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Library: McKinsey – Grow or exit? Overcoming the scale trap in life insurance closed books

Executive summary

Life insurers in continental Europe have been grappling with a combination of cost, regulatory, and interest rate challenges for much of the past decade. The COVID-19 pandemic has accelerated those challenges by adding pressure on life insurers’ costs, solvency, and investment yield, forcing necessary investments in digitalisation. Now the challenge for incumbents is to learn from these developments so they can be better prepared for the future and avoid becoming trapped in a downward spiral.

 The Digital Insurer reviews McKinsey’s Report on Grow or exit? Overcoming the scale trap in life insurance closed books

The time has come for bold strategic decisions

Shift of focus

To be sure, some players have been better able to cope with these challenges than others. Insurers implemented cost reduction programs and investments in the digitalisation of their back and front ends. Many shifted their product focus from traditional guarantees toward hybrids and unit linked solutions. Nevertheless, growth has been limited to markets where the majority of players adapted to the new environment, and performance has been mixed as a result. Meanwhile, the underlying challenges affecting the sector persist.

Tighter rules

First, since 2010, insurers have failed to reduce their overall costs (as opposed to costs as a percentage of reserves). Cost ratios fell in each of the top five European markets, except Spain because of increasing reserves. Second, regulatory pressure is showing no signs of abating. Rules such as the IFRS 17, which will come into force on January 1, 2023, and rules tightening up local consumer protection significantly deplete capacity and are challenging the traditional value proposition of life insurers.

No more lower for longer

Last, the era of ultra low interest rates has brought challenges. While insurers have naturally sought to boost returns to offset the meagre returns from traditional fixed-rate investments, the relatively high regulatory capital requirements involved have made this a difficult proposition. Even with increasing rates driven by the unprecedented inflation since first quarter 2022, life insurers still need to deal with these issues due to the long duration of low-yielding assets in their books. This can be particularly challenging for smaller insurers that do not have the scale to justify assigning large teams to monitor risks associated with smaller asset classes such as renewables and infrastructure.

It’s time to choose

Despite this challenging environment, new players, such as consolidators, have entered the market and have shown that insurers can still create value. Incumbents can learn from such players to become better prepared for the future. The time has come for insurers to make some bold strategic decisions.

See the full report for more…

Link to Full Article:: click here

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