McKinsey – State of property & casualty insurance 2020

Executive summary :

The insurance industry is often perceived as complicated and slow moving. Yet insurance is one of the largest global industries, generating more than $5 trillion in annual revenue.

P&C not disrupted by COVID-19 

It plays a critical role in today’s economies, offering financial protection and risk mitigation to individuals, small businesses, large corporations, nonprofit organisations, and even governments.

As a whole, property and casualty (P&C) insurance represents $1.6 trillion in premiums (about one-third of the insurance industry) and remains one of the few industries that has yet to be disrupted.

The three Rs: Resilience, relevance, and reinvention

As a notable achievement in the financial-services world, the insurance industry has grown economically stronger in the past two decades after sustaining $45 billion (2020 prices) in insured losses from the terrorist attacks of September 11, 2001—then the costliest event in the history of insurance globally. And in the past few years, natural disasters have led insurers and reinsurers to pay hundreds of billions of dollars in claims, an unprecedented amount of losses.

Despite these claims payments, the most recent natural disasters have been earning events for insurers, not solvency ones—perhaps a testament to the industry’s resilience. But this resilience will be tested in the years to come through the changing severity and frequency of disasters coupled with limited flexibility to balance market-driven price responses in the changing risk level, continued low interest rates, and changes to the traditional business model.

In fact, as innovation and technology significantly transform entire industries, P&C overall has largely been running in place. Industry growth relative to GDP is flat or even negative in several developed markets, valuations in the sector are often lower compared with adjacent financial services sectors such as banking and asset management, and new talent acquisition isn’t prioritised, despite more than one-quarter of its most experienced professionals soon retiring in key geographies.

Furthermore, despite improvements in labour productivity, overall cost performance has not improved in the past 15 years. The P&C industry is being outpaced on total productivity by sectors from automotive to telecommunications to banking. In the face of current and emerging advances in fintech and digital distribution, the P&C industry’s existing operating model faces challenges and risks losing economic relevance.

Given the fragmented nature of the industry, new models of collaboration—including with governments and regulators—will need to be tested to help carriers transition to this future state, as no single insurer can efficiently and repeatedly absorb first-mover costs as change accelerates. The industry must reinvent itself.

A call to action

Our research and experience reinforce that succeeding requires bold moves of considerable scale and investment. Now is an exciting moment for the industry, but leaders must act with speed and conviction. We anticipate that the gap between carriers that act swiftly and deftly and those that do not will increase: the former has proportionally more to invest in deploying new capabilities, as they capture most of the industry profits. This dynamic will further increase the gap between winners and laggards in subsequent years.

CEOs, working with the board, have a unique role to play in this context: they must decide what kind of organisation they will steward and lead in the next five years, which clients they will serve and focus on, and how they will do so with distinction and relevance.

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