Insurers set for low premium income growth in 2023 due to rising interest rates and weakening economic picture

• Non-life premium income forecast to grow 4.1% this year, but slow significantly to 1.5% in 2023
  
  
• Life premiums forecast to rise to 5% this year, but contract 1% in 2023 due to inflation and economic uncertainty, before growth rebounds to 8.8% in 2024

Insurers are set for low premium income growth in 2023, as rising interest rates and a weakening economic picture affect pricing and demand, according to the latest EY ITEM Club Outlook for Financial Services.

Both non-life and life sectors are expected to experience reduced premium growth next year, with non-life forecast only modest growth of 1.5% (down from 4.1% growth predicted in 2022) and life premiums forecast to contract 1% in 2023 (down from an expected rise of 5% in 2022).

Although rising interest rates, along with the prospect of falling inflation over 2023 will help insurers’ overall profitability, the wider economic environment of falling household incomes, cost of living pressures and an uncertain housing market is expected to affect demand significantly and negatively across collective insurance lines. The recent fall in UK bond prices – which pushed up yields – has also detrimentally affected insurers’ balance sheets given the amount invested by the sector in this asset class.

Non-life insurers face weaker consumer demand for products

The prospects for housing transactions and car sales are significant for general insurers, and contribute to a forecast reduction in insurance product demand over next year.

In the first eight months of 2022, housing transactions were slightly above the pre-COVID-19 norm (a monthly average of 100,000 per month compared to 98,000 over 2018 and 2019), but rising mortgage rates and a weakening economic picture have led the EY ITEM Club to expect dampened demand for house sales next year, which will have a knock on effect for home insurance.

As for motor insurance, which is largely driven by new car sales, numbers have remained weak this year. The 200,576 new cars registered to private owners in Q2 2022 was 10.7% down compared to Q2 2021. Aside from the pandemic period, Q2 2011 was the only other quarter on record in which registrations were lower. Looking at a six-month period, the 428,000 registrations in H1 2022 was only marginally above the 411,000 registrations in H1 2021, despite demand being restricted last year by dealership lockdowns until April. Looking ahead to 2023, the weakening outlook for real disposable household incomes and higher interest rates suggest that new cars purchases will remain low. This outlook will also affect personal insurance and exacerbate a fall in demand as consumers divert spend to essentials instead.

Following a period of deflation in home insurance prices, premium income rose between May and August 2022. As the cost of insurance claims has increased, the average price of home contents insurance rose, and in September 2022 was almost 28% higher year on year, representing the fastest increase since records began in 1988. Meanwhile, motor insurance prices were up 17.5% over the same period, the joint highest since mid-2016, in part a reflection of increases in the price of parts, labour and replacement cars.

Overall, non-life premium income is forecast to grow 4.1% this year, slowing to 1.5% in 2023 and rebounding to 4.5% in 2024.

Rodney Bonnard, UK Insurance Leader at EY, comments: “Challenging geopolitics, volatility in financial markets and a lack of clarity around future interest rate movements mean that the macroeconomic outlook for insurers is about as uncertain as it could be. Claims inflation remains a challenge, while pricing practices have disturbed retail pricing dynamics. Furthermore, weak prospects for household income growth are challenging insurers’ future pricing plans. In such an uncertain environment, where household finances are delicately balanced, insurers may need to rein back price rises to retain demand and discourage a rise in under-insurance while carefully balancing claims and other cost inflation.

“While insurers markets face a challenging time over the course of the next year, with premium income growth set to fall on both the life and non-life sides, they remain in a strong capital position and can continue to help customers through this difficult period.”

Rising interest rates and falling bond values present mixed outlook for the life sector

For the life insurance sector, the rise in long-term interest rates over the last six months, including the rise in UK yields since late September following the mini-Budget, is good news in some respects, as it boosts the income stream from new bond purchases. But even after the recent calming in UK market volatility, the value of bonds has fallen, to the detriment of balance sheets.

While cost of living pressures may cause some consumers to cancel or lower their life insurance coverage, an increasing pensions-age population may provide some offset. The ONS projects the UK population aged 60 or over will grow from 16.7m in 2021 to 19.6m by the end of this decade. The EY ITEM Club predicts that current market conditions are supportive of increasing in flows of capital leaving defined benefit schemes and moving into individual pensions and pensions drawdown products. This should be a positive for life insurers.

The life insurance sector has also been bolstered by continued growth in workplace pensions, which has increased the number of working British adults paying into a pension pot. The latest data from the ONS show the workplace pension participation rate standing at 79% (22.6mn employees) in April 2021, up slightly from 78% in 2020. However, financial pressures on households appear now to be pushing up retail outflows from pension schemes. According to HMRC data, Q2 2022 saw £3.6bn withdrawn from pensions, representing a 23% year-on-year increase. Overall, life premiums are forecast to rise to 5% this year, but then contract 1% in 2023 as inflation and economic uncertainty affect pricing and demand. Notwithstanding the pandemic period, this would be the first decline in premiums since 2016. Growth is forecast to rebound to 8.8% in 2024.

Martina Neary, UK Head of Life & Pensions at EY, concludes: “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 forces an increasing number of people to re-evaluate their finances, potentially choosing to risk pausing or reducing payment into non-essential products such as protection policies. There is, however, a significant opportunity for many life and pension firms to provide a solution to corporates and we expect to see a significant uptick in the bulk annuity market as a result.”