Posted on November 7, 2022.

Rising interest rates and a weakening economic picture affecting pricing and demand is setting insurers for low premium income growth in 2023, according to a recent EY report.

Rising interest rates and the prospect of falling inflation over 2023 will help insurers’ overall profitability.

Additionally, insurers’ balance sheets have also been detrimentally affected by the recent fall in UK bond prices – which pushed up yields –, mainly due to the amount the sector has invested in this asset class.

According to EY’s analysts, the prospects for housing transactions and car sales will contribute to a forecast reduction in insurance product demand over next year.

Home insurance will be impacted by rising mortgage rates and a weakening economic picture, factors that have weakened the demand for house sales in 2021.

EY believes that for 2023, new cars purchases will also remain low, mainly due to the weakening outlook for real disposable household incomes and higher interest rates.

This outlook will also affect personal insurance and exacerbate a fall in demand as consumers divert spend to essentials instead, analysts noted.

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.

For the life sector, rising interest rates and falling bond values present a mixed outlook. 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, has been good news for the sector in some respects as it boosts the income stream from new bond purchases.

But, to the detriment of balance sheets, the value of bonds have fallen even after the recent calming in UK market volatility.

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, which should be good news for life insurers.

Continued growth in workplace pensions has increased the number of working British adults paying into a pension pot, which has also been positive for the life insurance sector. However, analysts noted that financial pressures on households appear now to be pushing up retail outflows from pension schemes.

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. According to EY analysts, notwithstanding the pandemic period, this would be the first decline in premiums since 2016. Growth is forecast to rebound to 8.8% in 2024.

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.

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