McKinsey has been raising the alarm for some time about how insurers are in danger of losing relevance. The key indicator that we should be concerned is that global GDP is growing faster than insurance premiums, suggesting that insurers aren't keeping up with clients' needs.
Three areas stand out as ones where insurers seem to be backing away from the risks: natural catastrophes, climate risk and cyber. With natural catastrophes, damages are increasing so fast that they are outstripping coverage. With climate change, the issue is more that attempts to address it rely on new technology, so there is little or no historical data to use for pricing. With cyber, attacks are proliferating so rapidly and changing shape so quickly that many insurers are being cautious.
Now, nobody is saying that insurers should just step in front of these massive risks so they can stay relevant. That would be a good way to get walloped. But McKinsey argues that there are ways to increasingly lean into all of these risks, through a combination of mitigation and pricing, that will grow the industry while preserving its traditional, protective role in society.
In its Global Insurance Report 2023, titled, "Expanding Commercial P&C's Market Relevance," McKinsey says: "While premiums for commercial lines have been growing over the past three years at approximately 7% per year, rate hardening has driven most of this growth. After adjusting for rate growth, global premiums lagged significantly behind real global GDP growth during this same period, indicating a decline in the relevance of commercial lines."
With natural catastrophes (NatCats), the basic problem is just that there have been so many. "Since 2017," the report says, "the U.S. has experienced an average of 15 NatCats per year with damages exceeding $1 billion—up from fewer than 10 per year in the previous decade and fewer than six in the decade prior to 2007."
With climate risk, the report talks more about opportunities as the world tackles the problems. It says "the transition to a net-zero economy could account for more than $800 billion in annual global capital expenditures in renewable energies and decarbonization technologies by 2030. These new technologies will create new forms of risk requiring protection, and the resulting insurance value pool could be worth up to $15 billion, concentrated in property as well as energy and construction specialty lines." The report says insurers haven't found the renewable energy line of business to be especially profitable, so they have backed away, but says they can do better as they learn more and can develop risk-engineering services "to accompany clients on their way to net-zero emissions."
With cyber, the report talks about a massive problem... representing a massive opportunity:
"As widespread technological shifts have permeated nearly every aspect of work, especially with the rise of remote work environments, cyber risk has become ubiquitous.... Already, cyber economic losses in 2020 totaled $945 billion—more than one hundred times the total premium market ($9 billion in 2021)—indicating a massive protection gap. Even if only a fraction of these losses is insurable, it could translate to a more than $100 billion growth opportunity for the global commercial-insurance industry."
McKinsey says there are four ways to tackle the protection gaps in NatCats, climate risk and cyber: innovating on products and services, adjusting pricing to reflect the true cost of the risk, investing in risk prevention and mitigation services and educating stakeholders to raise awareness of the risks.
But I've already gone on long enough, so I'll leave you to read about those four options here, in the full report, if you're interested.
While I don't see insurance ever becoming irrelevant, I do think McKinsey has a point: We shouldn't back away even from wildly complex problems like NatCats, climate risk and cyber. We obviously need to price the risk appropriately, but we should lean into our societal role and use all our data and expertise to help the world tackle those issues. We'll stay relevant, earn a lot of goodwill -- and generate a ton of business.
Cheers,
Paul
P.S. Often, I see items that I think are worth noting, even though I won't go on at length about them, so I'm going to start appending some here. I hope you find these nuggets useful.
--CEOs still don't seem to be seeing that long-predicted recession. A Fortune survey that drew responses from 149 CEOs of major companies around the world found that 45% expect their firm’s growth to be strong (32%) or very strong (13%) over the coming 12 months. Another 44% said modest, while 12% said either weak (10%) or very weak (2%).
--A PwC survey found that 84% of executives thought consumers "highly trusted" their business. 27% of consumers agreed. Hmm. That result took me back to a survey Chunka Mui and I cited in our 2008 book, "Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years." The survey found that 80% of executives thought their product was the best in the market -- and that only 8% of their customers agreed. We really have to stop kidding ourselves.
At least executives seemed to have a better handle on employees' thinking. PwC found that 79% of executives thought they were highly trusted by employees, and 65% of employees agreed.
--The Insurance Information Institute, a sister organization of ours at The Institutes, released its latest economic outlook. The key takeaways are:
- Property/casualty (P/C) insurance saw its cyclical underlying growth rebound fail to materialize in 2022’s second half as interest rate tightening depressed housing starts, corporate spending, and vehicle expenditures.
- Increases in P/C replacement costs (e.g., vehicle parts, housing construction materials) slowed over 2022’s last two quarters but are up 40% since 2019.
- U.S. gross domestic product (GDP) growth is likely to remain depressed for at least the next two quarters after the Federal Reserve shifted away from its hawkish stand on interest rates; the Fed’s three-year consumer price index (CPI) expectations remain overly optimistic, Triple-I believes.