The life insurance industry faces a squeeze on profits because people are not buying enough long-term savings products.
In its prudential risk outlook, published today, the Financial Services Authority says the sector was collectively profitable in 2009 but that legislative and regulatory pressures will also hit the industry.
The report says: “UK life insurers face a number of medium to long-term pressures on profitability, including persistently subdued demand for long-term savings products, increased competition from other types of savings and investment products and regulatory and legislative changes.”
The Government is currently consulting on breaking up the FSA and replacing it with the Financial Conduct Authority and the Prudential Regulation Authority which will regulate life companies. The European Insurance and Occupational Pensions Authority has recently been set up in the European Union and will also regulate insurance companies.
New business for the sector is up 5 per cent, but the report says that increased annuity payouts, the decline of with-profits policies and the subdued market for savings products is responsible for a long term decline in net cash flows.
It also warns that lower investment returns due to current low interest rates strengthen the need for prudent underwriting and reserving, though it adds the sector’s capital position is “sound”.
Solvency II will impose capital requirements on the insurance sector and is aimed at aligning regulatory requirements more closely with the risk they are exposed to.
In a speech this morning, Treasury financial secretary Mark Hoban told the Association of British Insurers the requirements should be “proportionate” adding there is still a “long way to go” in the negotiations.