The latest PWC/CBI financial services survey finds the turmoil in the financial markets hitting the general insurance industry for the first time

The last PricewaterhouseCoopers/CBI survey of the financial services sector paints a gloomy picture of the current state general insurance market.

The survey found confidence the levels of general insurers and brokers had plunged in the past quarter. This was accompanied by falling business volumes and profitability.

Across the financial services sector as a whole, profitability fell at a record pace and business volumes fell at the fastest rate in 17 years. The deepening impact of the credit crunch was the key driver for the sector’s declining confidence.

The latest survey was particularly significant for the insurance industry. The past quarter was the first in which the credit crunch began to impact upon the insurance sector, which had hitherto been insulated from its effects. General insurers reported the steepest fall in confidence in four years.

Looking under the surface of the headline figures reveals some interesting points.

While the credit crunch was the main drag on profitability for most of the financials services sector, for the insurance industry the soft market and the fierce competition that follows was the prime concern.

90 per cent of brokers responding to the survey said competition would limit business levels in the next twelve months. 59 per cent said levels of demand would be a limiting factor.

In the case of insurers, 96 per cent highlighted level of competition as a factor affecting business volumes, with falling demand being picked by 58 per cent of respondents.

Levels of demand for insurance products were falling for the first time in the past year, particularly amongst overseas, commercial and industrial and financial institutions clients. Even demand from personal lines customers was beginning to be affected.

In general, insurers were more pessimistic than brokers about demand levels.

The decline in business volumes and profitability was leading to companies cutting back on investment expenditure and reducing costs. But while insurers said they expected to cut their marketing spend, brokers were intending to raise it.

On balance, insurers expected market conditions to worsen in the next quarter, with business volumes declining. A balance of 40 per cent of insurers said volumes would decline.

Brokers were more upbeat, however, with a balance of 4 per cent expecting a decline in business levels in the next three months.

Will the soft market continues to be the driving factor behind the sector’s profitability this quarter? Or will the grip of the credit crunch tighten more than expected?

The next survey will make interesting reading.