- COVID-19 related insurance pay-outs, ultra-low interest rates and the FCA’s insurance pricing review will continue to impact the sector this year
- Although for motor insurers, claims are down as COVID-19 lockdowns reduced road traffic accidents
- Non-life premium income is predicted to grow by 2.7% this year, following a projected 0.8% fall in 2020, with life premium income forecast to grow by 3.8% in 2021, after an expected fall of almost 10% the year before.
The economic impact of the pandemic, ultra-low interest rates and the FCA’s pricing review created a challenging operating environment for UK insurers in 2020 resulting in premium income falling in both non-life and life, but for 2021 overall premium income is forecast to grow by 3.4%, according to the latest EY ITEM Club for Financial Services Forecast.
While 2020 saw non-life premium income fall 0.8%, the EY ITEM Club forecasts it will grow 2.7% this year, alongside a 3.8% rise in life premium income.
Rodney Bonnard, UK Head of Insurance at EY, commented: “COVID-19 has caused significant increases in claims related to event and travel cancellations, business interruption and losses to investment portfolios, and there is no expectation this will curb anytime soon. At the same time, firms are operating in an ongoing low interest rate environment. General insurers will also likely have to overhaul their business and pricing models in response to the FCA’s pricing market review. This will require them to offer existing customers the same price for renewal as they would offer a new customer. On the immediate horizon though there will continue to be lower motor claims due to fewer cars on the road during lockdown.”
New car registrations down due to lockdowns
The national lockdowns have had a significant impact on new car sales, which has affected demand for motor insurance policies, which ended 2020 8.6% lower than a year earlier. The 1.6m new cars registered in 2020 was 30% down on the 2.3m registrations in 2019, and the lowest since 1992. However, once showrooms reopen, the EY ITEM Club forecasts 2m new car registrations this year, making up some of 2020’s drop.
End of stamp duty holiday likely to impact insurance policy sales
The housing market is an important driver of household insurance policies, which experienced deflation in 2020 as prices fell 4.1% year on year. Despite a ‘mini boom’ in house sales following the relaxation of last spring’s lockdown restrictions, total housing transactions only reached 1.04m in 2020, which is 11.5% below the 1.18m recorded in 2019. There will be further headwinds to contend with once the temporary stamp duty holiday ends in April, meaning a strong rebound is predicted to be delayed until 2022.
Life premiums expected to grow this year
The rise in the state pension age to 66 in October 2020, along with the increase in the UK population aged 65 or older projected by the Office for National Statistics (from 16.4m in 2020 to 18.1m by 2025) may mean more money flowing into pension products. At the same time, the sector continues to benefit from pensions auto-enrolment; although the latest ONS figures do show an 11% drop in employee contributions, possibly furlough related. Overall, EY ITEM Club forecasts life premiums to grow by 3.8% this year, after a projected fall of almost 10% in 2020.
Rodney Bonnard concluded: “COVID-19 has impacted almost all sectors, and insurers are certainly feeling their share of financial strain. While the sector overall has weathered the pandemic, it is likely there will be mixed results for individual insurers, reflecting portfolio mix and effectiveness of individual response. Looking ahead, the sector is facing strong headwinds as climate risk continues to create an increased risk of large weather events, business interruption cases bite and a continued low-interest rate environment persists, with the possibility of turning negative. However, assuming a successful roll-out of the vaccination programme and a reopening of the economy, household income growth and demand for insurance products should increase this year, which offers something of a growing light at the end of the tunnel. At the same time, the fact that the pandemic has compelled insurers – like most industries – to expand digital ways of working should deliver cost savings in the longer term, once initial investment costs are absorbed.”