Briefing: Industry has fight on its hands despite economic boost

By Jon Guy

The UK was provided with some much needed good news yesterday (23 May 2023) when the International Monetary Fund (IMF) released a forecast showing that the country’s economy was unlikely to slide into recession.

But the IMF didn’t stop there – it went on to deliver even more positive news, saying that resilient demand and declining energy prices were set to contribute to positive growth in 2023.

Still, the organisation explained that economic activity has slowed significantly from last year.

Inflation remains stubbornly high too, following the severe terms-of-trade shocks caused by Russia’s war in Ukraine and – to some extent – labour supply shortages that have been prevalent since the pandemic.

“The UK financial system has weathered the recent global banking stress well,” it added. “Continued strong oversight, including of smaller banks and the diverse non-bank financial sector, will be critical to preserve UK financial stability, which the IMF sees as a global public good.”

Despite positive news on the general economic situation, the IMF said there would be considerable challenges in the year ahead when it comes to risks. 

“The major near to medium-term risk is greater than anticipated persistence in price and wage setting, which would lead to higher inflation for longer,” the IMF cautioned.

“Should such upside risks to inflation materialise, headwinds to growth would likely be intensified by tighter demand-management policies needed to combat inflation.”

Not all good news

The potential downsides for the UK, as the IMF sees them, also include a further tightening in global financial conditions that could restrain credit and trading partner demand.

The impact on growth here would be amplified if there was contagion into the UK financial sector or if adverse macro-financial feedback loops – such as a housing market correction – were triggered.

So where does this all leave the UK insurance sector? In a nutshell, the industry is faced with a period of more uncertainty – and while there is light at the end of the tunnel, the economic issues that have beset the market look set to continue.

A shortage of labour will further challenge the ability for repairs and rebuilding to be carried out, putting pressure in indemnity periods and claims costs across a number of lines.

The supply chain issues caused by Russia’s invasion of Ukraine also show no signs of easing and, while energy costs look set to fall, insurers and brokers will need to manage client expectations.

This is vital while the ongoing messaging around underinsurance continues to fall on deaf ears for many businesses where costs are rising amid challenging trading conditions.

The hope has to be that if the country begins to see the green shoot of economic recovery – and with it the first flickers of sustained growth – business confidence will start to rebound.

For insurers and brokers, the necessity for continued education around a challenging risk environment shows no signs of easing.