The strength of the insurance industry will be tested over the next few months as the eurozone crisis puts pressure on insurers capital positions, according to Ernst & Young.
In its latest ITEM Club Outlook for financial services, publishedtoday, the advisory firm say the crisis will continue to increase the potential for credit rating downgrades for UK insurers.
There is also a danger that insurers' generally large debt and equity holdings in banks could require them to raise more capital in the long run, they add.
Neil Blake, senior economic adviser to the ITEM Club, said: 'The continuing crisis in the eurozone will put increasing long-term pressure on insurers' capital positions.
'But for now the market should be watching for year-end results closely to see whether insurers, especially in non-life, maintain relatively high levels of dividend payouts in the face of an expected decline in net profits, as a way of signalling their financial health,' he added.
According to the report, the market for life products will gradually recover but will not match the rapid growth - since reversed - achieved before 2008.
Higher capital requirements will raise the cost of and limit the appeal of some previously popular savings-related products, it said, while higher contribution requirements and rising annuity costs are a threat participation in pension schemes.
Non-life providers saw a 'sharp rise' in claims last year - both domestically and globally - which will require a further rise in premiums, Ernst & Young said.
'But with spare reinsurance capacity still reported, this is unlikely to signal an end to the down-phase of the underwriting cycle. Premium rises to date have mainly been concentrated in motor policies, where they have not yet matched rising costs,' it said.
'And Solvency II rules are likely to impede the capital adjustment that normally precedes a general hardening of premiums.'
The ITEM Club report also forecasts a contraction in bank lending for the first time since 2009. After expanding by an estimated 4.3% last year, total bank loans are expected to contract by 2.2% in 2012, and grow by just 0.9% in 2013.
Small and medium-sized enterprises, commercial real estate and personal customers who fall outside of standard credit terms are expected to be HIT particularly hard, Ernst & Young said.
Meanwhile, the growth of payday loan companies and alternative corporate vehicles is also set to continue apace, as the 'paralysis' of bank lending opens up both ends of the market to alternative or 'shadow' banking..