Global markets to offset weaker 2017 domestic insurance demand in UK

Following a year in which profits in the insurance sector fell by 23 percent in the UK to £7.0 billion, 2017 should see an improved performance, buoyed by a better global outlook, according to the latest EY ITEM Club outlook for financial services.

Volatility, however, is likely to persist, the report suggested. As well as Brexit, the recent changes to the discount rates for personal injury claims – the “Ogden Rate” – will have far-reaching effects for the UK insurance sector. The changes to the “Ogden Rate” were expected, but the extent of the drop came as a shock and will particularly impact motor insurers and – in turn – premiums. And events may yet unfold further, as the Lord Chancellor is set to review whether a fairer framework of compensation may be introduced, the report said.

But pressure on insurers’ revenues can also be expected from lower domestic demand. The EY report predicts that inflation, though still historically low, is set to climb to nearly 3 percent this year and next in the UK. This will serve as something of a shock to both consumers and businesses. Combined with weakening growth in job creation and continued modest wage rises, higher inflation will lead disposable incomes to fall by 0.3 percent (equivalent to around £3billion for the economy as a whole) this year, putting a squeeze on people’s pockets and dampening demand for financial products in the short term.

Weaker consumer spending may reduce demand for big ticket items - car registrations are predicted to fall back from the record 2.68 million sold in 2016. Housing transactions are also expected to rise by just 4 percent this year and next, which is less than half the average rate seen in the last four years. The increase in Insurance Premium Tax from 10 percent to 12 percent, will also provide an additional challenge to the industry, although the impact of the increase is unlikely to be passed on fully to consumers. EY predicts that pressure on real incomes will hold back non-life premium growth to 2.3 percent this year and 1.5 percent in 2018.

Life assurers are expected to fare better, with recent rises in long-term interest rates providing support for annuity providers and the improved outlook for equities underpinning flows into life products, according to the report.

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