EY ITEM Club
Outlook for financial services
“While rising household incomes and ongoing low interest rates will be generally positive for consumer demand, helping to drive annual increases in both life and non-life premiums through to 2019, the impacts will vary between the diverse segments within the insurance sector. And while industry-wide net profits will also rise – from £8.5bn this year to £9.9bn in 2019 – this will be achieved despite continuing pressures on insurers’ margins, with the possibility of both acquisitions and divestitures as providers reconfigure in the face of changing markets and regulation.”
Partner, UK Insurance Leader
Read Rodney’s full insurance viewpoint
UK Insurance Leader
While rising household incomes and ongoing low interest rates will be generally positive for consumer demand, helping to drive annual increases in both life and non-life premiums through to 2019, the impacts will vary between the diverse segments within the insurance sector. And while industry-wide net profits will also rise – from £8.5bn this year to £9.9bn in 2019 – this will be achieved despite continuing pressures on insurers’ margins, with the possibility of both acquisitions and divestitures as providers reconfigure in the face of changing markets and regulation. ↓ [... more]
Impacts from the pensions shake-up continue …
With the shock waves still reverberating from the earthquake in UK pensions, and further changes to tax relief expected in the March 2016 Budget, the life and pensions industry is adapting to an environment where multiple players – life insurers, wealth and asset management firms, distributors, and potentially the banks – are competing for the same assets.
It’s insurers who have the most to lose, since the bulk of retirement assets have traditionally been administered or invested through them. So they’re vulnerable to someone else coming up with a proposition that captures the mass market, while ensuring good customer outcomes and managing conduct risk.
… as three factors inhibit innovation
In the short term, pension providers may see rush of inflows, as higher earners bring contributions forward to capitalise on their annual allowances before they are cut back in April. After that surge, there will be a lot of money looking for an alternative home, putting a premium on product innovation. However, three factors could inhibit new ideas: first, the ongoing uncertainty around the long-term shape of pensions and tax relief; second, the Financial Advice Market Review; and third, concern over the possible longer-term risks around execution-only income drawdown.
On this final factor, FCA statistics suggest that income drawdown is now the leading model. But there’s already concern in the industry that, at some point in the future, regulators may see this approach as having been the wrong thing for clients to do. So, there’s a sense of being damned if you don’t offer income drawdown – won’t customers just transfer their assets to someone who does? – but also possibly damned if you do. And in the longer term, the question remains of whether today’s life and pensions players will innovate successfully to meet customers’ changing needs, or whether someone else will do it first.
General Insurance: unintended consequences from transparency on premiums …
On the general insurance front, a major change in prospect is the FCA’s proposal that renewal notes to home and motor policyholders should restate the previous year’s premiums. At first sight, this looks like a step forward for transparency and an informed customer choice. But the traditional approach to capturing new customers is to offer a ‘loss-leading’ price in the first year and recoup it through increases at subsequent renewals. Showing both prices could drive significant churn at renewal, so we might see first-year prices rising to narrow the gap. While this might enhance industry-wide profitability in the long run, the immediate outcome is likely to be price instability as providers test out different approaches. The best long-term answer is to be a cost-effective operator.
… as flood defences fail again
General insurers will also continue to pick up the pieces from this winter’s devastating floods. These appeared to represent the climate’s last kick at the industry before the introduction of its own flood defence scheme, the state-backed Flood Re.
M&A: rightsizing – not just seeking scale
The quest for relevance and cost synergies has already seen a pickup in insurance mergers. However, with the new prudential regime really starting to bite in 2016, there’s the prospect of selective M&A activity as providers seek to optimise their use of capital – focusing less on building pure scale, and more on accessing specific assets such as customer base, back book, risk profile or particular business streams.
Read the full Winter 2015-16 forecast 881K, February 2016
The insurance industry is still adapting to the recent pensions overhaul, but there are opportunities for growth throughout 2016
- The number of annuities purchased fell from an average of 47,000 per quarter in 2014 to around 20,000 per quarter in 2015.
- 2015’s strong 19% rise in profits for the UK Insurance sector is forecast to slow to a modest 3%–4% between 2016 and 2019, reflecting the impact of annuity reforms and greater competition, both within the sector and from the asset management sector.
- Life gross premiums are expected to rise by 16% above their 2015 level by 2019.
- We expect non-life premium to rise by 4.2% in 2016, with growth averaging close to 5% over the period to 2019.