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) (Exhibit 1). 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 (Exhibit 2): 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 (Exhibit 3), 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 (Exhibit 4). 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. Exhibit 5 offers an illustration: 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.
As a result of these longstanding challenges, economic profit—that is, profit after cost of capital—in the insurance industry is practically at a standstill (Exhibit 6).
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?
Welcome to the first edition of McKinsey’s Global Insurance Report, which seeks to answer these questions. In our view, leadership teams need to capitalize on nine value levers:
- Make environmental, social, and governance (ESG) considerations a core feature of the business model. ESG issues increasingly affect how all companies do business. Consider climate risk, an area in which evidence is mounting that P&C insurers will soon need to revisit their business models. However, while many insurers have begun to incorporate climate-risk considerations in their investment processes, new-product launches and underwriting processes are mostly unchanged.
- Regain relevance through product innovation and coverage of new risks. While the insurance industry has built financial resilience recently, some substantial risks have been left uninsured. A fast-changing world is creating many new and evolving risks. In P&C commercial lines, for instance, data and cybersecurity risk and machine-learning liability are coming to the fore. New risks call for new products and a reallocation of priorities, and represent significant opportunities for P&C and life insurers that are willing to innovate.
- Enhance and personalize customer engagement and experience. New customer behaviors require a shift in distribution. Consumers are embracing digital channels and have become used to delightful experiences with leading tech companies. They expect the same when buying insurance both online and offline. A seamless, consistent “multi-access” experience in every channel is now the gold standard for insurers.
- Engage with ecosystems and insurtechs. The ongoing drive toward digitalization has also put the insurance industry on the verge of a paradigm shift: as traditional industry borders fall away, ecosystems will greatly influence the future of insurers, with insurtechs aiming to play a role in this recomposition of the value chain. Our research suggests that ecosystems could encompass $60 trillion in revenue by 2030. Many insurance executives are looking at ways to engage with emerging ecosystems in areas such as mobility, healthcare, and the connected home.
- Develop new businesses for the digital age. Private investors have spotted the potential for improvement and the not-too-distant prospect of attractive returns in insurance. They are investing heavily in insurtechs, whose attractive talent pools can rapidly create and scale new businesses. In this context, incumbent carriers must reinvent their business models to fulfill the imperative to grow and, ultimately, to deliver stakeholder value.
- Scale impact from data and analytics. Most insurance executives would agree that data and analytics capabilities are becoming table stakes in the P&C and life sectors in Europe, North America, and Asia. Leaders see enormous potential in best-in-class data and analytics capabilities across the value chain, even for the highest-performing companies. For example, even the leading P&C insurers can see loss ratios improve three to five points, new business premiums increase 10 to 15 percent, and retention in profitable segments jump 5 to 10 percent. However, after years of investing and experimenting, most insurers have not yet seen the return on their investments at the enterprise level.
- Modernize core technology platforms. From 2012 to 2020, technology’s average share of operating costs rose by 36 percent (for P&C) and 10 percent (for life). The key driver is increasing digitalization—at both the front end, where technology enhances the customer experience, and the back end, where digital drives productivity gains and operational performance. Digitalization is straining legacy systems, some of which are decades old, and many insurers are considering a replacement of core systems with tech platforms that support the requirements of the digital age.
- Address the productivity imperative. In the current conditions, addressing structural expenses has become an even more important source of value—especially given the limited progress to date. Insurers need more than mere piecemeal attempts at improvements. Only a transformative approach will allow an insurer to survive and thrive in a post-COVID-19 world. Each carrier is unique, but any company can begin the process to improve productivity by establishing the trajectory and full performance potential of the business across the value chain—including sales and distribution, product development, operations, technology, and corporate functions.
- Reimagine culture, diversity, and ways of working to attract and retain talent. Our colleagues summed it up recently: “Once in a generation (if that), we have the opportunity to reimagine how we work. In the 1800s, the Industrial Revolution moved many in Europe and the United States from fields to factories. In the 1940s, World War II brought women into the workforce (if not the C-suite) at unprecedented rates. In the 1990s, the explosion of PCs and email drove a rapid increase in productivity and the speed of decision making, ushering in the digital age as we know it today. And in 2020, the COVID-19 pandemic drove employees out of offices to work from home…. The return to the workplace is a chance to create a new, more effective operating model that works for companies and people navigating a world of increasing uncertainty.”
Addressing these nine imperatives will help carriers answer strategic questions about “how to play.” But the challenges and recent trends facing the industry will force some insurers to also think about “where to play” and rebalance their portfolios of businesses and review their capital allocation accordingly.
In this report, we zoom in on this pressing question: Where should insurers be active (in terms of geography, lines of business, and position in the value chain) to renew value creation and themselves? Our conclusion? Most carriers would benefit by focusing their portfolio more tightly on the businesses of which they are the best natural owners. To download the full report, click here.