A hard-hitting report from McKinsey & Co has warned that the fundamental structure of the insurance industry is coming into question, and even its relevance, and insurers need to act now to address the issues.
The McKinsey & Co report, Creating value, finding focus: Global Insurance Report 2022, notes that economic profit – that is, profit after cost of capital – in the insurance industry is practically at a standstill: “After decades of stable returns, insurance is now a value-destroying industry in which half the players do not earn their cost of equity.”
It recommends a number of actions, including making ESG considerations a core feature of the business model, regaining relevance through product innovation and coverage of new risks, and addressing the productivity imperative. It also stresses the importance of enhancing customer engagement, engaging with insurtechs, scaling the impact from data and analytics, and modernising core technology platforms.
The report notes that while the insurance industry has improved its resilience and solvency in recent years, some substantial risks have been left uninsured. It points to new and evolving risks such as cyber, climate change, pandemics and intangible assets that remain underinsured.
“Risks are rapidly evolving. In P&C commercial lines, for instance, data and cybersecurity risk and machine-learning liability are coming to the fore. New risks call for new products and a reallocation of priorities, and they represent significant opportunities for P&C and life insurers that are willing to innovate. Such firms are taking three steps: making their products modular, reallocating capital between personal and commercial lines, and moving quickly to establish strong market positions in the new risks,” the report states.
It also says productivity is an issue for the industry. “In the current conditions, addressing structural expenses has become an even more important source of value – especially given the limited progress to date. Total expenses relative to total revenues (including investment income) increased by 20% from 2003 to 2019 for the life and annuities industry, and by 6% for P&C insurance carriers. During these same years, automakers and telecoms companies successfully reduced their total expense ratios by 15% or more,” the report points out.
The report concludes that without change, insurers could be left behind: “In a worst-case scenario, global insurers could become irrelevant, with an industry slowly moving toward a structure in which retail P&C transfers to mutuals, bancassurance, and direct players; commercial P&C goes to reinsurers and specialists; life insurance goes to wealth, asset management and private-equity firms; and health insurance becomes further entwined with public healthcare systems.”