Study shows that life insurers hit hardest by credit crunch

The life insurance sector is suffering the biggest fallout from the credit crunch, Confederation of British Industry (CBI) research suggests. According to the study, carried out with PricewaterhouseCoopers (PWC), business volumes, income and profitability have all fallen steeply while operating costs have also taken a hit.

PWC says UK financial services as a whole, with the possible exception of the fund management industry, has worsened in the last four months, with banks, building societies, securities trading and general insurance all struggling.

Andrew Kail, UK insurance leader at PWC, says: “Life insurers have reported their steepest decline yet for profitability.

“New business is expected to continue to fall, investment business is under threat from perceived market volatility and demand for protection products is being affected by the slowdown in the housing market.

“The slowdown is putting pressure on the sector’s own investment and capital plans. Life insurers intend to commit less capital to IT projects and look likely to reduce headcount.”

The survey, conducted between 21 May and 4 June and with 87 respondents, suggests the impact of the credit crunch remains far-reaching despite reports it had started to wind down.

The CBI says although the credit crunch has already been underway for ten months, nine out of ten firms (91%) think it will take more than six months for market conditions to return to normal.

The only bright spark, PWC says, was the fund management arena. According to the study and, contrary to CBI expectations, business volumes in fund management rose sharply for a third successive quarter.

In addition, fee & commission income was up, although profitability was lower.

Robert Mellor, UK financial services tax leader at PWC, says: “Despite a successful quarter of asset gathering, predominantly with foreign customers, and healthy activity over the past three months, fund managers’ profitability is under pressure.

“However, the sector remains upbeat in its plans for increased headcount and higher marketing expenditure.”

Across the industry as a whole, the survey found 20% of firms said business volumes had risen, while 55% said they had decreased. Profitability dived sharply, the report found, with a balance of 44% reporting a fall, compared with 18% in March.

The CBI says this is the fastest rate of decline in profitability since the survey began in 1989, and says another heavy fall is anticipated over the next quarter.

The survey also presented bad news for business volumes, operating costs and job losses.

Ian McCafferty, CBI chief economic adviser, says: “The impact of the credit crunch on financial services has deepened over the last three months, and conditions look set to remain difficult for some time yet.”