands may face a stark choice between gaining market share or concentrating on profitable niches. Each route comes with its own potential pitfalls.
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Insurers received a buffeting in 2014, but this year offers the prospect of more stability. However, for the life sector in particular, there is still a lot of uncertainty on the horizon.
- General insurers should continue to benefit from the fairly buoyant housing market (albeit less so than in 2014), but growth in home and motor insurance premiums will remain squeezed.
- Tax changes and pension reforms will create a challenging environment for life insurers.
- At the same time, the ongoing rollout of pension auto-enrolment to small and micro–employers from April 2015 will boost pension providers.
- Based on macroeconomic factors and 2014’s performance, we forecast that insurance sector profits will rise by an average of 13% per year from 2015 to 2018. But there are significant downside risks to the forecast.