UK insurers face slowing premium income growth this year as cost of living pressures continue to impact product demand
UK non-life premium income forecast to grow 4.5% in 2023 (down from a projected 4.9% in 2022), with growth further slowing to 3.8% in 2024
UK life premiums forecast to decline 2% this year, from projected growth of 4.6% in 2022, but strong growth rebound of 8% expected in 2024
UK insurers’ face slowing premium income growth this year, as high inflation, cost of living pressures and a rise in borrowing costs continue to impact product 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 this year, with non-life forecast growth of 4.5% (down from a projected 4.9% in 2022) and life premiums forecast to contract 2% in 2023 (down from projected growth of 4.6% in 2022).
Weakness in car sales and housing market activity to impact non-life insurers
High inflation and falling real incomes are expected to continue to hold back consumers from spending on big-ticket (and insurable) items, especially cars, in the first half of this year.
Looking more closely at the private car market, financial strains on households and ongoing supply-chain disruption to car manufacturers have contributed to continued weakness in new car sales. 179,419 new vehicles were registered to private buyers in the last three months of 2022, only 1% up on the same period in 2021, when COVID-19 restrictions were in force. Excluding the pandemic period, registrations from October to November were the lowest for those months since 2011.
As for the housing market, a fall in activity will also negatively impact demand for non-life insurance. With mortgage rates much higher than a year ago and affordability still stretched, residential transactions are expected to fall back this year, impacting insurance demand.
Recent premium price increases on motor and home insurance (late 2022 rates were around 30% higher than a year earlier) should provide a boost to non-life insurers, although the increase in rates partly reflect a rise in costs. The EY ITEM Club predicts the rate at which premium prices have been rising is unlikely to prove sustainable given the financial strains facing households, but at the same time, cost pressures should also fall back as inflation and supply chain pressures ease.
The EY ITEM Club’s latest forecast sees non-life premium income further slowing to 3.8% in 2024, before picking back up to 4.7% in 2025.
Rodney Bonnard, UK Insurance Leader at EY, comments: “Non-life insurers are braced for challenging conditions to continue for the foreseeable future. With the wider economic environment forecast to report declining household incomes, rising cost of living pressures and an uncertain housing market, history tells us that insurance demand is among the first to be impacted. Insurers will need to carefully manage their cost bases and look to innovative ways of finding growth and maintaining their current levels of capitalisation.
“Even with a difficult economic backdrop, insurers must not drop their focus on other priority areas such as achieving net zero, greening their products, services and supply chains, and carrying out digital transformation.
“There are green shoots on the horizon, and non-life insurers will be looking to the prospect of inflation easing back through 2023, conditions improving, and higher premium income growth kicking in from 2025.”
Life premiums to decline this year but bounce back in 2024 as economy recovers
The EY ITEM Club notes long-term UK market interest rates have fallen back since the autumn’s market turmoil, reflecting intervention by the Bank of England and a change in fiscal policy. However, rises in the Bank of England policy rate, and expectations of further increases to come, mean long-term yields are still much higher than they were last summer. This is good news for the life sector, as it provides a boost to the income stream from bonds. However, the rate hiking cycle is probably close to an end and inflation is expected to fall back this year.
As with the non-life sector, cost of living pressures may also cause some life insurance consumers to cancel or reduce their coverage. However, demographic developments should provide some offset, supporting flows of money leaving defined benefit schemes and moving into individual pensions and pensions drawdown products. The UK population aged 60 or older is projected by the ONS to grow from 16.7m in 2021 to 19.6m by the end of this decade, and the recent rise in long-term market rates appears to be boosting demand for annuities.
Overall, the EY ITEM Club forecasts gross life premiums to decline 2% in 2023, as inflation and the weak economy hit pricing and demand. Excluding the pandemic period, this would be the first decline since 2016. 2024 is expected to see a strong rebound, with premium income rising around 8%, before falling back but maintaining strong growth of 5.8% in 2025.
Martina Neary, UK Head of Life & Pensions at EY, concludes: “Premium income is expected to fall this year. While not great news for insurers, it is more worrying from a consumer perspective, with high inflation potentially causing some individuals to pause or reduce payments into what they consider to be non-essential products, such as pensions and protection policies. This comes with significant risk and the industry must help customers carefully consider their options and support them to make the best choice for their circumstance. On the more positive side, however, market conditions should start to improve through the end of 2023 and into 2024, which will help consumers. And it's important to note that high interest rates, used to combat inflation, can be good news for many savers, including pensioners, increasing the values of their pensions and investments.”