Rate changes in either direction are known to impact the insurance industry with profitability typically rising or falling in concert with interest rate increases or decreases. That’s why tomorrow looks set to be another crucial day for the sector post-Brexit with a Bank of England rate cut described as a “foregone conclusion”.
With Britain’s economy tumbling at its fastest rate since the onset of the financial crisis, financial data company Markit has recorded its largest monthly decline on record for its purchasing managers’ index after significant falls among private sector services, construction firms and manufacturing.
According to its numbers today (Wednesday) reported on by Reuters
, Britain’s economy is poised to shrink by 0.4% in the three months to September – a decline that has not been witnessed since 2009 when the Bank last cut interest rates.
The Brexit vote has weighed on companies and insurers are no exception. With AXA
, Direct Line and AIG
among the big names having already reported their half year financial results, and Aviva
due to follow tomorrow, there have been widespread messages of caution issued throughout the sector and now a rate cut looks set to further dampen spirits.
According to a Reuters
poll, almost all economists are predicting at least a quarter percentage point rate reduction tomorrow – although they are split on whether a quantitative easing programme will also be introduced.
Falls in interest rates are known to decrease the liabilities of an insurance company by reducing future obligations to policyholders. However, they are also known to make products less attractive, impacting sales and creating lower income from premiums. There can also be a negative impact on a firm’s risk profile as an equity investment if the company may struggle to meet future financial obligations. Lower levels of equity investment in turn mean lower levels of assets for insurers.
We will have full coverage of tomorrow’s rate announcement as soon as it is made.
Lloyds Bank announces lower insurance income, 3000 job cuts