Commercial P&C carriers must expand relevance, says McKinsey

Commercial P&C insurers are at an inflection point as they face a continuing cycle of economic uncertainties, according to a new report from McKinsey, Global Insurance Report 2023: Expanding commercial P&C’s market relevance. It says the declining relevance of commercial lines is the most critical challenge that the insurance industry is facing today.

The report states that commercial carriers have not always kept pace with structural changes in the nature of risk, which are accelerating more rapidly than ever. It notes that global premiums lagged significantly behind real global GDP growth over the past three years, indicating a decline in the relevance of commercial lines.

McKinsey says that in combination with the structural changes in the nature of risks, commercial carriers need to address a number of critical challenges. Rates in some lines are starting to soften as capacity returns, while hardening continues in other lines – in some cases further supported by maintaining limits, despite inflation. It says the race to decarbonise underwriting portfolios is challenging and calls for new capabilities, but also offers opportunities for growth.

The report also notes that the nature of risks is evolving faster than ever, especially when it comes to natural catastrophes, the net-zero transition, and supply chain and cyber risks. “Rather than stepping back and reducing their exposure, commercial carriers have a significant opportunity to step forward to address the growing protection gaps – or risk losing relevance in a changing world.”

These challenges are exacerbated by tightening capacity in both traditional reinsurance capital and alternative capital markets, and the hardening of the reinsurance market at the January 2023 renewals. According to McKinsey: “To navigate the new nature of risks, commercial carriers must prepare to transform their capabilities and talent, as underwriting and claims shift from an art to a science.”

It adds: “Commercial carriers will need to invest and take decisive action in response to each of these challenges. First, commercial carriers must define a clear source of distinctiveness to protect their margins by competing beyond rates. Second, they can expand relevance by closing protection gaps through product innovation, more sophisticated pricing, and risk prevention and mitigation solutions. Third, commercial carriers will need to secure capacity by innovating the use of alternative capital and addressing investor concerns about long-term profitability. Finally, commercial carriers must reinvent their employee value proposition and develop the capabilities to shift from art to science to address the risks of the future.”

McKinsey urges commercial carriers to take action to expand their relevance by reducing protection gaps to fulfil the societal desire for resilience in a changing environment, especially in three areas: the increasing frequency and severity of nat cat risks, the transition toward a net-zero economy, and the evolution of cyber risks.

It recommends that commercial carriers expand their offerings beyond risk transfer to services that mitigate or prevent risks, and improve their ability to price and model the impact of catastrophic events.

The report notes that many commercial carriers “are investing heavily in advanced analytics, workbenches, and external data sources to help put data at the fingertips of underwriters and claims handlers to address the changing nature of risks”. It adds: “To keep up with the speed of change, commercial carriers must attract and retain the necessary talent, as well as develop the capabilities of experienced employees.”

The report concludes: “Commercial P&C carriers are at a crossroads. Persistent challenges lie ahead, including high inflation, rate volatility, the net-zero transition, the changing nature of risks, tightening capacity, and a shrinking labour market. Yet there is significant opportunity open to those who can carve out a distinctive value proposition for their clients, investors, and talent, and innovate risk transfer and prevention solutions to stay ahead of the evolving risk landscape. By taking bold and decisive action, commercial carriers can expand their relevance and advance their purpose to create a safer and more resilient society.”