A quarterly financial services survey released today shows the sector's Q4 economic outlook appears gloomy.
Demand and profitability are set to weaken, despite volumes increasing at the fastest rate in over seven years, the CBI and PricewaterhouseCoopers (PwC) report found.
The results showed profitability sentiment in the life insurance sector was at its weakest in the history of the survey, while the pace of growth in fund management is expected to slow.
CBI chief economic adviser Ian McCafferty says the survey of 68 firms, conducted between 23 May and 6 June, showed “signs that activity in the sector may be starting to come off the boil”.
“The outlook for the coming quarter is one of flat business volumes, falling income values and lower profitability,” he says.
The report states the value of surrendered contracts rose more strongly than life insurers expected last quarter, giving the impression “policy churning is accelerating”.
Expanding capacity is a key investment motive for 81% of respondents, compared to just 3% at the same time last year.
Among the largest players, the report concluded the desire to maintain scale, market share and reputation is a reason the sector may be prioritising market share over profitability.
PwC insurance partner Andrew Kail says: “this is the second quarter to report a decline in profitability and another fall is predicted, potentially as a result of increasing competition from the banks and asset managers.”
Fund manager prospects are good for the next quarter, with the survey recording rapid increases in business volumes, values and profitability, but the pace of growth is expected to slow.
Strong equity market performance, positive inflows and continued demand for services are the driving force behind the strong fund manager finding, the report displayed.
The largest percentage of respondents since 2000 also cited the sectors desire to develop new products and services as a driver of investment.
The report states: “it reflects the sector’s ongoing investment in upgrading existing products and developing alternative propositions such as derivative-backed products for the retail marketplace.”
Mergers and acquisitions activity levels are expected to increase, as survey questions revealed the majority of financial services firms believe the current increase in M&A activity reflects consolidation within sectors.
John Hitchins, UK banking leader says: "while nearly half of respondents believe that M&A activity will continue to grow, there is an overwhelming consensus that in-sector consolidation will be the most likely driver of new transactions.”
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