GLOBAL INSURANCE REPORT 2023: CLOSING THE PERSONAL PROPERTY AND CASUALTY (P &C) PROTECTION GAP
?GLOBAL INSURANCE REPORT 2023: CLOSING THE PERSONAL PROPERTY AND CASUALTY (P &C) PROTECTION GAP
?INTRODUCTION
The closure of manufacturing plants, restaurants, retail establishments, and other places of business to limit the spread of COVID-19 has resulted in significant business interruption losses. The vast majority of these losses are likely to be absorbed by the affected businesses as: (i) many businesses have not acquired coverage for business interruption losses; and (ii) unless governments (or courts) intervene, few of the companies that have acquired business interruption coverage have coverage that is likely to respond to these types of losses ( the OECD’s?Initial assessment of insurance coverage and gaps for tackling COVID-19 impacts?for a more detailed assessment of the insurance coverage available for COVID-19 related losses). In response to the current crisis, policymakers in a number of jurisdictions are examining various ways to support commercial policyholders (particularly small and medium-sized enterprises (SMEs)) in the context of the uninsured business interruption losses that they have faced as a result of the current COVID-19 pandemic. Policymakers are also beginning to examine longer-term solutions to address the gap in financial protection for pandemic-related business interruption that has come to light as a result of the current crisis. This note provides an overview of the initial responses to the likely business interruption protection gap for COVID-19 and a discussion of how business interruption insurance against pandemic risk could be provided with support from governments based on the experience of other catastrophe risk insurance programs.
?COVID-19 business interruption protection gap
Businesses across many sectors of the economy have faced a significant decline in revenue as a result of government directives to close their businesses or curtail their activities in order to slow the spread of the virus among employees and customers. The OECD estimates that one month of strict confinement measures leads to approximately USD 1.7 trillion in revenue losses. ?Most governments have implemented programmes to support businesses that have faced significant disruption as a result of COVID-19, focused on ensuring the availability of financing for businesses or income for their employees. Some commercial property insurance policies also include coverage for business interruption losses which provides policyholders with protection against some of the losses that they incur when their business is forced to close, subject to the terms and conditions of the individual policy.
Estimates of business revenue losses. The initial set of confinement measures that occurred in March-June 2020 across most OECD countries had different impacts on different businesses sectors. Some types of business activities were able to be maintained at (or near) normal levels, while others had to shut down.?In Canada, the national statistics office (Statistics Canada) undertook a survey of businesses to determine the change in businesses revenues in April 2020 (during the period of confinement) relative to April 2019. While the survey only provided ranges for revenue changes, there was sufficient granularity to allow for a rough calculation of the average decline in revenues across sectors (ranging from an 11.7% decline in the agriculture, forestry, fishing, and hunting sector to a 41.0% decline in the accommodation and food services sector). applies these sector-level average declines in revenue across other OECD countries to provide estimates of the losses that would be incurred in different countries, adjusting for the different components of business activities in different countries (and assuming that the different confinement measures resulted in similar impacts on revenues). For the 27 OECD countries for which the necessary data was available (in addition to Canada, calculated based on, a month of confinement measures could result in total business revenue losses of USD 1.7 trillion. The 28 countries included account for approximately 93% of OECD country GDP. Additional periods of confinement and business closures would of course increase the overall level of losses.
19 USD. ?For example, one survey of US small bu as retail or food services) and physical-type industries (such as construction or manufacturing) were much more likely to face severe decreases or even total losses of revenue than businesses operating in knowledge-type industries?(SHRM, 2020[).
2. Confinement measures were of course different across countries and also had different impacts on business revenues. In the United States, one estimate suggests that the overall decline in business revenues among small businesses reached 38.2% as of 30 April 2020 (relative to January 2020)?(Chetty et?al., 2020)?which is higher than the overall estimate for Canadian businesses (25.5%). In Australia, data on the share of businesses that faced decreases in revenue have been published (although no estimates of the amount of decline). In May 2020, it was estimated that 72% of businesses faced a reduction in revenues?(Australian Bureau of Statistics, n.d.)?which is comparable to the figure for the Canadian sample for April (70.2%).
Insurers and their associations around the world have indicated that most policyholders have not acquired insurance coverage that will respond to the business interruption losses that result from COVID-19 business closures. In most countries, business interruption coverage is provided as an optional coverage attached to commercial property insurance that is often (but not always)1?triggered only as a result of damage to physical property. In addition, in a few countries and policies (notably, in the United States), an exclusion was developed (more than 15 years ago) and has been applied with the aim of specifically excluding coverage for losses due to viruses (or bacteria) (or specific losses in the context of a pandemic).2?Some explicit coverage for business interruption losses resulting from a pandemic has been made available as endorsements or specialty coverage although take-up of this explicit coverage has been limited (see Box 2).
Box 2.?Insurance coverage developed for pandemic (and non-damage) business interruption
Some insurance products have been developed to offer explicit coverage for business interruption losses suffered as a result of an infectious disease outbreak, either as a specialty stand-alone policy or as an endorsement of a policyholder’s existing business interruption coverage. In 2018, for example, specific coverage for financial losses due to outbreaks, epidemics, or pandemics was made available?(Marsh, 2020[8])?although there has reportedly been almost no take-up?(Collins, 2020[9]).
The Insurance Services Office in the United States developed two optional endorsements for commercial property policies applicable to business interruption losses as a result of business closures related to COVID-19 in February 2020 although it is too early to determine whether insurers will seek to offer that coverage??(Barlow, 2020[10]). There are also a few commercial insurance policies that specifically include pandemics as a covered peril in some markets (such as a property and liability policy tailored to dentist practices in Canada)?(O’Hara, 2020[11]). In addition, some coverage has been developed for a non-damage business interruption which is meant to respond to any interruption to business that does not involve physical damage to the insured premises or a building in proximity to the insured premises (which would include pandemics unless specifically excluded under the terms of the coverage). However, non-damage business interruption remains a specialty coverage with limited penetration.
Responses to the COVID-19 business interruption protection gap
A number of insurance supervisors have assessed the potential for business interruption coverage to respond to losses incurred as a result of COVID-19-related business closures. In the US state of Washington, for example, the Office of the Insurance Commissioner undertook a review of policy wordings offered by 84 insurance companies and found that only two insurance companies offered coverage for a pandemic in their base policies while 15 others offered limited coverage through endorsements to other policies?(Washington state Office of the Insurance Commissioner, 2020[12]). In France, the Autorité de contr?le prudential et de résolution (ACPR) requested information from approximately 20 insurers (accounting for a significant portion of business interruption coverage in the French market) and found that only 2.6% of these company's policyholders had explicit business interruption for a COVID-19-type event while a further 4.1% had coverage that could potentially respond (i.e. their policy wordings did not provide certainty on coverage)?(ACPR, 2020[13]).3(P&C) Property and casualty insurance is actually an umbrella term which includes many forms of insurance. Homeowners insurance is one type of property and casualty product, as is renters’ insurance, auto insurance, and powersports insurance. The term property and casualty insurance typically contain two primary coverage types: liability coverage and property protection coverage. As it relates to a homeowners insurance policy, property and casualty insurance may cover our belongings and/or another individual’s expenses in the aftermath of an accident occurring as the result of our negligence. For instance, if a guest suffers an injury in our home as a result of our negligence, property, and casualty can cover their medical bills, pain and suffering, and loss of income. Negligence would come into play if, for instance, you have put off repairing broken stairs in your home and your guest is injured on these stairs as a result. Property and casualty insurance may also help cover legal fees in the event you are sued by that individual. However, property and casualty insurance can also cover losses relating to your home and belongings in the event of a covered accident.
?Despite overall growth, personal P&C lines are losing market relevance and facing a growing protection gap, with a clear contradiction between local winners and losers. Despite a slowdown?during the height of the pandemic, personal P&C insurance has seen annual growth of 3 % since 2019. Personal lines still represent more than half of global P&C gross written premiums (GWP), but a growing protection gap in both developed and developing countries denotes that insurers struggle to design products fit for the evolving and emerging risks that modern personal-lines consumers demand. P&C insurance — often overlooked in financial planning — is an integral tool for managing a client’s risk. The insuring of hard assets such as homes, cars, yachts, and jewelry, and the liability associated with them, should be a standard part of wealth management. Advisors, however, may be intimidated by the idea of adding a property and casualty specialist to their practices. This is partly due to the fact that advisors often do not have the training to conduct due diligence on an insurance professional. They simply don’t know the right questions to ask. General securities license training, for example, does not require property and casualty insurance education. For many financial services professionals, insurance training focuses on life insurance and annuities.
One exception is the curriculum for the Certified Financial Planner (CFP) designation. CFP candidates receive about 35 hours of property and casualty training in their first 180 hours of coursework, according to Professor Michael Snow don of the College of Financial Planning. Snowdon, however, acknowledged that property and casualty insurance often isn’t part of a CFP’s day-to-day work. There are typically two types of insurance consultants to choose from when it comes to serving the high-net-worth market: independent agents and large risk management firms such as Marsh and Hub International. Independent agents specialize in working both with wealthy clients and underwriters who can provide the insurance limits and expertise for that market. These underwriters include insurers such as Chubb, AIG subsidiary Chartis, Fireman's Fund, and Pure. Large risk management firms may rely on the same insurance underwriters used by agents but are able to provide additional risk management services to affluent individuals.
The protection gap has a number of direct and indirect causes. In developed economies, customers’ personal P&C insurance needs are changing significantly and rapidly—particularly when it comes to motor insurance, given that connected cars and the sharing economy are transforming pricing models and risk profiles. Extreme weather events are wreaking havoc, with increased flooding, tropical storms, wildfires, and droughts challenging traditional risk assessment and underwriting models in property insurance. Cybersecurity risk is on the rise, and many insurers are struggling to properly quantify risk exposure, adjust terms and conditions, and consequently win the conviction of reinsurance capacity. And e-commerce is becoming indispensable, bringing a heightened risk of online fraud and theft. Developing economies’ populations also remain underinsured, with premiums largely for nonmandatory products such as homeowners’ insurance still representing a small portion of people’s income—mostly driven by limited purchasing power and a lack of awareness.
The industry is growing overall, but a more granular assessment shows that a locally focused scale largely defines a given personal P&C insurer’s competitive stance. Regional winners are likely to continue to retain market share, benefiting from the capabilities they employed to achieve their current leadership position and from their investment capacity going forward. More globally, personal P&C insurance will join all industries in contending with inflation in the near term, putting additional pressure on margins. Inflation will also have clear implications for traditional operating models—specifically by requiring faster feedback loops between the claims, actuarial, and pricing functions. Insurers must recalibrate their products, distribution, and technical models for a customer base and an employee pool with higher standards than ever.
PERSONAL P&C INDUSTRY LANDSCAPE
In 2022, the insurance industry surpassed $6.5 trillion in GWP, with P&C representing almost one-third of total revenues. The premium volumes of both the global insurance industry and P&C have recovered from the pandemic; however, global insurance profits still have yet to surpass pre-pandemic levels, and 2022 P&C profits lagged 2019 levels by about 10 %, suffering from acute inflation. Personal P&C insurance saw an average three-year CAGR of 3 % from 2019 to 2022, compared with 1 % during the height of the pandemic—better, but lagging P&C commercial’s growth of 7 % since 2019, fueled by rate increases.?Personal lines represent more than half of GWP in global P&C, but current growth and profitability headwinds constitute a clear call to change the course and regain relevance in an increasingly complex near future.
Challenges facing personal P&C insurance
Despite the segment’s historically strong performance and resilience after the pandemic, half of P&C insurers are not earning their cost of equity, raising questions about the long-term economic sustainability of their business models. Unsurprisingly, public markets have taken note, with more than half of listed insurance companies trading below book value over the past year. Among others, we see five main forces driving challenges for the personal P&C insurance industry—inflation, new entrants, business model and distribution innovation, mobility disruption, and an explosion of data—which should also be looked at as opportunities.
Road map for personal P&C in 2023 and beyond
Going forward, insurance carriers can reignite growth by reclaiming their crucial role in society, covering risks where they are most needed, and enlarging the addressable market. The path to doing so will vary: in developing economies, protection gaps tend to be driven by consumers’ limited purchasing power and a lack of awareness about the benefits of traditional personal P&C products (particularly nonmotor ones); in developed economies, current risk frameworks are lagging the proliferation of new and evolving risks, from cyber to natural catastrophes (NatCats) to shifting mobility habits. As demand for personal P&C insurance grows, insurers are even shying away from addressing the most critical protection needs. Indeed, insurance carriers are crucial to the communities and businesses in regions experiencing more severe climate events, but they are becoming increasingly uninsurable and, in some instances, have required government intervention—for example, in California due to wildfires and storms and in Florida and Texas due to hurricanes. Insurers are already pulling back from the NatCat segment in certain geographies: personal property direct premiums written (DPW) in Florida decreased by 2.0 %age points from 2007 to 2021 and by 0.5 %age points in California over the same period. To regain relevance and fuel growth, personal P&C carriers need to focus on capturing market tailwinds—namely new or new-product innovations—as well as on addressing four key success factors of distinctive capabilities: perfecting capabilities within specific distribution channels; enabling cross-functional collaboration and faster feedback loops between claims, actuarial and pricing; modernizing claims through advanced analytics and automation; and innovating to address an evolving risk landscape and to fully monetize customer relationships.
Taking a step in beginning
As personal P&C carriers further develop and refine their approaches to address current industry trends and define their market position, several key considerations form central decisions they must make.
Decide where to work —geographically, by spread channel, and by business line.?
Given the clear signs of local scale to personal P&C market share and progress, many insurers will want to be mindful of investment decisions so that they create meaningful scale in their distribution or product strength. This might comprise their largest domestic market positions in a core channel consolidation or even reevaluating their readiness to exit the markets and segments without a way for scale. They’ll also need to identify what distinctive business areas they can use as leverage in each market to deepen their competitive advantage.
?Increase the pace and accuracy of insights by reviewing underwriting, pricing, and claims.?
Rapid change and the need for integrated solutions—from embedded distribution to usage-based insurance pricing and claims integration—will require a new level of the alliance. An effective feedback loop is critical to reacting faster than the competition, as is a plan for overcoming the traditional and well-known roadblocks to boosting organizational collaboration: siloed operating models, lack of data availability, slow technology systems, and so forth.
Focus on fully serving customers and society.?
Evolving customer needs and a more complex environment will require reinventing personal P&C value propositions to face the next frontier of risks and the new challenges our world is facing (for instance, NatCats, cybersecurity, and digital crime). Too many insurance carriers are doing the exact opposite, allowing their caution of risk to widen the protection gap. Also, in developing economies, nonmotor-lines penetration in GDP is still casing that of motor, pushing insurers in those regions to prioritize the diversification of personal lines. Going forward, the leaders in personal P&C will be those that embrace the industry’s role in society and ensure coverage is provided where it’s needed most, both in traditional core personal lines, such as motor and property and in adjacencies, such as electronic warranties.
Determine your ecosystem role.?
As the global economy increasingly concentrates services and products into ecosystems, traditional distribution channels are being displaced by one-stop-shop solutions built around the customer and their convenience and preferences. Insurers can’t afford to sit on the sidelines of these ecosystems—but they also don’t necessarily need to construct an ecosystem or expanded capabilities from scratch. Insurers will need to start by considering what options are available, given existing customer relationships, and by defining the role they want to play: Are they aiming to become the preferred insurance provider of those better positioned to own such customer relationships? What capabilities do they need in any given scenario? All told personal lines P&C carriers will continue to face numerous strategic market challenges and considerations in the 2020s—and establishing market relevance remains the most effective means of securing stability and growth. There is no right or wrong strategy. In fact, success may be defined more by how adeptly personal P&C carriers can envision their desired end state and adapt along the journey to reach it.
Capturing the climate opportunity in insurance
The world’s transition to net-zero emissions will cost trillions of dollars and present new kinds of risks. Here’s the role insurers can play. The world is at an inflection point?in its climate transition efforts. As governments and companies worldwide pledge to achieve net-zero greenhouse gas emissions, the transition is poised to spark the greatest capital reallocation in a century, requiring an estimated annual investment of more than $9.2 trillion?in energy and land-use systems. It’s a transformational moment for insurers, with significant climate-related risks and opportunities on both sides of the balance sheet. Taking an offensive approach will be critical for insurance carriers to unlock growth and remain relevant in a net-zero future.
What the net-zero transition means for insurers
As the net-zero transition unfolds, new forms of volatility are emerging. Capital reallocation to low-carbon technologies is rapidly reshaping industries. New technologies face business cases with uncertain economic viability and scalability. Companies face increasing demands for transparency on climate risk and emissions, driven by regulatory requirements and investor and consumer advocacy. The risk of litigation for climate inaction is also growing. And against this backdrop, the rising physical risk continues to affect communities and economies. Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation. Yet in our experience, climate aspirations are often disconnected from commercial strategies, leading to a lack of a cohesive approach on two fronts: identifying and prioritizing climate-focused commercial opportunities, and taking a go-to-market approach to better source, underwrite, and share new types of risks. Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation.
1. Identifying and prioritizing climate-focused commercial opportunities
Insurers have opportunities to identify and develop climate-focused solutions in three major areas: insuring the net-zero transition, creating new risk transfer solutions for rising physical risks, and providing adaptation and resilience services. Within each area, there is room to offer traditional property and casualty coverage as well as to develop new and innovative products to meet emerging market demand.
Ensuring the net-zero transition
Across high-emitting sectors, technology is a crucial decarbonization lever alongside demand reduction and business model changes. By our estimates, annual global capital expenditures in the top climate technologies could account for more than $800 billion by?2030, corresponding to roughly $10 billion to $15 billion in insurance premiums on capital expenditures alone
Based on current technology maturity, supporting infrastructure and favorable policies, and projected investment flows, the highest potential near-term target markets for insurers are likely in proven renewable-power assets and established green technologies including solar, on- and off-shore wind, electric-vehicle (EV) batteries, and EV charging infrastructure (EVCI).?In the next several years, emissions-intensive asset transformations will also become a major market,?along with various emerging technologies that catalyze the decarbonization of emissions-intensive assets—such as heat pump retrofitting; carbon capture, utilization, and storage (CCUS); and en hydrogen and electroliers. In addition, insurers could play an important role in catalyzing new markets that are not yet proven. For example, insurers could accelerate the development of voluntary carbon markets (which could reach up to?$30 billion by 2030) ?by providing protection to both buyers (for example, should an offset become invalid) and sellers (for example, should a nature-based solution such as a forest experience loss from pest infestation or wildfire).
Demand for insurance will grow in line with investment in these technologies. In addition to standard coverages—such as construction, surety, and liability—new opportunities will emerge for insurance to support derisking along the value chain, from manufacturing to deployment to production. For example, a hydrogen developer may be more likely to pursue a project if there is protection in the event the off-taker becomes insolvent.?Likewise, the off-taker may benefit from coverage in the event of reduced production from a green asset (for example, due to grid traffic).
new risk transfer solutions for rising physical risks
Parametric solutions for adverse weather events are well established.?We anticipate greater demand as extreme weather increases in both frequency and severity—making indemnity coverage less affordable—and because many climate-related assets (such as solar and wind) are built in climate-exposed areas. In addition to coverage for natural catastrophes, parametric policies can be used for income loss on renewable assets (for example, cloud-cover protection for solar fields) as well as to address the impacts of chronic weather shifts on climate-exposed sectors (such as heat stress on power grids and drought leading to crop loss in the energy and agriculture sectors). The development of multiyear parametric policies could be a mechanism to provide more predictable, affordable coverage while also pricing in a way that considers rising physical risk. Unlocking the parametric opportunity at scale will require an industry-wide effort to develop simple, standardized parametric coverages; reduce basis risk through improved risk modeling; and build awareness and interest among insured clients.
Rising physical risk will continue to affect communities and will require collaborative innovation from the public and private sectors to address protection gaps and ensure affordable coverage. Even in moderate warming scenarios, in the coming decades, more than 50 % of the global population will be exposed to climate hazards such as heat stress, drought, riverine and coastal flooding,?and water stress.?A growing number of public–private partnerships are emerging to provide protection for communities and ecosystems. That said, the pace and scale of this challenge are enormous, and insurers need to increase their focus if they are to play a more significant role in protecting the populations most vulnerable to climate risk.
Providing adaptation and resilience services
Insurers and industry players may offer advisory and risk-engineering services to manage and reduce clients’ exposure to climate risks and enable more effective responses to climate-related losses. Examples of such services include risk assessments and engineering for natural hazards, preconstruction risk advisory, and post-loss incentives to rebuild with improved resilience or in less vulnerable locations. We believe the industry could play a much more significant role in reducing risk and losses and that climate-focused risk engineering is an attractive entry point for insurers to increase their relevance and promote continued affordability and access. Partnerships with third-party data and analytics providers and value-added services (such as forward-looking risk modeling for physical assets) can strengthen and differentiate carrier offerings.
While the impact of climate change and the net-zero transition will unfold over a period of decades, insurers must act now if they wish to make tangible progress. Establishing a concrete growth aspiration underpinned by a prioritized set of opportunities can create clarity on the scale of the opportunity and what will be required to get there—such as hiring new underwriting talent or adopting new go-to-market approaches.
2. Establishing go-to-market approaches to better source, underwrite, and diversify
Despite the enormous growth opportunity that the net-zero transition represents, insurers may find market entry challenging due to a lack of underwriting data, loss history, and pattern recognition among underwriting teams. In addition, well-established technologies may have mixed track records. These are understandable hurdles, but they’re not insurmountable. Rather than taking an incremental, wait-and-see approach, we encourage insurers to proactively build climate capabilities (such as forward-looking climate risk modeling) and explore new approaches to establish a foothold in emerging opportunity areas. Partnerships are a promising avenue to address challenges and accelerate learning and opportunities. Such partnerships may include the following: Upstream partnerships with asset owners.?Partnerships with infrastructure funds, private equity funds, and other institutional investors can diversify insurers’ risks while providing access to data and technical expertise. Given that many new technologies carry less loss history but demand near-term investment and protection, investors and insurers could explore diversification through the pooling of green assets with different risk characteristics (such as different geographies, underlying technologies, or asset operators). These partnerships may also give insurers access to the technical data and expertise of asset owners, enhancing the ability to underwrite new technologies. Brokers can play an important role in establishing partnerships and bringing insurance carriers to the table. Marketplace partnerships that enable portfolio underwriting.?Portfolio underwriting may reduce the idiosyncratic nature of transferring individual risks and enable the exploration of new opportunities without costly infrastructure and capability development. Managing general agents (MGAs) and managing general underwriters (MGUs) enable this; they are high-value potential partners because they allow insurance carriers to enter new markets without building new internal infrastructure and capabilities. MGAs and MGUs can provide underwriting sophistication and expertise (for example, in artificial intelligence and machine learning) for new lines of climate-related business and unlock access to new clients and geographies an insurer may otherwise be unable to reach. The success of this approach rests on partnering with MGAs and MGUs that have a distinctive ability to assess and originate climate-related insurance products based on their track records and data or technology sources.
Some other partnership approaches to consider include forming syndicates with other insurers and tapping alternative sources of capital (via capital markets) for reinsurance. The former allows insurers to lower costs by collaboratively sourcing, underwriting, and insuring climate-related risks on newer technologies with risks that are difficult to diversify or effectively price. The latter enables insurers to expand their capital optimization and risk-sharing options, though this approach is likely viable only for established green technologies and insurance products with short-tail or parametric (limit-defined) risks. In addition, insurers could strive to partner with developers, venture-capital funds, and start-up companies at the front line of the climate transition to build innovative solutions to emerging risks. The momentum toward net-zero emissions is undeniable. It will shift value pools, creating new winners and losers in the process. We believe there is a significant first-mover advantage for insurers that establish themselves in the ecosystem early. While insurers should always be prudent in approaching unfamiliar markets and risks, those that wish to lead in the net-zero transition should act now to accelerate green growth and build a resilient portfolio for the future.?
Net-zero underwriting in P&C and the growth at stake
P&C insurers need to position themselves to capture net-zero transition growth opportunities. Whether by setting net-zero commitments or responsibly steering the portfolio, the time to act is now. The January publication?of the Net-Zero Insurance Alliance (NZIA)?“target setting protocol” marked a turning point and a step forward for the insurance industry. NZIA members committed to setting and publicly disclosing their first set of underwriting portfolio decarbonization targets by mid-2023,?giving concrete form to members’ commitments to decarbonize their property and casualty (P&C) underwriting portfolios. According to an initial estimate, staying on the 1.5° pathway will require a 43 % reduction of underwriting portfolio–enabled emissions by 2030 (compared with a 2019 baseline). While progress related to portfolio emissions transparency and target setting varies by geography and is a popular focus primarily of European insurers and NZIA members, the growth opportunity presented by the net-zero transition is a key strategic priority for insurers around the world. Irrespective of public commitments and geography, those that take early steps toward technologies and sectors that support the net-zero transition are likely to generate a first-mover advantage—just as insurers that built early capabilities in renewable energies are now leading the market.
P&C insurers aspiring to contribute to the net-zero transition need to take a comprehensive approach to sustainability. Underwriters should proactively seize the opportunities resulting from the transition and position themselves as strategic partners to sectors and technologies that support net-zero efforts. Insurers can directly support the net-zero transition through risk transfer, prevention, and mitigation solutions. On top of this, P&C insurers should understand their own underwriting portfolio emissions and evaluate levers to advance decarbonization across industry sectors. Integrating the emissions perspective into underwriting will require substantial upgrades in technical and nontechnical capabilities, additional data, and a cultural shift to establish an additional “emissions perspective” in portfolio management and frontline underwriting decisions.
The focus is shifting toward the decarbonization of P&C underwriting portfolios
To date, P&C insurers have largely focused their efforts on reducing emissions associated with their own business operations (Scopes 1 and 2) and decarbonizing their investment portfolios (Scope 3 financed emissions), which have been the purview of the Net-Zero Asset Owner Alliance (NZAOA).
?The growing attention on emissions related to P&C insurers’ underwriting portfolios is a comparatively recent development and has accelerated since the January 2023 launch of the NZIA net-zero target-setting protocol at the World Economic Forum. Under this protocol, NZIA members committed to disclosing emissions in their underwriting portfolios (Scope 3 insurance-associated emissions) by mid-2023 and setting initial concrete decarbonization targets for 2030.?Members must specify how they plan to achieve sustainable underwriting portfolios—for example, by engaging with their clients or providing more coverage for sustainable technologies, or “sectors.”
While it is unconventional to aggregate the emissions of an insurer across emitting business areas because underlying methodologies vary, doing so emphasizes the real materiality of the underwriting portfolio in achieving net-zero emissions. According to our analysis, for a typical P&C insurer, the insurance underwriting portfolio accounts for roughly 50 % of total emissions (enabled emissions), with the majority coming from retail motor insurance and commercial-lines insurance (30 % and 15 % of total enabled emissions, respectively).5The investment portfolio accounts for the other half of total emissions (financed emissions), while Scopes 1 to 3 emissions from business operations are unavoidable but marginal in comparison (own emissions). While the NZIA represents broad industry support for the net-zero transition, nuanced perspectives exist. Some insurers remain skeptical of reducing their exposure to emissions-intensive sectors and question the technical profitability of covering green sectors and technologies. As long as covering high-emissions sectors is profitable, some insurers will act opportunistically by providing coverage to these sectors. Moreover, some insurers perceive that they have less direct influence over their clients’ decarbonization efforts relative to their own financed emissions; shareholders can directly contribute to the company’s overarching strategy, while an asset’s insurance provider can be more easily replaced.
But insurers should not think in absolute terms. Leading P&C insurers are taking a measured approach by engaging with clients and distribution partners to support their decarbonization efforts and transitions; they are also integrating a portfolio emissions perspective to gradually shift their portfolios to low-emissions sectors and green technologies. Consequently, insurers are starting to think consistently about their approach to net zero on both the asset and liability sides. In the long run, establishing a net-zero underwriting strategy today will contribute to combating global warming and will therefore mitigate the severity of physical or natural catastrophe (NatCat) impacts and strengthen the resilience of underwriting books.
Four Steps to net-zero underwriting portfolios
To achieve a net-zero underwriting portfolio by 2050—and any intermediary target—P&C insurers must take four steps: Use the best available data to establish a pragmatic emissions baseline; set granular emissions targets based on a forward-looking perspective; embed the emissions perspective into business processes; and continuously monitor progress and course correct as necessary.
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Step 1: Use the best available data to estimate an initial baseline
The biggest challenge to developing an accurate underwriting portfolio emissions baseline is the uncertainty that stems from a lack of historic data. However, data will not become perfect in the short term, and uncertainties will remain, requiring insurers to take a pragmatic approach and leverage the best available data. In November 2022, the Partnership for Carbon Accounting Financials (PCAF) published standards for assessing emissions in both commercial lines and retail motor segments. Meanwhile, leading P&C insurers also incorporated residential-home-and-property insurance into their baselines,?applying an emissions-accounting methodology inspired by the one used in retail motor insurance.
In the absence of company-specific emissions data, especially for small and medium-sized enterprises (SMEs) and midsize companies, P&C insurers can apply sector averages to estimate an initial emissions baseline for commercial-lines portfolios. One resource is McKinsey’s Planetrics database, which provides average emissions for more than 300 industry sectors, scalable by company size—including a forward-looking view of emissions and revenue trajectories for different transition scenarios. For commercial-lines portfolios, an effort is required to collect data on companies’ emissions and transition plans, which can then gradually replace initial average-based assumptions in calculations. A granular understanding of client-specific emissions is critical to determine the effectiveness of an insurer’s individual decarbonization actions on their own clients’ emissions. In retail motor insurance, individual-vehicle emissions present a similar challenge: the available data is fragmented, and information rarely exists at the level of kilometers driven per customer. To fill this gap, future underwriting processes should include the collection of customer-specific data on vehicle emissions and kilometers driven. This gradual move from estimated to actual emissions data will allow insurers to effectively measure the effects of their individual decarbonization actions.
Step 2: Set granular emissions targets based on a forward-looking perspective
After establishing an initial emissions baseline, insurers need to set evidence-based, achievable targets for underwriting portfolio emissions. The NZIA estimates that staying within the 1.5° limit specified by the Paris Agreement will require an approximate 43 % reduction in underwriting portfolio emissions by 2030 (using a 2019 baseline).To define their targets, insurers should consider commercial and retail segments separately and break down the overall targets by sector or subsector (for the commercial lines segment) and by a line of business (on the retail side). “Inertia pathways”—projections of business-as-usual emissions in the absence of intervention—can also provide valuable insight into the relevant transition scenarios: For commercial-lines portfolios, sector decarbonization pathways from the Science Based Targets Initiative (SBTi) can serve as references, though most are still in development. McKinsey’s Planetrics transition model is another data source that can support evidenced-based target setting. For retail motor portfolios, reference scenarios can be drawn from external models, including those from the McKinsey Center for Future Mobility on the projected rise of electrification and the corresponding decarbonization of the vehicle fleet.
When choosing metrics, insurers, like their banking counterparts, tend to prefer emissions intensity metrics based on physical activity, such as emissions per vehicle or emissions per volume of steel produced, in line with the PCAF methodology. In commercial lines, calculating such physical metrics requires additional client data. Economic activity–based emissions intensities—or revenue-based metrics—can provide a temporary solution.
Step 3: Embed the emissions perspective into business processes
It is critical that emissions perspective and decarbonization targets are incorporated into the relevant business processes to shift the portfolio onto a credible net-zero pathway. The objective is threefold: develop a comprehensive understanding of emissions intensity and growth in individual sectors and subsectors and in green technologies; shift the portfolio to more climate-friendly clients; and develop the right insurance products for those clients (in other words, “insuring the transition”). For example, sales and underwriting teams in commercial-lines units—in collaboration with distribution partners—will need to collect data on their clients’ emissions and physical output (such as production volumes) and discuss decarbonization plans and overarching sustainability and environmental, social, and governance (ESG) strategies with clients. Every step a client takes to reduce their emissions contributes to the insurer’s portfolio emissions targets. When plans involve net-zero-transition technologies such as electricity storage, underwriters must also develop the capabilities to produce individual estimates and risk scenario models for these emerging technologies, which are often prototype-like, given the lack of historical data. Finally, portfolio managers must incorporate the emissions perspective into the portfolio strategy next to profitability, loss history, and capital intensity, which will remain the ruling criteria. Understanding different sectors’ decarbonization pathways—including their growth opportunities and transition risks—will become an important part of portfolio management in the future. Insurers should engage with operational stakeholders such as frontline underwriters, members of the sales team, portfolio managers, agents, and brokers each step of the way.
P&C insurers that can effectively build the right capabilities and business processes will be best positioned to outpace the competition. They will be able to better identify net-zero supporting sectors and green technologies, understand the underlying risks, and win market share with a compelling value proposition and tailored solutions.
Step 4: Continuously monitor progress and course correct
Measuring insurance portfolio emissions on an annual basis is critical to effective decarbonization. This involves continuously tracking progress against targets and determining whether corrective action is required. Insurers can focus on three areas in which to adjust their portfolios if they are falling short of their decarbonization targets.
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Growth opportunities from the net-zero transition
The path to net-zero emissions is paved with growth opportunities and value at stake for P&C insurers. On the retail side, this can take the form of tailored coverages for environmentally friendly behaviors, such as those related to e-mobility or green building technology. In the commercial lines segment, attractive growth opportunities stem from green technologies and industry sectors and subsectors that contribute to the net-zero transition and have rapid decarbonization pathways. Globally, capital expenditure investments of approximately $28 billion will flow toward green sectors by 2030, with the largest share of nearly $16 billion to be invested in clean-energy systems, including carbon capture and storage and wind power technologies. Insurers can capture these opportunities in three ways: developing innovative risk transfer products in growth sectors and green technologies, expanding decarbonization advisory services, and pioneering new business models and partnerships beyond the core business. The path to net-zero emissions is paved with growth opportunities.
New products for risk transfer in growth sectors and green technologies
For commercial lines P&C insurers, the first step is to identify attractive sectors and green technologies and develop an in-depth understanding of their risks and value chains. These insights can then inform growth priorities for the future. A primary challenge for insurers is building the relevant technical expertise to underwrite new green technologies such as hydrogen—due, in large part, to the lack of historical data. A first-mover strategy, however, can yield significant returns. Take the wind power sector, for example: In the early 2000s, a few insurers began focusing intensely on wind power and have continued to refine their understanding of the underlying risks. Today, they command a combined market share of more than 30 %. Insurers can strengthen their value propositions in target sectors and technologies with innovative products that provide coverage for the new risks—including supply chain risks in expanding renewable energies, the risk of solar-panel performance loss, or energy price volatility. Alternative risk transfer solutions and passing on risk to capital markets can also help to make these types of risks insurable. In retail lines, opportunities arise from trends such as e-mobility and building retrofitting, including the installation of green building systems. To participate successfully in these areas, insurers need a comprehensive net-zero value proposition for customers, as well as products with specific commitments and services, such as a completely emissions-free claims process.
?Advisory services to support decarbonization
Both private and commercial customers face challenges in reducing their carbon footprints. Insurers that have developed a clear perspective on the relevant decarbonization levers can position themselves as partners to help customers and distribution partners achieve their net-zero aspirations.
In retail lines, P&C insurers can provide guidance on residential-building retrofitting and energy efficiency. This type of support is especially relevant after a customer files a claim because insurers can leverage the opportunity to offer their expertise on energy-efficient retrofitting when customers are most likely to need it. Small businesses typically have industry-specific emissions levers. Insurers could develop and scale digital platforms that allow clients to compare their energy costs and emissions against industry averages and could suggest ways to reduce them. For commercial clients, insurers can build on risk engineers’ proximity to clients and their production processes to offer decarbonization risk advisory services. This would strengthen insurers’ value propositions for both clients and sales intermediaries, especially for a larger family- or owner-managed companies and the upper-SME segment.
New business models and partnerships
The net-zero transition creates opportunities for insurers to develop new business models beyond the classical insurance model. For example, insurers’ access to customer data enables direct contact with building owners—and, as a result, access to a large number of roofs where solar-energy systems could be installed. P&C insurers can connect these owners to solar-energy companies while also offering insurance products related to the installation and operation of solar-power equipment. For retail motor insurance customers, insurers can provide ways to offset emissions with verified climate-protection solutions. They can also work with commercial clients to develop and test innovative green technologies and support them with both insurance and asset management solutions.
The transition to net-zero underwriting in P&C is accelerating, with lasting risks and opportunities for insurers—regardless of whether or not they are an NZIA member. To stay ahead, they must develop forward-looking decarbonization targets, proactively seize the transition’s growth opportunities, and take a pragmatic approach to calculate underwriting portfolio emissions. This shift will require new capabilities: a perspective on sector and subsector decarbonization pathways and revenues trajectories, as well as an understanding of the new, often prototype-like nature of emerging risks—enabled by a cultural shift in underwriting, sales, and portfolio management. P&C insurers that rise to the challenge will emerge as leaders in the net-zero transition and capture the value at stake.?
?The individual health insurance market in 2023 represents an outsize year for insurers and enrollment growth. More than 3.6 million new consumers entering the market are choosing among an average of 88 plans. The year 2023 marks the tenth year of operation?for the US health insurance exchanges since they launched as part of the Affordable Care Act in 2014. The individual market has remained fluid during this time, with insurer participation, pricing, and plans to change from year to year. Consumer participation increased 25 % to approximately 16 million from 2020 to 2022, coincident with extended enrollment periods and enhanced subsidies implemented under the American Rescue Plan Act of 2021 and extended through 2025 by the Inflation Reduction Act of 2022.
?METHODOLOGY
We have collected and analyzed data from every health insurance exchange in the country across the 33 marketplaces on the federal platform and the 18 state-based marketplaces at the county level (see sidebar, “Methodology”). This document includes several insights into the individual market for 2023 that are relevant to stakeholders, including insurers, providers, private equity firms, policy analysts, and consumers: Participation continues to grow across almost all insurer categories, as it has since 2018, although the growth rate has slowed in 2023. Participation in 2023 increased most in the national insurance carrier (nationals) category, while participation in the insurtech category declined, driven primarily by the exit of Bright Health. Consumers continue to have increased choice in product offerings in 2023, given increased insurer participation and an increase in the number of plans offered by participating insurers. Beyond 2023, this trend could be affected by regulations recently proposed by the Centers for Medicare & Medicaid Services (CMS) for federally facilitated marketplaces (FFM), which would limit the number of plans each insurer can offer starting in 2024. Plan premiums have increased modestly in 2023 (a median increase of 4 % for the lowest-price silver plan) following four consecutive years of almost no premium changes. These increases have occurred across insurer categories and metal tiers, although insurrectos increased premiums the most. National insurers are offering more competitively priced silver-level plans compared with last year. They currently offer the lowest-price silver option available to 20 % of consumers, up from 6 % in 2022. Medicaid insurers and Blue Cross Blue Shield insurers (Blues) continue to provide the lowest-price silver plan option for the largest share of consumers on the individual market (30 % of and 25 % of consumers, respectively).
Looking ahead, consumer participation could continue to grow. Open enrollment results from November 1, 2022, through January 25, 2023, show 13 % growth from 2022. The upcoming resumption of Medicaid redeterminations, which states may begin as early as April 2023, could result in an estimated additional 2.7 million individuals becoming disenrolled from Medicaid coverage and eligible for individual market premium subsidies.
The individual marketplace grew to approximately 16 million enrollees in 2022
Heading into the 2023 open enrollment period, consumer participation increased to more than 16 million in 2022. Approximately 42 % of members were enrolled with Blues in 2022, down 18 %age points from their high in 2014. Insurtechs enrolled 14 % of members, a 12-%age-point increase since 2019.
Insurer participation continued to grow in 2023, although at a slower rate
observed in the previous four years, which ranged from 11 to 16 %. Insurer participation increased in 2023 for the fifth consecutive year to 303 insurer participants at the state level, nearly matching the all-time high of 306 in 2015. Twenty-six new insurers entered at the state level in 2023 (a 9 % increase in participation), compared with 48 and 35 new entrants in 2022 and 2021, respectively. This increase was offset by the exit of 20 insurers (a 7 % decrease) at the state level. The overall net increase of six insurers (a 2 % increase) in 2023 is lower than the increases
National insurers expanded participation the most from 2022 to 2023, and insurtechs we're the only insurer category to see declines
Although insurtechs have been a major contributor to participation growth in recent years, they experienced a retrenchment in 2023, with Bright Health exiting the market and Friday Health Plan pausing operations in some states. All other insurer categories were stagnant or grew in 2023, with national insurers driving the largest increase in participation. As of 2023, 59 % of consumers have access to a plan from a national insurer, up from 47 % in 2022. Blues (98 %) and Medicaid (76 %) insurers still provide access to most consumers nationwide.
Consumer choice of insurers and products has increased substantially over the past five years
Consumer access to multiple insurer options has increased along with insurer participation over the past five years, with 87 % of consumers having access to three or more insurers in 2023. This is unchanged from 2022 but up from 49 % (an increase of 38 % in age points) since 2018. Just 4 % of counties had access to only a single insurer in 2023, down from 52 % in 2018. Additionally, consumers continue to have more choices, with insurers offering 17 % more plan options in 2023 than in 2022 and more than three times the number of offerings in 2018. On average, a consumer can choose among five insurers and 88 plans in 2023, compared with three insurers and 27 plans in 2018. With the goal of simplifying the shopping experience for consumers, CMS included regulations as part of the HHS Notice of Benefit and Payment Parameters for 2024 proposed rule that would limit insurers in FFM states to offering two nonstandardized plans (in addition to one standardized plan, which insurers are required to begin offering to start in the plan year 2024) per product network type (for example, HMO, PPO) and metal tier.1?We estimate that if this rule had been in effect for the plan year 2023, the average number of plan options available to FFM consumers would be 34 % lower overall, with a 45 % reduction in nonstandardized plan options.
Growth in product availability has varied by plan type and metal tier
?Although overall product offerings have increased substantially, this growth has not been consistent. In 2023, 82 % of plans available to consumers are HMO or EPO plans that generally do not provide out-of-network coverage, with the proportion of HMOs relative to EPOs increasing in 2023. In 2014, HMOs and EPOs represented a combined 42 % of offerings, with the increase coming at the cost of PPO and POS offerings, which have declined from 58 % in 2014 to 18 % in 2023. A higher proportion of plans available to consumers in 2023 are gold plans (24 %, compared with 19 % of total product offerings in 2022). Proportions across other tiers in 2023 are largely consistent with recent years, including a six-%age-point increase in the availability of bronze plans since 2018, with proportional decreases in platinum and catastrophic plans.
Rates for plans increased in 2023 across metal tiers and plan categories
Gross premiums in 2023 increased across all metal tiers after four years of relative premium stability or declines. Platinum and catastrophic plans saw the highest rate increases in 2023, at 10 % and 5 %, respectively. Increases for gold plans were relatively modest at 2 %. Premiums for the lowest-price silver plan also increased across all plan categories, with the highest increases coming from insurtechs.
Premium changes varied by insurer type
?From 2022 to 2023, 83 % of all consumers enrolled across all insurer categories saw at least some increase in lowest-price silver premiums. The insurance category had the largest increases in 2023, with a median increase of 8 %, compared with 4 or 5 % for Blues, nationals, Medicaid, and regional insurers, and 2 % for provider plans. A greater share of national insurers had declines in silver premiums from 2022 to 2023, compared with other insurers; but on average, the provider and CO-OP categories had the most stable premiums.
?National insurers improved their price position in 2023
?Nationals now offer the lowest premiums for silver plans for 20 % of consumers in the individual market, an increase of 14 %age points from 2022. This increase is offset by a similar decrease in price leadership for insurtechs from 2022 (price leader in silver for 18 % of consumers) to 2023 (price leader in silver for 2 % of consumers). Medicaid and Blues plans maintain the highest proportion of price leadership in 2023, offering the lowest-cost option for 30 % and 25 % of consumers, respectively.
Reimagining the life insurance model in 2023
?There are several forces that we believe will shape the industry going forward. First, there is an increasing awareness of personal risk and security. As we come out of the pandemic, there has been a heightened awareness and concern about personal health as well as personal savings and financial security. The number of people over the age of 65 is expected to double over the next 30 years, growing from around 0.8 billion to 1.7 billion. A large part of that growth is going to come from developing economies like India and China, but developed economies will also continue to make up a significant part of that population, too.
Many citizens are realizing that they will be personally responsible for their healthcare and retirement savings because several government-provided social-security programs are dealing with high levels of indebtedness. For example, for some social-security programs in the most advanced economies in the world, we estimate that there is close to a $41 trillion pension funding gap. That gap represents an opportunity for the life and retirement industry to meet the needs of citizens globally. Another force that will shape the industry over the next few years is the macroeconomic environment, particularly interest rates. The industry has seen a decade-long era of ultralow interest rates, and that’s put a lot of pressure on life insurance balance sheets. In the past six months, we’ve seen the opposite phenomenon: interest rates have risen by more than 300 basis points across several markets and countries. While the increase in nominal interest rates does provide a tailwind in the near term for life insurers, insofar as they’re able to rebalance the asset side of the portfolio quicker than they had been able to on the liability side, there are a few important considerations they also need to keep in mind. One is that they’re dealing with an extremely volatile economic environment in terms of the equity market and credit market volatility, which increases return expectations from investors as the cost of capital goes up, as well as financial costs such as hedging.?The second is the difficult economic environment, which will likely cause credit deterioration and rating migration. As a result, life insurers will need to actively manage risk and rebalance the investment side of their portfolio. The third consideration is that real interest rates have stayed low despite nominal interest rates increase because inflation has outpaced the growth of nominal interest rates. We expect this trend to continue over the next several years as the working-age population declines.
?Two aspects: one is focused on the global level, and one is more specific to the role of Asia on the global insurance stage. The first is technology. Insurance and life insurance are information businesses. Over the years, there has been a lot of investment in technology. We have seen IT spending to grow from 2 % of the gross premium to 3 %. We are on the cusp of a new era for life insurance to harness the power of data, analytics, and digital customer engagement. So this will enable insurers to find different ways to address the gap that Ramnath alluded to and find more efficient ways to engage and operate. Over the years, there has been a lot of investment in technology. We have seen IT spending grow from 2 % of the gross premium to 3 %. In Asia specifically, there has been a macroeconomic shift, and despite any geopolitical context, Asian economies and societies will continue to grow. The role of the middle class will also grow, which is central for life insurers because people’s savings ratios are enough that they can invest in life insurance and are concerned about protecting their families. In Asia, the number of middle-class people will grow to about 1.2 billion by 2030, so it will be the largest force on the consumer side for life insurance.
The performance of the industry over the last couple of decades has been lackluster. We have seen significantly lower nominal growth of industry activity versus the GDP. In the US and Europe, for example, between premium growth and GDP growth, we have an average gap of two %age points over the past couple of decades. Across Asia and in Japan, there’s an astonishing 7 % gap. We’ve also seen weak productivity development over the past couple of decades compared with what we’ve witnessed in other service industries. The life insurance industry has not been able to deliver productivity gains, and that shows in the development of its cost base. The outcome of that is that the industry has struggled to generate returns in excess of the cost of capital.
Last, market caps over the long term have been depressed. The cumulative market cap of the top 20 life insurers in the US 40 years ago was quite close to the cumulative market cap of the top 20 banks in the US. Today, it’s only one-sixth. Obviously, these are averages, and there have been certain markets doing better than others and certain players that are more successful than others.?It’s critical to look at individual value pools across and within geographies. In the US, the products that provide principal protection with some upside based on market performance have done well. Over the same period, more market-oriented annuity products have struggled. In France, equity markets have grown substantially, whereas general accounts suffered. In the coming years, we will see if the trend changes. But it shows that it’s important to look product by product in each market.
In Asia, the picture is on the product side, particularly for health-related products. China and India are the big growth hotspots and have ample value-creation opportunities driven by the underlying macroeconomics, but we also see that some Southeast Asian markets have high demand. Beyond the product and market mix, it’s important that we see a shift in value creation to investment alpha. Despite nominal tailwinds, we expect low-for-long real rates. In that environment, it is critical that insurers shift to generate investment alpha. Last, there has been portfolio restructuring. Many insurers aspire to be a global insurers, and in Asia, many insurers have quite mixed portfolios and are struggling with how to trim those portfolios for value creation. We expect the pressure will increase to demonstrate how a portfolio creates value and is a source of growth.
?One of the big trends we have been seeing from the last decade is the emergence of private capital—particularly platforms that have been known by some private-asset and alternative-asset managers. There are several reasons why private capital finds the life insurance industry attractive: the industry’s performance has been disappointing, the returns have been below the cost of capital, and productivity improvements have not taken shape. This provides an opportunity for someone else to come in and drive the performance improvement and drive up the return trajectory of some individual companies.
In addition, a lot of the alternative-asset managers and private capitals see life insurance as a source of permanent capital, a stable pool of long-date liabilities that can be deployed into many different asset strategies—everything from traditional fixed income to more-structured products and alternatives. For these alternative-asset managers, that reduces the fundraising burden that they typically go through and creates more predictable sources of income. As a result, you’re seeing a phenomenon today where, in the US, for example, platforms owned by private capital make up nearly 9 % of all the assets in the industry, and that number was less than 1 % a decade ago. Not only are they playing an important role in terms of some of these legacy liabilities that they’re acquiring from traditional insurers through M&A, but they’re also starting to play an important role in terms of new business. For fixed-index annuities, for example, which have been growing significantly in North America, private capital–owned insurers account for close to 40 % of all the market share, and they’re growing faster than the market. These insurers also provide investment management solutions to the industry. So in many ways, this category of insurers is not playing a very significant role in terms of industry structure.
The second big structural shift is how distribution is evolving. If you look at the market cap of pure-play distribution companies relative to life insurers, the total shareholder returns of these distribution companies have been close to two and a half times that of traditional life insurers. To Bernhard’s point, we’re seeing a consistent shift in value toward distribution. We’re also seeing a phenomenon where value and premiums are shifting from a traditional captive-carrier-tied distribution to more of an independent distribution. In the US, for example, the independent distribution now accounts for close to 55 % of all premiums across life insurers as well as annuities. And there are similar trends in Europe and Asia.
?In the context in which the insurance industry finds itself today, evolution will not be enough. It’ll require a fundamental rethink and reimagination of the business model. If you look at the traditional model today, most life insurers do all activities across the business system and the value chain. And we’re average at best across most, if not all, of the activities in the value chain. We’re also seeing the phenomenon where customer needs are converging across health, wealth, retirement, and investment management. As a result, future life insurers will need to create a business model that is simpler, narrower, and more focused and unbundle the value chain. We see four different types of business models that could emerge and could be the basis of value creation in the future. One business model is “distribution specialists.” These models primarily use a client-centric approach and have a range of different insurance, wealth and investment management, and health products available through an open architecture approach. These business models will typically invest a lot in client-facing technology. By design, they’re extremely capital-light because they don’t take on any of the balance sheet risks and are typically valued on metrics like inorganic growth as well as operating margins.
A second business model is “product origination specialists.” These are business models where the insurer has strong capabilities in product design, risk assessment, and underwriting and will have privileged access to distribution. It could be their own distribution, or it could be third-party distribution, but it will typically have constraints in terms of balance sheet and capital or investment management capabilities. In this case, they will largely rely on originating the product using the distribution and product development capabilities but will use someone else’s capabilities on the balance sheet side and the investment management side. So they’re transforming a more traditional, capital-intensive model into a relatively capital-light model because they’re combining balance sheet and fee-based earning streams. We think many publicly traded insurers may gravitate toward this model, given investor demands and expectations in terms of how business models are evolving. The third model is the “balance sheet specialist.” This is the complement of the product origination model. These business models will typically not have the capabilities and access of individual distribution but will have a strong, weighted balance sheet; strong investment management capabilities; and robust risk management capabilities. So they can provide solutions to the other insurance companies through legacy book transfer of M&A, through flow reinsurance, or through other solutions. We’ve seen privately owned insurance companies gravitating toward this model. Last, there will be a handful of “truly integrated insurers”—and it is a handful because the bar for distinctiveness will be high in terms of distribution capabilities, product development, risk management, capital position investment management, and their operations and technology. We think that there will be few insurers that meet that bar to become fully integrated insurers in the future.
Insurers will come with their own sets of challenges and opportunities. Top-traded insurers, for example, will have to be extremely clear on what their unique competitive advantage is and make sure that they protect and strengthen it. It could be that they are dominant in certain geographies, great in certain lines of business, or have better positioning in the value chain. Second, they will have to selectively find potential to create more value. For example, they could form a partnership with others to build state-of-the-art investment management capabilities in private assets, or they could convey to the market the value of their portfolio of gross opportunities.
Stock-traded insurers are usually expected to deliver regular results, and their growth potential is not always properly valued. So there is probably an opportunity to improve that within their business. Shifting to private-equity owners and operators, they would have to develop new gross vectors above and beyond the legacy M&A levers that they’ve been using. They could do that through geographic expansion, by using stronger organic gross capabilities, or by thinking about different levers to create value beyond the investment alpha that has been core to their proposition over the last decade. They could, for example, reinvest technology and operations in areas where they could make a difference.
It is also looked specifically at mutuals and state-owned insurers because they are a core pillar of the life insurance industry in many geographies. Mutual’s strength is in its reputation, customer loyalty, and strong captive distribution. They typically have a lower costs of capital, and in some markets, they have the potential for operational efficiency at scale. They take a holistic approach to customer needs and to their role in society. All of this speaks to the core principle of what insurance is about. As they look toward the future, there are many strengths mutuals can build upon. We see specific opportunities in how to further innovate product offerings and how to specialize in areas to find distinctive competitive advantages. Some mutuals are challenged with operational efficiency and need to bring down costs to ensure competitiveness and customer service. It’s also critical for mutuals to think about their distribution models. As mentioned, many are strong in traditional captive-adviser networks but need to develop partnerships on the digital side in affinity networks and foster new ways to connect with peers.
State-owned insurers, in many countries, these insurers play a critical role in bridging public social services and the private life insurance sector. They also typically have strong distribution capabilities, benefit from a lower cost of capital, and can make long-term investments in their role in society. Where they struggle is innovation. They need to get on the cutting edge of digital innovation so they can keep up with the pace of the private sector. State-owned insurers also are disadvantaged in the talent market. They need to strengthen their positioning to attract talent for the future. Both mutuals and state-owned insurers are important business models, but an exciting element of the life insurance industry is that you have different models competing in the sector for the benefit of customers, hopefully, to create a more resilient society.
?Conclusion
Insurers have been hurtling towards a perfect storm of converging market trends that all point to an inconvenient truth; disruption and change are here to stay. To defend their position, insurers must set their ambitions beyond merely weathering the storm. They need to focus on building strength and resilience and be ready for the ever-changing market environment. In other words, they need to embrace the digital transformation and ‘get connected’. This guide explains how. We take a holistic view and introduce eight capabilities in an organic framework that we believe enables your organizations to become ‘connected’. All insurers are taking this challenge head-on. This guide helps you to accelerate your journey and center on the customer in a digital world.?