Rising costs hit brokers' profits in Q4 - PwC survey

Insurance brokers suffered a “sharp” fall in profitability in the fourth quarter of 2013 because of rising costs, according to the latest CBI/PwC Financial Services Survey.

This was despite a “strong” increase in business volumes, which rose at their fastest pace since March 2009.

The survey said that the profit drop was contrary to brokers’ expectations.

Brokers’ spending looks set to increase. The survey said brokers are planning to spend more on land and buildings than at any time since December 1993, as well as planning to boost spending on IT in the year ahead.

Regulation and replacement of systems are main causes of the expected spending increase.

PwC UK insurance leader Jonathan Howe said: “Ageing systems are a growing problem, with inadequate systems capacity seen as a major barrier to expansion. Of course, the regulatory agenda is another major driver of investment.”

Broker optimism

However the survey, which is published quarterly, also sounded a positive note for brokers. It said that they expect “robust” volume growth and a recovery in profits in the first quarter of this year. It also said that optimism among insurance brokers grew in the three months to December 2013.

In addition, the survey noted that the number of people employed by insurance brokers “grew robustly” in line with expectations. A stronger rise is expected in the first quarter this year.

Insurer profits

In contrast with brokers, general insurers enjoyed a boost in profitability in the fourth quarter of 2013. The CBI/PwC survey said profitability increased at its fastest pace since March 2008, helped by falling costs and a healthy rise in premium income.

Profits should be stable next quarter, the survey said.

As with brokers, general insurers’ business volumes grew “strongly” for the second successive quarter.

Business with overseas customers and industrial and commercial companies was particularly buoyant, the survey said. A similar increase in business volumes is expected next quarter.

Personal lines prowess

Howe noted that there were also signs of improvement in insurers’ personal lines business.

He said: “The fact that personal lines are showing signs of growth after several quarters of falling or flat activity is particularly encouraging.

“Despite the improving top-line picture insurers are keeping operating expenses controls and remain cautious over their head count, which has delivered a strong increase in profitability.”