Insurance a “value destroying” industry, warns McKinsey

“After decades of stable returns, insurance is now a value-destroying industry in which half the players do not earn their cost of equity,” a new report by consultant McKinsey & Company finds.

Its Global Insurance Report 2022 finds that the industry “struggles to make a profit”, according to the company. The impact of Covid in 2020 on the sector was significant, with premium growth slowing to 1.2% compared with over 4% in the preceding decade. Profits fell by about 15% from 2019.

“Even before 2020, the insurance industry faced challenges”, however, it finds. These include persistent low interest rates, pricing pressures and slow growing organic demand in mature markets. Insurtechs and market disruption add to the difficulties.

Reinsurers have not escaped, the report finds. The annualised total shareholder return (TSR) between 2010 and 2019 shows the sector’s TSR at 14.9%, second only to global brokers (21.9%), and ahead of P&C (12.7%), multiline (9.8%) and life and health (9.7%) insurers. However, in 2020-21 reinsurers trailed them all, with a TSR of -4.4% compared to 53.4% for brokers, and 19.8%, 14.9% and 7.0% for P&C, multiline and life and health, respectively.

“Over the past five to ten years, brokers have emerged as the clear winners of the industry, with both public and private investors recognising their position of strength in the insurance value chain,” the report notes.

While Covid continues to cause problems and accelerates other trends, the challenges of the past decade have not gone away, it warns.

“Revenue growth is limited in most regions; intermediaries are capturing more value; scale economies are proving elusive; and productivity is quite stagnant. As a result, economic profit – that is, profit after cost of capital – in the insurance industry is practically at

a standstill.

“The industry’s problems are not lost on capital markets. As public investors mark down companies’ shares, private investors swoop in to acquire closed books, and some insurers reconsider their geographical footprints, the fundamental structure of the industry is coming into question.”

The consultant argues that insures should make a raft of changes to renew value creation, addressing “nine imperatives”. They include making environmental, social, and governance considerations core; embracing product innovation and coverage of new risks; reinventing business models to compete with insurtechs; and scaling impacts from best-in-class data and analytics capabilities.

“Addressing these nine imperatives will help carriers answer strategic questions about ‘how to play’,” it concludes. “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.”