The CBI/PricewaterhouseCoopers financial services survey published last week reveals that the upsurge in optimism in the second quarter of 1999 has carried through to the third quarter.

The latest in this series of quarterly surveys shows that, even against a strong quarter-on-quarter comparative, a net figure of 27% of financial services businesses are more confident about the overall business situation in their sector. The number of financial services companies anticipating an increase in marketing spend in the next year reached the highest level since December 1993. A growing number are looking to increase investment in IT and in providing new services, which hints at a more concerted foray into the e-business arena.

The mood among general insurers is consistent with the overall results. Confidence rose for the fifth consecutive survey though at a slower pace than June. There is continuing optimism about the value of premiums, reflecting rate increases in many lines of business. Also, motor business continues to attract premium rate increases.

Some business lost
However, total business volumes are growing less strongly, suggesting a loss of some business, particularly from overseas customers. The trend in overall profitability continues to rise, albeit to a lesser extent than expected. This may be attributed to a higher than forecast rise in the value of insurance claims and continuing upward pressure on commission levels. Fierce competition remains the defining feature of the market and for the third successive quarter, insurers stated that their operations have been affected by overseas competition.

Continental competition
This can be seen clearly in the marine and aviation markets where continental European insurers are continuing to take a larger slice of the market. Continental insurers may also be increasingly competing with the global programmes of both UK and overseas multi-national and transactional companies, resulting in a loss of business by UK insurers.

Insurers are also forecasting domestic competition as a major constraint on their business over the next 12 months although they seem slightly less concerned than in previous surveys.

A separate report by an actuarial consultancy published earlier this month discussed how household premium rates need to rise by five per cent. The reinsurance market is starting to see the withdrawal of capacity in some areas, which should start to feed through to premium rates in due course. Recent natural catastrophes can only have a beneficial impact on reinsurance rates, although the impact is limited at this stage.

Weaker returns
Weaker investment returns due primarily to low interest rates are also likely to put increased pressure on insurers.

To combat competition, general insurers have signalled their intention to spend more on IT which follows a forecast decline in spending in the previous quarter. We also believe that competitive pressures are pushing insurance companies to spend more on marketing and IT to introduce more e-commerce products. This trend is consistent with all areas of financial services.