Global megatrends in the insurance industry

“After a decade of stable revenues, the insurance industry has become a value-destroying industry in which half of the players do not realize their cost of equity,” say the researchers and authors of the report. McKinsey, Create value, focus: Global Insurance Report 2022.

Economic profits are unevenly distributed among the world’s largest corporations, they say. Indeed, those who occupy the first 10 ranks monopolize 80% of the profits.

In Canada, the top five life insurers (by premium) held 76% of the market in 2020, according to the McKinsey Global Insurance Pools database. There is less inequality in the non-life insurance market. According to data from McKinsey, the top five non-life insurers (again by premium) held 45% of this market in 2020.

To the insured reinvest a considerable part of the capital in internal growth and innovation; perform thematic and programmatic mergers and acquisitions (avoiding mega-deals, however); improve underwriting margins; and deliver “game-changing” productivity enhancements. “All of this has to be done in a very different environment that changes very quickly. Starting points vary greatly from region to region and branch to branch,” they write.

The report’s authors also delve into post-COVID-19 megatrends that will affect insurers and provide an update on the state of the industry. They claim that productivity improved little and economies of scale proved insufficient. In addition, they comment on the perception that investors have of the industry; list nine strategic imperatives for insurance companies; operate means of determining the regions and branches where it is preferable to do business; examines the next phase of industry mergers and acquisitions; and generously how insurers should refocus their respective business portfolios. Finally, he concludes the report with nine additional questions for executives about their company’s geographic presence, industries, and position in the value chain.

The state of the industry globally

According to McKinsey researchers, industry growth is being held back by driving factors. These factors are continued low interest rates, cyberattacks, and pricing pressures from comparison websites and claims claiming fee transparency.

“Natural demand is growing slowly in established markets,” they add. This is of particular concern, as the growth of developed economies comes mostly from price increases, rather than volume or new risks covered. The industry therefore risks losing its relevance over time. »

The report insists on the thesis that the insurance industry has become a value-destroying industry. “Industry average ROEs have remained stable or slightly below the cost of capital in recent years, particularly in North America and Western Europe. It’s not just a few insurers who are pulling back. Rather, it is a general problem: 54% of listed insurers (which represent 52% of global industry equity) have reported an ROE below the cost of capital in the last five years, which calls into question the long-term economic viability of their business models,” the report reads. “Globally, the securities of approximately 50% of listed insurance companies have traded in December of book value over the past five years. There is therefore a glaring lack of trust in the industry, which calls into question the long-term prospects of several players as autonomous entities. »

What’s more, McKinsey researchers say certain trends are certain to transform how the industry underwrites, distributes and manages. The growing complexity of the macroeconomic environment, stagnating productivity and talent retention are all themes and concerns cited in the report.

Post-COVID-19 megatrends

Overall, McKinsey researchers believe that part of these megatrends are defining a new way of operating. “In the coming years, they write, the global insurance industry will be profoundly changed by some of the megatrends that have emerged and accelerated since February 2020.”

Among these trends, they mention the decoupling of macroeconomic environments in Asia, Europe and North America. The pandemic has had winners and losers, as it has had different impacts from industry to industry, and even within each industry. Additionally, remote customer interaction and personalization have forced insurers to invest more in technology. “They may even have changed their distribution models by repositioning the role of agencies, courtiers and digital sales channels,” the report reads.

At the same time, awareness of sustainability, climate change and diversity, equity and inclusion issues will have immediate effects on insurers, as will changes in mobility and working methods . In particular, the researchers argue that the rationale and relevance of insurers and the industry will be questioned.

“The pandemic and the problems it has created for insurance have shone a spotlight on the industry. Insurers may want to rethink their purpose in society and their relevance in the economy, as the industry is inherently risk-taking. The industry is said to have lost this feature in the last ten years, by limiting the types of risks or clients it is willing to cover. »

In addition to the questions they pose to executives at the end of the report, the researchers recommend that insurers apply to nine “levers of value.” Here are a few: making environmental, social and governance issues a core part of their business models; seek to cover new risks; focuses on customer engagement and customer experience; Interact with ecosystems and insurance technology companies to renew value creation.

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