Brokers hit by unexpected Q2 profit drop - CBI

Insurance brokers suffered an unexpected fall in profits in the three months to June, according to the latest survey by the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC).

Brokers’ second-quarter business volumes were flat and incomes declined while average costs continued to rise, the survey found.

General insurers’ profits remained flat as a rise in commissions, fees and premiums is offset by a drop in business volumes and income, according to the survey.

The study also revealed that sentiment in the three months to June had fallen by the fastest pace since March 2003 and investment plans for the year ahead were also subdued.

In the life insurance sector, business volumes increased and premium, fee and commission income also rose solidly.

But profitability fell for the first time since December 2009, affected by rising costs and reduced pricing power.

PwC partner, insurance, James McPherson said: “General insurers’ confidence has fallen rapidly, ending the stability of the past two quarters. General insurers’ performance often reflects the health of the broader economy, so it is not encouraging that business volumes and premium income have fallen.

“Despite this fall in confidence, general insurers still expect revenues to pick up during the coming quarter. With investment income under growing pressure, insurers are hoping that price increases following 2011’s motor and catastrophe losses will help them achieve stronger rates and alleviate pressure on underwriting profits.

“Life insurance sentiment has declined slightly, reflecting growing uncertainty in the sector over the long-term impact of the Retail Distribution Review and pension auto-enrolment. Despite this, the sector has had another good quarter with a strong majority of firms reporting higher volumes of business.”

Overall, in the financial services industry business volumes volumes and income both grew strongly in the three months to June, but firms said they were less optimistic about their business situation than in the last quarter.

Of the 108 financial companies that responded to the CBI/PwC survey, 59% saw volumes rise in the quarter to June, and 21% reported a fall. The overall 39% increase in volumes represented the ninth consecutive quarter of growth.

Companies reported that overall levels of business were above normal (+10%), for the first time since June 2007.

The CBI’s chief economic adviser Ian McCafferty said: “The financial services sector has seen another quarter of robust growth, with business volumes, income and profitability all rising solidly once again.

“However, businesses are less optimistic than in the previous survey, have reduced headcount and are reappraising investment plans. Regulatory compliance is an increasing factor shaping investment, activity and intentions.”