Declining interest of customers in long term savings products is set to squeeze the margins of insurance companies, the FSA said.
The latest Prudential Risk Outlook review published today says that the industry will witness decline in profits as legislative and regulatory measures come into force. The industry had been profitable till 2009 despite adverse economic conditions, which is set to change.
“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 FSA report says.
Although new business has grown by 5 percent, increased annuity payouts, lower customer interest for savings products coupled with a drop in with-profit policy sales will hit future cash flows, the report warns.
The life insurance sector’s capital position is ‘sound’, the report says but cautions current low interest regime makes a stronger case for prudent underwriting and reserving procedures.
The new Solvency II regulation will make additional capital requirement mandatory for insurance companies with the aim of aligning the sector’s risk exposure with regulatory requirements.