Indies Set Well For Coming Shift
Insurance industry consolidation will be dramatic
Indie brokers and agents are well-positioned for the coming insurance industry consolidation, according to a McKinsey & Company report, but it won’t be easy going forward.
The insurance industry is on the cusp of major changes and consolidation, according to McKinsey & Company’s Global Insurance Report 2022, written by a team from McKinsey’s Insurance Practice group. General financial underperformance, lack of technological applications to solve corporate or consumer problems, and the emergence of brokers’ strength in the value chain are among top factors shaking up the industry.
The report cites findings that 54% of listed insurers, representing 52% of the global industry’s equity, had returns on equity below their cost of equity during the past five years. The report cautions that such performance raises questions about the long-term economic viability of current business models.
About half of insurance companies have been trading below their book value, which likely will affect several players as stand-alone entities, particularly in multiline, where about 60% of companies are trading below book value.
The report indicates that brokers are doing well currently reporting total shareholder returns of 53.4%. That performance compares to property and casualty companies with 19.8% returns, multiline at 14.9%, and life and health at 7%. Reinsurers report negative total return at -4,4%.
Total shareholder return is the total amount investors reap from equity investments.
Fight for the Customer
Like all massive industry shifts, innovation and technology are playing crucial roles in insurance industry consolidation. Consumers already facing extraordinary inflation in critical areas of necessities, such as fuel and food, will be squeezed even more in coming months as insurance rates also skyrocket. Consumers will be shopping around not just automatically renewing, diluting any brand loyalty that might remain, McKinsey analysts say.
During the past five to 10 years, brokers have emerged as clear industry winners and are attracting public and private investment. Their value has increased as they provide consumers with broader choice in coverage and pricing.
Their expertise, McKinsey notes, is enhanced as “insurtechs,” specialized insurance technology firms, drive the industry’s digital innovation. The combination is allowing intermediaries to solve customer pain points using digitally enhanced experiences that are a competitive threat to big-company incumbents.
Private-equity-backed brokerage deals completed in the United States accounted for roughly three-quarters of all insurance transactions from 2016 to 2019, McKinsey reports.
This dynamic is driving the fight for customers. Big companies are shedding agents and turning to technology to go directly to consumers, but insurtechs are focused on marketing and distribution segments that broaden access to insurance sales.
McKinsey believes this change means new industry entrants or incumbents must provide distinctive digital experiences as a prerequisite for growth. The projection is that superior technology and resultant healthy margins in insurance service businesses will challenge the traditional approach of insurance giants owning the whole value chain.
“Big insurers will be forced to form partnerships or make outside investments to keep up,” the report says.
Insurers that don’t control their distribution channels tightly run an even greater risk of becoming pure balance-sheet providers, the report notes. Intermediaries are nimble and more connected to customers, which caused McKinsey analysts to observe that the “shift toward digital is perhaps the last chance for insurers to regain the upper hand in this ‘fight for the customer.’”
The combination of new technology to sell and deliver insurance coverage, high operating costs, and the inability for companies to find economies of scale in the process will drive pressures to form partnerships or invest heavily in external technology.
Between 2014 and 2019, expense ratios fell for only 45 percent of global property and casualty carriers. 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,” the report stated.
Increased scale was a primary goal for 60 percent of recent acquisitions, the report authors said, but that has not realized lower operating costs or higher margins. McKinsey thinks scale globally won’t be found in getting bigger, but in optimizing and consolidating local markets.
McKinsey’s strategic take on the situation involves several areas, but they highlight these key points:
Insurers generally don’t take climate-risk considerations into account for new-product launches and underwriting. While nodding to environmental, social, and governance (ESG) concerns in investment and other areas, McKinsey doesn’t believe insurers are considering how their business models will work in times of increased climate hazards, such as hurricane and tornado frequency. Insurers should become more focused on risk mitigation and stress-test total exposure against hazards.
New and evolving risks in cybercrime, pandemics, and intangible assets remain underinsured, McKinsey analysts believe. Data and cybersecurity risk and machine-learning liabilities are emerging risk areas. The report suggests insurers develop new products and reallocate their priorities because these risk areas represent significant opportunities for property-and-casualty and life insurers willing to innovate.
Winning insurers are making such products modular, reallocating capital between personal and commercial lines and moving quickly to establish strong market positions in these areas. McKinsey analysts would like to see formation of an industry-wide coalition and increased collaboration with governments and regulators to address these new risks.
To address affordability issues, McKinsey suggests more opt-in coverage models and more public-private partnerships, possibly even government insurance-voucher programs to maintain affordability and cover costs. This also would sidestep highly valuable pricing mechanisms that send risk back to the insured for risky behaviors, such as building in areas of high floods.
Consumer expectations mean insurers must become more digitally aware and digitally effective.
This might be an area of cooperation for big insurance companies to provide digital information on topics and concerns but also allow customers to select where they might want personal advice before purchasing policies.
“Carriers that rely on both an agent network and direct channels can build a true multi-access model that fully integrates both agent and direct channels,” the report encourages.
The use of technology to build “ecosystems” – meaning networks of interdependent industry players using cooperative systems – will greatly influence insurers’ future. Insurtech involvement in this re-composition of the value chain could encompass $60 trillion in revenue by 2030, the report estimates.
Ecosystems also might drive consumer expectations that insurance is just part of the deal, as insurance solutions and services are embedded in product or service purchases.
Rev Up for the Digital Age
Insurance leaders must shift leadership from a methodical pace of change to the decisive reinvention of their businesses. They must combine the speed of start-ups with the scale and resources of their core business, analysts said, especially involving new technologies such as artificial intelligence and machine learning.
Use New Technology
Modernizing technology platforms and being able to reimagine the relationships between IT and other business functions is critical for insurance leaders. Delivering products and services to customers and anticipating future technology requirements will help lay a path to growth.
It's Bright for Indies
For independent agents and brokers, this brave new world offers many opportunities. The fact that brokers are significantly outperforming other industry segments speaks to the powerful role indies play. Their closeness and connection to end-user customers will continue to be significant drivers as the insurance industry consolidates.