Low interest rates, higher hedging costs, lower business volumes and the impact of Solvency II will combine to hit insurers hard both this year and next, Ernst & Young said yesterday.
In its summer 2012 ITEM Club financial services forecast, the consultancy highlighted the 'challenging' macroeconomic environment facing insurers and warned that their profits look set to decline for the second year running.
Non-life premiums are expected to grow by just 0.3% this year before increasing by between 4% and 6% between 2013 and 2016 as economic growth gains traction.
New life business growth will be limited this year as a result of weak gross domestic product, employment and income growth. Premiums are expected to grow by just 3% this year, compared to 4.1% in 2011.
Ernst & Young expects life premium growth to slow further next year as it is curtailed by the introduction of new European legislation for the insurance industry, Solvency II, as well as the retail distribution review, which affects how financial advice is delivered.
Carl Astorri, senior economic adviser to the Ernst & Young ITEM Club, said: '2012 is providing to be a tough year for the insurance industry. Insurers need to plan their businesses on the assumption that the low interest rate environment is here to stay for some time.
'They need to wean customers off the guarantees that are creating the asset and liability matching problems, prices need to rise for property and casualty insurance, annuity rates need to fall and distribution models for life insurers need to be reassessed.'
In terms of assets under management, Ernst and Young downgraded its forecast for growth in the value of assets from 10.7% this year to 7%. This comes after 2011 saw a 2% decline in the value of AUM.
Next year is then expected to see growth of 10.5%, meaning the total value of AUM hits a new high of £746bn.
Mr Astorri added: 'The asset management sector is still the strongest performing sector in financial services but it will change rapidly in 2013/14.
'Bonds and money market funds will lose favour as economic stability increases confidence and property and equities will make a comeback as investors start to look for higher return opportunities.'