“After decades of stable revenue, the insurance industry has become a value-destroying industry where half of the players do not realize the cost of equity,” say the researchers and authors of the report. McKinseyAnd the Creating value and creating focus: The World Insurance Report 2022.
They say economic profits are unevenly distributed among the world’s largest companies. In fact, those in the top ten monopolize 80% of the profits.
In Canada, the five largest (premium) life insurers accounted for 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 McKinsey data, the top five non-life insurers (again by premium) accounted for 45% of this market in 2020.
For insurers looking to break into the top 10%, McKinsey researchers suggest five strategies that, if implemented consistently, could push them along the power curve: dynamic capital reallocation between different sectors; Reinvest a significant part of the capital in internal growth and innovation; Conducting thematic and programmatic mergers and acquisitions (while avoiding mega deals); Improving underwriting margins. and productivity improvements to “change the rules of the game”. “All of this has to take place in a very different environment that changes very quickly. The starting points vary greatly from region to region and from branch to branch.
The report’s authors also delve into the major post-COVID-19 trends that will affect insurers and provide an update on the state of the industry. They claim that productivity has improved slightly and that economies of scale have proven insufficient. Additionally, they comment on investors’ perception of the industry; List nine strategic imperatives for insurance companies; Suggest ways to identify areas and industries where it is best to do business; considering the next phase of mergers and acquisitions in the industry; and determining how insurers can refocus their business portfolios. Finally, they concluded the report with nine additional questions for executives about their company’s geographic presence, industries, and location in the value chain.
The state of the industry globally
According to McKinsey researchers, industry growth is decelerating due to structural factors. These factors are persistent low interest rates, cyber attacks, pricing pressures from comparison sites and claims that claim fee transparency.
“Natural demand is growing slowly in established markets,” they add. This is particularly worrisome, because growth in advanced economies comes mostly from price increases, not volume or new risks being hedged. The industry thus risks losing its relevance over time. »
The report insists on the premise that the insurance industry has become a value-destroying industry. The industry’s average returns to equity have remained stable or just below the cost of capital in recent years, particularly in North America and Western Europe. It’s not just a few insurance companies that are holding back. Rather, it’s a general problem: 54% of listed insurance companies (representing 52% of global industry shares) have reported a return on equity less than their cost of capital in the past five years, which calls into question the long-term economic viability of these companies. business models,” the report reads. Globally, nearly 50% of listed insurers have traded below book value over the past five years. Therefore, there is a stark lack of confidence in the industry, which calls into question the long-term prospects for many Players as independent entities. »
Moreover, McKinsey researchers say that certain trends are certainly changing the way the industry is secured, distributed and managed. The increasing complexity of the macroeconomic environment, stagnating productivity and talent retention are all topics and concerns featured in the report.
Major trends in the post-Covid-19 period
Overall, McKinsey researchers believe that part of these larger trends is defining a new way of working. “In the coming years, they write, the global insurance industry will be dramatically changed by some of the major trends that have emerged and accelerated since February 2020.”
Among these trends, they mention the separation of macroeconomic environments in Asia, Europe and North America. The epidemic had winners and losers, as it had different effects from one industry to the next, and even within each industry. In addition, remote customer interaction and personalization have forced insurance companies to invest more in technology. The report reads: “They may even have to dramatically change their distribution models by redefining the role of agencies, intermediaries, and digital sales channels.”
At the same time, increased awareness about sustainability, climate change and diversity, and issues of equity and inclusion will have immediate implications for insurers, as will changes in mobility and ways of working. In particular, the researchers argue that the rationale and importance of insurers and the industry will be called into question.
The pandemic and the problems it has created for insurance has shone a spotlight on the industry. Insurance companies may want to rethink their purpose in society and their importance in the economy, since industry is inherently risk-taking. The industry is said to have lost this advantage in the past 10 years, by limiting the types of risks or clients it is willing to cover. »
In addition to the questions they ask executives at the end of the report, the researchers recommend that insurers use nine “value levers.” Here are some of them: making environmental, social, and governance issues an essential part of their business models; seeking to cover new risks; Focus on customer engagement and customer experience; Interact with ecosystems and insurance technology companies to re-create value.