Global megatrends in the insurance industry

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“After decades of stable earnings, the insurance industry has become a value-destroying industry, with half of the players unaware of the cost of equity,” the report’s researchers and authors said. increase. McKinsey, Creating Value, Discovering Focus: Global Insurance Report 2022..

They say that economic benefits are unevenly distributed among the world’s largest companies. Indeed, those who occupy the first 10 ranks dominate 80% of their profits.

According to the McKinsey Global Insurance Pool Database, in 2020, the top five life insurance companies (by premium) accounted for 76% of the market in Canada. There is less inequality in the non-life insurance market. According to McKinsey data, in 2020, the top five life insurers (also in premium) accounted for 45% of the market.

McKinsey researchers suggest to insurers looking to enter the top 10% five strategies that can drive the power curve when implemented consistently. Reinvest a significant portion of our capital in internal growth and innovation. Perform thematic and programmatic mergers and acquisitions (but avoid mega deals). Improve underwriting margin. Achieve improved productivity that “changes the game”. “Everything needs to be done in very different environments that change very rapidly. The starting point varies greatly from region to region and from branch to branch,” they write.

The report author also delves into the megatrends since COVID-19, which impact insurers and provide up-to-date information on the state of the industry. They claim that productivity has hardly improved and economies of scale have proven to be inadequate. In addition, they comment on the perception investors have about the industry. List nine strategic requirements for insurance companies. Suggest ways to determine the best region and industry to do business with. We are considering the next phase of industry mergers and acquisitions. Outline how insurers can refocus on their respective business portfolios. Finally, they conclude the report with nine additional questions to executives about their geographic presence, industry, and position in the value chain.

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World industry situation

According to McKinsey researchers, industry growth is constrained by structural factors. These factors are allegations of ongoing low interest rates, cyberattacks, price pressures from comparative websites, and price transparency.

“In an established market, natural demand is growing slowly,” they add. This is of particular concern as growth in advanced economies comes primarily from rising prices, rather than covering volumes and new risks. Therefore, the industry runs the risk of losing its relevance over time. »»

The report claims that the insurance industry has become a value-destroying industry. “Industry average ROE has been stable or slightly below the cost of capital in recent years, especially in North America and Western Europe. Rather, it’s not just a few insurers that are withdrawing. Rather, it’s a general problem. 54% of listed insurers (accounting for 52% of the world’s industry capital) report ROE below the cost of capital over the last five years, questioning their long-term economic viability. I’m throwing it. Business model, “said the report. “Globally, about 50% of listed insurers have traded below book value in the last five years. Therefore, there is a clear lack of trust in the industry and multiple players as autonomous entities. I am questioning the long-term outlook for. »»

In addition, McKinsey researchers say that certain trends are steadily transforming the way industry underwrites, distributes and manages. Increasing the complexity of the macroeconomic environment, stagnant productivity, and retaining talent are all the themes and concerns cited in the report.

After COVID-19 Megatrends

Overall, McKinsey researchers believe that some of these megatrends define new ways of operating. “In the next few years, they write that the global insurance industry will be significantly changed by some of the megatrends that have emerged and accelerated since February 2020.”

In these trends, they refer to the separation of the macroeconomic environment in Asia, Europe and North America. There were winners and losers because the pandemic had different impacts in each industry, and even within each industry. In addition, remote interaction and personalization with customers requires insurers to increase their investment in technology. “By relocating the roles of distributors, brokers, and digital sales channels, we may have to make significant changes to our distribution model,” the report said.

At the same time, increasing awareness of sustainability, climate change and diversity, equity and inclusiveness issues will have an immediate impact on insurers, as well as changes in mobility and work practices. In particular, researchers argue that the rationale and relevance of insurers and the industry is questioned.

“The pandemic and the problems it poses to insurance are spotlighting the industry. As the industry is inherently at risk, insurers may want to rethink their social objectives and their economic relevance. The industry is said to have lost this property in the last decade by limiting the risks and types of clients it is ready to cover.

In addition to the questions asked to executives at the end of the report, researchers recommend that insurers use nine “valued levers.” Here are some. Make environmental, social and governance issues a core part of your business model. Try to cover new risks. Focus on customer engagement and customer experience. Renew value creation by interacting with ecosystems and insurance technology companies.