EY ITEM Club
Outlook for financial services
Market movements offset weaker demand“2016 proved to be a challenging year for the insurance sector. Despite surprisingly strong consumer demand, the sector’s profits continued to be under pressure, falling by 23% to £7b.
2017 should see a much-improved performance, with profits stabilising. Improved bond yields will support life insurers. The prospect of rising inflation will give general insurers some leeway to raise prices, which could offset some of the impact of reduced consumer demand for high-value purchases, but given the pressure of rising inflation on consumers, competitive pricing will remain vital.”
Partner, UK Insurance Leader, EY UK
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Market movements offset weaker demand
UK Insurance Leader,
2016 proved to be a challenging year for the insurance sector
Despite surprisingly strong consumer demand, the sector’s profits continued to be under pressure, falling by 23% to £7b.
2017 should see a much-improved performance, with profits stabilising. Improved bond yields will support life insurers. The prospect of rising inflation will give general insurers some leeway to raise prices, which could offset some of the impact of reduced consumer demand for high-value purchases, but given the pressure of rising inflation on consumers, competitive pricing will remain vital. ↓ [... more]
Market movements will give life insurers some breathing room…
Life insurers are subject to the ebb and flow of the financial markets; they faced a combination of low bond yields and extreme market volatility in 2016. They nevertheless came through a difficult year relatively unscathed, and with their solvency intact.
Volatility is likely to persist as the UK negotiates its departure from the EU, and as President Donald Trump begins to implement his policies. In response, insurers will scrutinise and adapt their investment strategies to mitigate the impact of short-term market swings, whilst protecting returns.
An improvement in the global economy, combined with expectations of fiscal loosening in the US, will bring a welcome rise in bond yields: the forecast is for UK 10-year gilt yields to average 2.6% until 2020 — twice the level they saw in the aftermath of the EU vote. This will reassure annuity providers, who have seen rock-bottom yields reduce annuity rates and as a result, consumer demand.
Despite continued volatility, it is anticipated that equity prices will rise overall this year, buoyed by an improving global outlook — and in the case of the FTSE, cheaper sterling. This should prove positive for flows into life products, offsetting some of the impact of a squeeze on household incomes. The EY ITEM Club expects life premiums to increase by 3.9% in 2017, nearly twice the rate predicted in our last outlook.
These comparatively benign market conditions will be welcome as many insurers embark on a major programme of modernisation. Prompted by the FCA’s Long-standing Customer Review, insurers are looking to rationalise their legacy IT estates and embrace digital customer journeys. This will be a significant investment over the next few years but should ultimately leave the life sector in better shape to fight back against increasing competition from asset managers, advisory businesses and banks.
…but a slowing economy will weigh on general insurers
A slowing economy will weigh on general insurers’ performances this year, dampening growth in premium income. Weaker consumer spending will reduce demand for big ticket items, with car registrations falling back from their record 2.68m sold last year, and housing transactions rising by 4% this year and next, less than half the average rate seen in the last four years. Increased taxation also provides an additional challenge. The insurance premium tax has been increased to 12%, and insurers will need to consider how much of this they can afford to absorb.
However, the economic momentum built in the second half of 2016 places the sector in better stead than envisaged six months ago. The return of inflation provides opportunity to increase prices, balancing out some of the effects of weakening consumer demand, and increasing operating costs. However, as consumers increasingly shop around to reduce household expenditure, price competition will remain vital for general insurers. In the wholesale non-life market, pricing is an even more prominent issue, as global competition takes its toll and ratings pressures bring profitability headwinds. Overall, non-life insurance premium income is forecast to climb by 2.3% this year, slowing further in 2018.
Cost management and improving efficiency will therefore be high on the list of priorities in the year ahead to maintain margins, with robotic process automation, customer self-service and greater use of analytics all set to transform insurers’ cost bases.
Brexit remains a concern as insurers take action
The UK’s ability to access the EU following our forthcoming departure from the single market is a key concern for the sector, especially for non-life firms. Whilst an implementation period looks possible, insurers are moving to put in place the right structures in the EU to allow them to trade from 2019, rather than waiting for the outcome of negotiations. However, these bring with them associated costs and resourcing requirements.
Brexit may bring a silver lining for insurers if it allows UK regulators to fine-tune the solvency regime whilst maintaining equivalence. Relatively small changes to required solvency margins and capital requirements could attract insurers and customers back to classes of business they have found difficult, such as annuities.
2017: A year of quiet revolution?
After coming to terms with extreme volatility in 2016, and despite the forecast of slowing economic growth, we expect insurers to push on with modernisation and development plans in 2017, with greater innovation to follow.
And, whilst the recent changes to the discount rates for personal injury claims — the ‘Ogden Rate’ — were expected, the extent of the drop will have far-reaching effects for insurers, particularly motor insurers, and — in turn — for insurance premiums. Uncertainty still remains as the Lord Chancellor has announced an intention to look at whether a fairer framework for compensation might be introduced. This could mean further changes in the near future so this story is not yet over.
Regulatory pressure will be a driving force behind change. The European General Data Protection Regulations (GDPR), which take effect in 2018, will introduce more stringent rules on how customers’ data must be handled, but also offer the prospect of new opportunities. In particular, the Right to Data Portability will allow customers to authorise companies to consolidate the data held on them across multiple providers. Companies are starting to recognise that their current IT infrastructure is unlikely to be suitable for delivering GDPR compliance and are starting to look to big data solutions to help. Capitalising on the opportunities will also need new propositions that capture customers’ imagination and the emergence of standards for sharing data.
In the meantime, 2017 is set to be a critical year for robo-advice. Uncertainty about the regulatory status and risks of automated advice solutions has led providers to be cautious so far, but the demand for greater help from customers is likely to lead more providers to consider automated solutions.
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- Pressure on real incomes will hold back non-life premium growth, decelerating to 2.3% this year and 1.5% in 2018.
- Car registrations in 2017 are set to fall back 5% from last year’s record high of 2.68m.
- Life insurers are forecast to see premiums climb by an average of 3.5% per year until 2020, compared to average rises of 5.5% in the last five years.
- Increasing long-term interest rates will prove some support for insurance companies, with the 10-year gilt yield to average 2.6% until 2020, up from a post-EU vote low of 1.25%.