How to narrow the personal P&C protection gap
Here are some of the insurance business insights revealed in McKinsey's new study titled 'Global Insurance Report 2023.'
First, the good news: Since 2019, personal property and casualty (P&C) insurance revenues have grown an average of 3% a year, and the industry proved its resilience during the pandemic. From 2016 to 2021, personal carriers saw a 5 % improvement in their operating expenses.
And now, the not-so-good news: In 2021, half of P&C insurers were not earning their cost of equity, and most listed insurance companies were trading below book value, raising questions about their business models. P&C profits are still down about 10% since 2019.
Clearly, carriers need to find new profit streams. But instead, there are growing “protection gaps,” or consumer needs that the industry is not addressing.
In auto insurance, for example, most carriers have not yet addressed mobility trends such as connected cars and the sharing economy. The McKinsey Center for Future Mobility estimates that these trends could affect 25% to 30% of premiums. In property insurance, concerns about extreme weather are challenging traditional risk assessment and underwriting models. And insurers are still figuring out how to address fraud and theft in e-commerce as well as other kinds of cyber-breaches.
Then there are structural challenges. The industry faces intense pricing pressure, even as inflation erodes margins and demand softens in mature markets.
To do better, and to fight back against new competition, such as retailers and tech companies, personal P&C carriers need to narrow the protection gaps. Here are four approaches that can help.
Four-step plan to profitability
Perfect capabilities within specific distribution channels. Consumers have more options than ever. So insurers need to be strategic about their distribution models, with the goal of becoming the provider of choice.
There are five main types of distribution models:
- Bancassurance specialists;
- Direct players;
- Ecosystem builders;
- Agent distributors; and
- White-label specialists.
Each requires different capabilities; each comes with different trade-offs. No one can become great at all five. The key is for companies to decide which models work best, and then systematically build on these strengths.
This is difficult because many portfolios have been cobbled together with little attention to creating a coherent channel, product, or segment focus. Now more than ever, insurers need to be strategic. For example, scale can be a critical advantage in building market share and growth. In making investment decisions, then, insurers should keep in mind how an acquisition can create meaningful scale in distribution or product strength.
Encourage cross-functional collaboration. Traditionally, the product, claims, actuarial, and pricing functions have operated independently, with different incentives; in a sense, they speak different languages. That model cannot meet challenges the industry faces. Some firms have demonstrated that it is possible to break down these siloes by employing new ways of working; moving toward agile squads; upskilling teams; and improving communication.
For example, one European direct insurer set up an agile squad to update pricing, with the pricing, technology, data and claims teams all working together. As a result, the insurer reduced its pricing update turnaround from 18 months to three, while significantly improving its loss ratio.
Collaboration is a means to an end — meeting the competition. One important element is to create fast and effective feedback loops so that small problems do not become big ones.
Invest in data. Most insurers are still in the early stages of capturing the full potential of modern analytics. Only 10% of 59 insurers surveyed said they had core analytical and automated systems. Less than 5% said they track the value captured that can be attributed to analytics. None considered themselves analytics-driven organizations.
Embracing digitalization and analytics could help insurers generate value through improved pricing, more tailored distribution and improved productivity.
Already, leading insurers use advanced analytics such as digital cognitive agents to process routine claims. In addition, younger consumers want — and even assume — that they will be able to access seamless, omnichannel, real-time interactions.
But better analytical capabilities can go much deeper, providing the foundation to inform strategy. This is an opportunity lost — and one that new competitors are taking.
Create products that address new risks. Insurers rely on long-term relationships with their consumers and are well aware of the value of these relationships. But these cannot be taken for granted. Because the nature of risk, and the demands of consumers, are changing so fast, personal carriers need to develop new, products, processes and partnerships to keep up. For example, they could seek to improve resilience in their property book by redesigning terms and conditions and providing solutions for areas exposed to natural disasters. There may also be ways to add ride-hailing insurance to existing personal motor policies.
In sectors that are not part of their core value proposition, carriers can partner with other players. In the U.S. pet insurance market, for example, eight of the top ten personal-lines insurers rely on partners to grow and expand.
Innovation is the answer to many business questions, and that is certainly true here
The future is going to be different than even the recent past. Insurers need to accept this, and act on that basis. That doesn’t mean ditching fundamental values around service to people and society. It does mean being willing to adapt in order to meet the next generation of challenges such as cybersecurity and digital crime.
Too many carriers are taking risk-aversion too far and widening the current protection gaps. Providing coverage where it is needed is the way to lead, and to prosper.
Kia Javanmardian is a senior partner in McKinsey & Company’s Chicago office; he is one of the co-authors of the Global Insurance Report 2023: Closing the personal P&C protection gap. These opinions are the author’s own.
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