General Insurance Article - Volumes grow but financial services firms remain pessimistic

 While slowing slightly on the previous quarter (+24% from +30%), profitability growth across the sector remains robust and is expected to increase at a quicker pace in the next three months (+44%).

 Despite volumes and profitability growth holding firm, industry sentiment over Q3 fell (-55% from -43% in June) at the fastest rate since September 2019.

 Investment intentions were lacklustre across the sector. Capital expenditure on IT (-1% from +33%) and vehicles, plant & machinery (-2% from -13%) is set to be broadly unchanged in the next 12 months (compared with the previous 12). Meanwhile, investment in land & buildings (-12% from -6%) is expected to decline.

 Firms cited inadequate net return (62% from 22%) as the factor most likely to limit investment in the next 12 months.

 Employment contracted modestly in the quarter to September (-8% from +12%). The decline in headcount is expected to accelerate next quarter (-21%).

 Rain Newton-Smith, CBI Chief Economist, said: “While activity in the financial sector looks to be in a good position, with profitability and volumes growth remaining strong, the rapid fall in sentiment and lacklustre investment intentions illustrate the challenging conditions that firms find themselves in.

 “Recent market volatility stemming from the Government’s “mini”-Budget – alongside other global developments – underlines the clear need to restore macro-stability and boost business confidence. The decision to bring forward the publication of the OBR forecasts and medium-term fiscal plan is the right one and can help demonstrate to investors that the UK has a credible plan for stabilising debt to GDP at a sustainable level.”

 Isabelle Jenkins, Leader of Financial Services at PwC UK, said: "Despite the steep drop in sentiment this quarter, it's good news to see that just over a third of all FS firms have either tangible initiatives in place to support consumers through the cost-of-living crisis or are intending to put such plans in place.

 "The headwinds coming from inflation and other economic changes likely played a role in the sinking of sentiment, with over half of firms expecting significant disruption coming from this area.

 "However, with 74% of firms seeing clarity as the key to supporting consumers, both in terms of simplifying decision-making process and providing vital educational resources on products, firms seem to see the importance of keeping their eye on the ball. As we enter into another tricky quarter, I hope this stability and clear thinking continues."

 Key findings:
 • Sentiment declined sharply in the quarter to September – its quickest rate since September 2019 (-55% from -43% in June).
 • Business volumes grew at a strong pace in the quarter to September (+31% from 0% in June). FS firms expect business volumes growth to slow next quarter (+13%).
 • Profitability growth remained solid in the three months to September, despite easing slightly on last quarter (+24% from +30% in June). Profitability is expected to increase at a faster rate next quarter (+44%)
 • Employment contracted modestly in the quarter to September (-8% from +12% in June). The decline in headcount is expected to accelerate next quarter (-21%).
 • Investment intentions for the next 12 months, compared to the last 12, for IT (-1% from +33% in June) were flat, which, nonetheless, marks their weakest since December 2010. Firms expect capital expenditure to remain broadly unchanged for vehicles, plant & machinery in the next 12 months (-2% from -13% in June), while investment in land & buildings is expected to decline to a greater extent than last quarter (-12% from -6% in June)
 o The most common factor likely to limit investment in the next 12 months is inadequate net return (62% from 22% in June).
 • Average spreads in the quarter to September (-31% from -10% in June) fell at their fastest rate since June 2020 and are expected to decline at a broadly similar rate in the next three months (-28%).
 • The value of non-performing loans was flat in the quarter to September (0% from -7% in June) and is expected to increase at a modest pace in the next three months (+5%).

 Disruption
 FS firms expect high inflation / cost-of-living (76%), changes in regulation (75%), and climate change & growing focus on ESG (70%) to be the key trends driving operational disruption in the year ahead.

 The most common ways to respond to disruption include: employing new technology or adapting tech capabilities within the business (86%), upskilling the existing workforce (80%), and placing a greater focus on ESG (74%).

 Achieving operation resilience (87%), upskilling or reskilling the workforce (84%), and embedding ESG considerations within the business (75%) are firms’ most common priorities for future business strategy and transformation plans.

 Technology
 52% of FS firms are in the “implementation” stage of realising the benefits from investment in IT and technology.

 The most common value to be gained from advances in AI and analytics is analysis and managing financial risk (65%).

 90% of FS firms think customer experience is one of the areas most likely to be impacted by advances in automation, standardisation, and FinTech.

 Cyber security
 Firms expect to increase investment on cyber security in the next 12 months (compared to the previous 12), but to a lesser degree than last quarter (+5% from +40% in June).

 The most common priorities for improving cyber resilience and reducing tech risk are placing a greater focus on how to respond to new/emerging threats (80%) and improving the ability to detect a cyber breach (74%).

 Upskilling/reskilling
 The most common workforce priorities for the year ahead are improving leadership and management skills (56%) and workforce reskilling (45%).

 The most common barrier to deliver FS firms’ training needs is time needed for training (29%). 52% of respondents reported having no barriers.

 The most commonly cited objectives from undertaking reskilling are improved workforce agility (58%), financial benefits from maintaining productivity (56%), and better team preparation for strategy delivery (54%).

 ESG
 The most common climate change priority over the next three months is measuring emissions across portfolios (65%)

 48% of FS firms said that they needed a standardised governance and reporting framework to improve their ability to track and compare progress against set criteria in order to deliver their ESG agenda.

 D&I
 The most common priorities for D&I over the next 6-12 months are supporting health and wellbeing (78%) and improving gender (72%) and ethnic (54%) equality.

 Cost-of-living
 46% of FS firms have initiatives to support consumers with cost of living challenges. 29% of firms intend to have some support for consumers and/or commercial clients in the future.

 91% of FS firms say that higher cost of doing business has not impacted investment decisions in their company.

 The most common actions that FS firms think organisations in their sector can do to support consumers include: simplifying the decision-making process around choosing a financial service (74%) and providing educational resources on financial products (65%).

 Regulatory changes
 76% of FS firms are “very aware” and 19% are “somewhat aware” of new consumer duty rules released by the FCA in July 2022. 0% of firms said they were not at all aware.

 Only 1% of FS firms said they were “not at all prepared” for new consumer duty rules that are expected to come into place in 2023-24. 77% of firms said they were “somewhat prepared” and 17% said they were “very prepared”.