But insurance is ring-fenced, says Ernst & Young Item Club

The financial services sector will grow at a slower pace after the recession ends, but areas such as insurance, asset management and wholesale finance will continue to thrive, according to a report by the Ernst & Young Item Club.

The report points out that the international insurance sector is a major source of income for the UK and the prospects for non-life insurance companies are solid, with signs that markets are hardening, which will lead to a sharp rise in insurance premiums.

The report adds that the financial sector is still under intense pressure. Last year, the sector shed 220,000 jobs (3.3%), and anecdotal evidence points to a pick-up in job losses in the early months of this year. It expects the sector to shed a further 500,000 jobs by 2011 – 10% in total.

The report also warns that, while the UK has some natural advantages as a financial centre, the government should not harm its prospects by imposing tighter regulations or higher taxation than other countries.

“The financial services sector is still central to the prospects of the UK economy, employing a large number of people and linking in many other sectors. It is a disproportionately large contributor to tax receipts and slower growth in the future will put the onus on other sectors to make up the revenue shortfall.

“If overbearing regulation dampens competitiveness, then revenues will fall further, and even tighter spending restraint would be necessary to control the public finances,” warned Andrew Goodwin, senior economist at Ernst & Young Item Club.

Earlier this month, the Financial Services Global Competitiveness Group said it reinforced the importance of maintaining a stable, sustainable and competitive tax system. But when financial services secretary Paul Myners was asked about the exodus of some notable insurers from London to the Netherlands and Ireland, he insisted that London had other attractions.

“There is not an institution in the world that does not have an office presence in London. You cannot be attractive on tax and tax alone. There are other things that draw financial services companies to London, such as skills and innovation,” said Myners.