Rising interest rates and weaker economic conditions affecting prices and demand put insurers in weak premium income growth in 2023, according to a recent report from EY.
In the latest EY ITEM club outlook for financial services, analysts expect the non-life and life sectors to see reduced premium growth next year, with non-life forecasts predicting only growth modest 1.5%, compared to growth of 4.1% expected in 2022; and life premiums are expected to contract by 1% in 2023, compared to an expected increase of 5% in 2022.
Rising interest rates and the prospect of lower inflation in 2023 will help insurers’ overall profitability, EY noted. Despite this, the broader economic environment of declining household incomes, cost of living pressures and an uncertain housing market is expected to significantly and negatively affect demand across all lines of group insurance, analysts said.
In addition, insurers’ balance sheets have also been affected by the recent fall in UK bond prices – which has pushed yields higher – mainly due to the amounts invested by the sector in this asset class.
According to EY analysts, prospects for real estate transactions and car sales will contribute to an expected reduction in demand for insurance products over the next year.
Home insurance will be impacted by rising mortgage rates and weaker economic conditions, factors that have weakened demand for home sales in 2021.
As for auto insurance, the number of new car sales has remained weak this year. EY estimates that for 2023, new car purchases will also remain weak, mainly due to the weakening outlook for real household disposable income and rising interest rates.
The outlook will also affect personal insurance and exacerbate a drop in demand as consumers divert spending to essentials instead, analysts noted.
Analysts expect non-life premium income to grow 4.1% this year, slow to 1.5% in 2023 and rebound to 4.5% in 2024.
Rodney Bonnard, UK Insurance Leader at EY, comments: “Difficult geopolitics, financial market volatility and a lack of clarity around future interest rate movements mean that the macroeconomic outlook for insurers is about as uncertain as they could be. Claims inflation remains a challenge, while pricing practices have disrupted retail pricing dynamics.
“Furthermore, weak prospects for household income growth call into question insurers’ future rate plans. In such an uncertain environment, where household finances are delicately balanced, insurers may need to rein in price increases to maintain demand and discourage increased underinsurance while carefully balancing claims and inflation. costs.
“While insurers’ markets will face a difficult period over the next year, with premium income growth expected to fall on both the life and non-life side, they remain in a strong capital position. and can continue to help customers through this difficult time.”
For the life insurance industry, rising interest rates and falling bond values present a mixed outlook. The rise in long-term interest rates over the past six months, including the rise in UK yields since late September following the mini-budget, has been good news for the sector in some respects, EY noted. , as it stimulates the flow of income from new bond purchases.
But, to the detriment of balance sheets, bond values have fallen even after the recent easing of UK market volatility.
Although cost-of-living pressures may cause some consumers to cancel or reduce their life insurance coverage, an increase in the retirement-age population may provide some compensation. The EY ITEM Club predicts that current market conditions are favorable for increased capital flows out of defined benefit plans and into individual pensions and pension withdrawal products, which should be good news for life insurers.
The continued growth of workplace pensions has increased the number of working UK adults contributing to a pension fund, which has also been positive for the life insurance industry. However, analysts noted that financial pressures on households now appear to be pushing up cash outflows from pension plans.
Overall, life insurance premiums are expected to rise 5% this year and then contract 1% in 2023 as inflation and economic uncertainty affect prices and demand. According to EY analysts, notwithstanding the pandemic period, this would be the first drop in premiums since 2016. Growth is expected to rebound to 8.8% in 2024.
Martina Neary, UK Head of Life & Pensions at EY, said: “The current economic environment has had an immediate impact on life insurers’ balance sheets, but the industry is well capitalised. From a consumer perspective, high inflation is forcing an increasing number of people to reassess their finances, potentially choosing to risk suspending or reducing payment for non-essential products such as protection policies.
“There is, however, a significant opportunity for many life insurance and pension companies to provide a solution to businesses and we expect to see a significant increase in the block annuity market as a result.”