Mar 30 2009 Alex Davidson Complinet exclusive
Insurers and other financial services firms are less concerned about regulation as a business constraint than in the last quarter, according to the CBI/PricewaterhouseCoopers quarterly financial services survey. The Financial Services Authority has been concerned about the quality of the balance sheets of life insurers but this has not been a significant influence of their cost cutting, said Andrew Kail, UK insurance leader at PwC.
He noted that life insurers were assessing costs and, in some cases, had gone further by reducing dividends. "Once you get to solvency consideration, such things come into play. The survey indicates that the market, and not the regulator, has been driving firms to look at capital preservation."
Kail said that life insurers were making allowance for the future level of corporate defaults and this was a major influence in capital preservation. General insurers and insurance brokers, unlike life insurers, were optimistic. "General insurers are at their most optimistic since 2005," he said. "Investment returns have been severely hit and the insurers rely on these for profits, so they are at the point of increasing rates."
Kail noted that, at January 1 renewals, rates hardened in certain commercial classes, such as aviation and non-marine, and were also up in motor and household. "The rate increases are modest but the ability in this market to increase prices is unique. General insurance is non-discretionary."
He said that general insurers needed to increase prices due to the decline in investment ratios. He noted that US property and casualty insurers had seen an underwriting profit only twice in 30 years, which, he said, demonstrated the industry's dependence on investment returns for overall profitability. The lack of those returns in the UK would have to be compensated for by an underwriting profit.
Kail said that, as might have been expected in this economic climate, claims had increased and there had been some large claims, particularly in commercial lines. "But they are at manageable levels. General insurers are looking to manage costs less aggressively than life insurers and are actually increasing head count."
He said that life insurers were more pessimistic than general insurers because the demand for their products was discretionary, and that their outlook for new business growth was very pessimistic. "All life insurers are doing is looking to sell more products to existing customers, and they are looking to reduce headcount."
The pessimistic mood in life insurance is reflected in banking, securities trading and asset management, according to the survey. Andrew Gray, UK banking advisory leader at PwC, said: "Demand is the only factor constant across banks and building societies restricting future growth, but some concerns about regulation are still evolving."
