BMI View: We believe the UK's economic recovery will continue in 2015 and beyond, powered by a recovery in real wages and further improvements in labour market conditions. Although real GDP growth rates will decelerate slightly over the coming quarters, the UK will likely outperform most regional peers. This will improve available funds for spending on insurance across both life and non-life lines. In particular we anticipate strong growth in health insurance.
Even if London was not home to Lloyd's of London and the International Underwriting Association, the UK would still have a huge and dynamic insurance sector. Relative to other large European markets, the UK is unusual in that the competitive landscapes of both the non-life and life segments contain large numbers of world-class indigenous companies (some of which have very large footprints outside the country) and numerous multinational/global titans that are based in other countries. In short, customers in both major segments can be assured of world-class solutions that are provided by innovative insurers which have excellent access to global capital and reinsurance markets. Some of the leaders enjoy the additional stability of business that comes from being composite insurers.
The changes that were announced in the March 2014 Budget are momentous. This is because the life insurers dominate organised savings in the UK in a way that they do not in other Anglo-Saxon countries. Key metrics such as life density (premiums per capita) and penetration (premiums as a percentage of GDP) are high in the UK. The mega-merger that was announced in December 2014 by Aviva and Friends Life will not be the only strategic response by majors. Meanwhile, Ageas has sold its protection business, while Prudential plc has disposed of 25% stakes in two joint ventures in order to keep its options open in relation to protection.
We expect that premiums will rise slowly and steadily in both major segments of the UK's massive and highly sophisticated insurance segment. In the life segment, the changes that were announced by the government in the March 2014 Budget are a game-changer. Total premiums will be boosted as leading life insurers take advantage of the multiple strengths to promote products and solutions other than annuities. We would stress, though, that sales of annuities will not fall to zero. In the non-life segment, the continuing growth of the UK and global economies, along with product innovation, mean that premiums should rise.
Discipline in underwriting remains a key theme in the non-life segment. Across the segment as a whole, the outlook for premium growth is not particularly exciting. However, we are confident that underwriting will be profitable for most players. Government-backed initiatives to contain claims costs arising from motor accidents should be helpful. In addition, as household budgets improve we are seeing an increasing number of family policies being acquired in both the life and non life segments. An increasing number of parents in the UK are buying protection insurance for their families, according to the newest Aviva Family Finance Report. The report reveals that in the last six months, life insurance take-up reached 42% from 36%, health insurance increased to 15% from 13%, critical illness cover up to 16% from 11% and income protection was at 10% against 7%.
However, there are risks to our forecasts. Despite ramping up consumption, the financial position of households remains precarious. Real wage growth was weak throughout 2014, which combined with rising house prices have left households vulnerable to interest rate hikes. With private consumption still the main driver of growth in the UK, premature rate rises could easily derail the economic recovery, and this would have a negative impact on insurance premium levels as households return to the belt-tightening stance seen in the immediate aftermath of the recession.
In May 2015, Standard Life established a national advisory business - 1825 - as it expects an increase in demand for financial planning.
UK-based Charles Taylor has entered an agreement to acquire three of the operating companies of SC Management, the independent management companies of The Strike Club. The acquisition is part of the firm's strategy to achieve growth, via entering management contracts with mutual insurance companies.
France-based private investment firm Ardian has agreed to purchase UK-based Jardine Lloyd Thompson (JLT) Group's 26.2% interest in Milestone for undisclosed terms. The transaction is likely to be completed by end-April 2015, subject to the signing of a definitive sales agreement by all parties and the approval of antitrust authorities.
Standard Life acquired Pearson Jones, the advisory arm of the Skipton building society. With the transaction, which is expected to be completed by end-June 2015, Standard Life will foray into the UK financial advice market.
US-based insurance broker Arthur J. Gallagher (AJG) has acquired UK-based managing general agency (MGA) Evolution Underwriting Group for an undisclosed sum. Evolution offers commercial insurance products and services customised for the small-to-middle-market sector to its independent retail broker clients.