The insurance industry struggles to create economic profit — but amid the pandemic’s enduring changes, opportunities await: McKinsey
Chicago, IL (Feb. 15, 2022) – The past two years may have been the most peculiar recession and recovery in living memory. In 2020, the human tragedy of the COVID-19 pandemic triggered a global economic downturn that was initially sharper than the Great Depression. As government support programs took shape, the recession rapidly bottomed out, leading to a strong economic recovery in 2021. Global financial markets took a roller-coaster ride as well.
The impact on the insurance industry was noticeable: in 2020, premium growth slowed to approximately 1.2 percent (compared with more than 4 percent per year between 2010 and 2020). Profits fell by about 15 percent from 2019. The decline was sharpest in Asia–Pacific (down 36 percent) and was particularly driven by falling profits in life.
Preliminary data suggest that premium growth and profits rebounded in 2021, especially in regions where strong vaccine rollouts have made many activities possible again, at least periodically.
State of the industry
Even before 2020, the insurance industry faced challenges. Now, those issues have taken on even greater urgency:
- Headwinds on revenue growth. Three structural factors are challenging industry growth: persistent low interest rates, which pressure spread-based businesses such as life insurance; pricing pressures driven by fee transparency, digital attackers, and lower-cost options—pressures that in some markets are aggravated by price comparison websites; and organic demand that is growing only slowly in mature markets. The latter is particularly worrying, because growth in developed economies is coming mostly from price increases rather than from volume or new risks covered, highlighting a risk that the industry might lose its relevance over time.
- An ongoing ‘fight for the customer.’ Insurtechs are driving digital innovation and disruption in the industry, with investments in insurtechs worldwide growing from $1 billion in 2004 to $7.2 billion in 2019 to $14.6 billion in 2021. More than 40 percent of insurtechs are focused on the marketing and distribution segments of the insurance value chain, enabling them to solve customer pain points through a digitally enhanced client experience that could pose a competitive threat to incumbents. And while some of these players have seen their share price tumble since their IPOs, we believe that a distinctive digital customer experience—from attackers or incumbents—will be a prerequisite for industry-beating growth. And beyond distribution, superior technology and healthy margins in insurance service businesses will challenge the traditional approach of many insurers to own the whole value chain—they will be forced to form partnerships or make outsize investments to keep up.
- A value shift toward intermediaries. Over the past five to ten years, brokers have emerged as the clear winners of the industry, with both public and private investors recognizing their position of strength in the insurance value chain. Total shareholder returns are much higher for brokers than for other industry segments, and private-equity firms are investing. In 2019, for example, CVC Capital Partners invested in April, and GTCR invested in AssuredPartners. PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of all insurance transactions from 2016 to 2019. Because insurers do not control their distribution channels as tightly as other financial sectors, they might run an even greater risk of becoming pure balance-sheet providers, while intermediaries keep an asset-light client relationship model. The shift toward digital is perhaps the last chance for insurers to regain the upper hand in this “fight for the customer.”
- Limited productivity improvement. Though many insurers have undertaken cost savings programs, the aggregate results have not been fruitful. Industry-wide, productivity improvements have been limited. Between 2014 and 2019, expense ratios fell for only 45 percent of global P&C carriers (with important variations across regions). For many, ratios did not budge or actually rose. That’s a disappointing outcome for an industry that has communicated so much on the need for productivity improvements.
Restarting value creation
The challenges run deep. And insurance leaders must also contend with a raft of trends unleashed by COVID-19. It’s a unique moment; insurers now face several fundamental strategic questions. How can they create more value for shareholders? Can they unlock latent demand and improve the customer experience? How can they regain momentum on the long-running quest to improve productivity? Also, what about talent? How can they reimagine the employee proposition to attract and retain the brightest and best after the pandemic? Finally, how can insurers, individually and collectively, reframe the role and purpose of insurance in society?
Read the full report, with additional charts and details of nine ‘value levers,’ on McKinsey’s website.
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SOURCE: McKinseyTags: coronavirus, epidemic, McKinsey