Legal & General’s gloomy comments about the outlook for the UK life and savings market sent a shiver through the insurance industry on Wednesday.
Although L&G’s UK new business in the first quarter was broadly flat compared with last year, conditions “could not be more different” from the first three months of 2007, says Tim Breedon, chief executive.
At that time, the housing market was roaring ahead, and changes to the tax rules for pensions in April 2006 were still fresh in consumers’ minds.
Fast forward to the first quarter of this year, and the credit crunch is starting to bite, particularly hurting the availability of affordable mortgages.
“This year is going to be very difficult for the UK pure players,” says Raghu Hariharan, an insurance analyst at Fox-Pitt, Kelton.
Conditions are getting tougher in mortgage protection, where homeowners buy insurance to cover repayments in the event of illness or death.
Mortgage protection is driven by the number of transactions, which are falling.
Remortgaging can be an opportunity, but with homeowners facing higher mortgage costs, their appetite might be limited.
L&G expects sales across the total protection market to be 5-10 per cent lower this year, although it expects to beat the market, helped by an agreement to sell policies through the Nationwide. Other life assurers with large protection businesses include Friends Provident and Aviva.
With consumers tightening belts, the conclusion might be that savings should rise.
But Mr Breedon says saving is “precautionary”, with individuals choosing to put money in the bank rather than long-term savings products, such as those offered by insurers.
Banks enticing customers with high savings rates also play a part.
“It’s all very well saying the credit crunch is an issue for the banks, but its actually an issue for equity fund providers,” says Ned Cazalet, an independent life assurance analyst.
“The demand from the banking sector for liquidity is going to suck away assets from somewhere else.”
Sales of investment bonds have also been hit by changes to the capital gains tax regime.
These have made collective investments more attractive from a capital gains perspective than insurance-based products.
Mr Breedon expects the market for long-term savings, sold widely across the industry, to be flat this year.
But it is not all bad news for life assurers. Individuals are still adding to pension pots.
According to Mr Breedon, these are savers, perhaps in their 40s or 50s, who have paid off their mortgage and so are unaffected by the current turmoil, but who are becoming increasingly worried about having enough money to live on when they retire.
“They are in savings mode. They have paid off their mortgage and they are thinking about their retirement,” says Mr Breedon.
L&G is also fairly unusual among the big life assurers in that it does not have a sizeable overseas operation.
Prudential’s first-quarter new business figures, to be announced on Thursday are expected to be driven by its Asian operations.
Aviva, which reports next week, also generates more than half its sales from outside the UK.