EY ITEM Club
Outlook for financial services Summer 2015
Forecast for Insurance
“While the general economic environment is positive and the prospect of a gradual rebound in interest rates is good news for the insurance industry as a whole, there are several potential challenges ahead. One of the biggest is the consultation on pension sustainability launched in the Summer Budget – including possibly replacing pensions with an ISA-style product.”
Partner, UK insurance
Read Mark’s full insurance viewpoint
While the general economic environment is positive and the prospect of a gradual rebound in interest rates is good news for the insurance industry as a whole, there are several potential challenges ahead. One of the biggest is the consultation on pension sustainability launched in the Summer Budget — including possibly replacing pensions with an ISA-style product. ↓ [... more]
The risks: more competition from investment managers…
The prospect of a move to such a system brings major implications for incumbent life and pensions (L&P) providers. The changes made to date have already made it easier for investment managers to challenge L&P companies’ traditional revenue streams, capitalising on their generally lower cost bases and less complex systems environments, so further changes rub salt into the wound.
While the trend towards convergence is well established, the Chancellor’s latest move suggests he is willing to accelerate the blurring of the old sector boundaries. Although this convergence poses a threat to L&P providers, it seems unlikely that they’ll attract much sympathy from outside the industry.
…wholesale disengagement by consumers…
A further risk from the latest proposals — one that could have implications for the UK economy as a whole — is the fear that the ongoing blizzard of change may cause savers to lose faith in pensions and become disengaged from long-term saving altogether. Such a result would undo the decade of hard work encouraging individuals to fund their retirements that had culminated in auto-enrolment. The Chancellor is keen to avoid that, so any change will certainly aim to keep savers saving.
…and a longer-term threat to the economy
A shift to ISA-style retirement provision — where post-tax income is saved and then drawn down tax-free post-retirement — could leave the UK economy staring down the barrel of a major issue. Picture the scene in 30 years’ time, when an ageing generation is retiring and is in need of medical treatment and care homes, but all their tax has been levied and spent decades ago. The burden of funding their care will fall heavily on the working population.
The Chancellor’s tapering of pension tax relief for high earners could be positive or negative for providers. The reduced contribution limit for an income band where there are generally big contributors will lead them to look for alternative investment vehicles. ISAs and “general investment accounts” will take up some of the slack, but there might also be more of a case for life bonds, if insurers can meet today’s demands for greater transparency and lower fees. However, it might also drive even more money into investment property, pushing up prices and making it harder for young people to get onto the housing ladder.
General insurance: effects of higher IPT could be offset by police technology
A significant announcement for general insurers was the 50% hike later this year in insurance premium tax (IPT). This triggered initial fears that the resulting rise in motor premiums could lead to more uninsured drivers on the road. However, the technology now being used by the police to identify and catch uninsured drivers is proving increasingly effective, and the rising likelihood of getting caught is a strong enough disincentive to offset the impact of IPT. But the price hike may make consumers more price-sensitive, giving insurers who can leverage analytics and price optimisation a potential edge.
A new era of mergers and acquisitions?
There is already a climate of consolidation in the global specialty market, as evidenced by mergers between Ace and Chubb, and XL and Catlin. But against a backdrop of industry overcapacity, there may be more to come. In the UK life insurance industry, Friends Life and Aviva have tied the knot and brokerage firm Willis has made a move for advisor Towers Watson. With access to customers at a premium, we may see mergers both between peers and across different parts of the value chain.
For the insurance industry as a whole — and especially for L&P — what’s clear is that further change lies ahead, and competition is on the rise. Overall, the sector remains a challenging place to be.
Read the full Summer 2015 forecast 1.1Mb, August 2015
The growing number of people of pensionable age should be good news for insurers. However, regulatory and other changes could reduce investment in traditional pensions in the long term.
- The number of people aged 65+ is forecast to rise by almost 1 million by 2019. This should boost demand for insurance products, but insurers will face headwinds from low interest rates and tax and regulatory pressures.
- 2015 is forecast to see real household disposable incomes rise by 3.7%, the strongest rise since 2001 and larger than the entire cumulative gain over the previous five years.
- Demand for insurance products may be hit by the 50% rise in insurance premium tax from 6% to 9.5% in November 2015, raising £1.5b for the Exchequer by 2017/18.
- The limit on lifetime pension contributions and restrictions on pension tax relief for those earning £150,000 or more will come into place in 2016. This could provide a short boost to contributions this year, but may lower payments thereafter.