UK insurance companies and brokers are expecting a bleak start to 2012 after profits and business volumes declined in late 2011.

In a survey of the UK financial services sector, conducted by PricewaterhouseCoopers (PWC) and the Confederation of British Industry late last year, insurers indicate they are still gloomy about business expectations for 2012 – but not as much as last year.

The struggling UK economy, turmoil in the Eurozone and the prospect of a new regulatory regime is weighing on the entire financial services sector.

PWC insurance partner Howard Scott says insurers’ hopes for the early part of 2012 “rest on growth in commercial lines and an anticipated recovery in business with overseas customers”.

“General insurers continue to plan further headcount reductions in response to the tough market conditions.”

Brokers appear to be faring the worst. The survey shows brokers’ profitability declined last year after a strong fall in the volume of business and the value of premium income.

While total operating costs also fell, the decline in volumes was substantial enough to push up the average cost per transaction.

Brokers expect profitability to fall again in the first quarter of this year, although not by as much as in the December quarter.

Life insurers turned out two straight years of growth and profitability but the companies are worried about “lower volumes, incomes and profits” this year.

Staff turnover in the area is low. “Employees are clearly choosing to sit tight rather than test the current employment market,” Mr Scott said.

UK life insurers’ predictions for the year ahead are downbeat as they struggle with the unhelpful combination of falling consumer confidence, a quiet housing market, tighter household budgets and volatile investment markets.

“This difficult environment is expected to hurt profitability, with most life insurers expecting a significant dip in the next quarter,” Mr Scott said.

The outlook of companies in the general insurance sector is the most optimistic, but even they have a far from rosy view of the future.

Mr Scott says “intense competition in the retail market, especially in home and motor insurance, coupled with the recent run of natural catastrophes and the increasing value of claims, continues to put pressure on general insurers’ profits”.

The survey reveals “very marginal growth” in premium income and business volumes last year but an expectation of “faster” improvement in the first quarter of this year.

The value of insurance claims is also “higher than its long-run average” for the sixth consecutive quarter.