Most carriers are struggling to meet their cost of capital, and productivity has barely moved over the past decade. Taking a more structural approach to productivity is required to make significant progress.
By Bernhard Kotanko, Björn Münstermann, Pradip Patiath, Jasper van Ouwerkerk, and Ulrike Vogelgesang
Chicago, IL (Aug. 16, 2019) – The insurance industry is facing a serious structural challenge. While some lines of business have seen years of steady top-line growth, life insurance carriers in mature markets have been particularly hard hit by the low interest environment. As a consequence, the majority of carriers are not making their cost of capital. In fact, the industry as a whole is in the red by average economic profit, with huge disparities in performance among the profitable carriers and the rest of the pack. As insurers struggle to sustain growth, the pressure to boost performance has become an urgent priority. Unlike other industries, which have been able to capitalize on their investments in digital technologies, insurance hasn’t increased its overall productivity in the past ten years.
In response, carriers have rolled out standard cost-cutting strategies—but with little to show for it. One of the primary culprits is complexity. Increasing performance by achieving scale through M&A or creating ecosystems to capture value in adjacent markets is a complicated undertaking that has only borne fruit for a few leading insurers. Moreover, digital attackers (including aggregators) are reshaping the competitive landscape and altering the cost curve by commoditizing product lines and driving down prices through increased transparency. Emerging risks, from cyber to the increasing frequency and severity of natural catastrophes, also threaten to undercut established business strategies. Last, investments in innovation and new products for future growth will require a more productive core.
There’s no time to lose in addressing these challenges. Insurers must shift from incremental budgeting improvements in favor of more ambitious structural changes to their business model and organization. Four categories of levers—deepened functional excellence, comprehensive simplification, an end-to-end business model transformation, and enterprise-level enablers—can increase productivity and jump-start growth. Leading carriers have pursued these levers individually to generate significantly higher economic returns. But to gain a sustainable competitive edge, insurance executives must and can pull all of these levers at once.
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