INDUSTRY INSIGHT: INSURANCE
Top three things killing the insurance industry
Thanks to these threats, 54% of insurers had an ROE below their cost of equity.
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here are three major issues that have been posing a threat to the global insurance industry for a long while now; but now well into 2022, McKinsey & Company has finally rung the alarm bell. “These issues have now taken a greater urgency,” the global consultancy firm warned. The three threats, according to McKinsey, are the persistently low-interest rates, which pressure spread-based businesses such as life insurance; pricing pressures driven by fee transparency, digital attackers, and lower-cost options aggravated by price comparison websites; and organic demand that is growing only slowly in already mature markets. “The [third] is particularly worrying because growth in developed economies is coming mostly from price increases rather than from volume or new risks covered, highlighting a risk that the industry might lose its relevance over time,” McKinsey said. According to McKinsey & Company’s Global Insurance Report 2022, these threats are said to have resulted in the worst possible outcome—half of the industry players
Globally, 50% of insurance companies have consistently traded below their book value in the past 5 years
still do not earn their cost of equity even after decades of stable returns. McKinsey stressed that this is not a problem caused by a few underperformers, it is industry-wide. 54% of listed insurers, representing around 52% of the global industry’s equity, had a return on equity (ROE) below their cost of equity over the past five years. McKinsey said this raised questions about the long-term economic viability of their business model which investors in the public markets have taken note of. Globally, about 50% of listed insurance companies have consistently traded below their book value in the past five years, which McKinsey said is a clear vote of no confidence in the industry and raises questions about the long-term future of insurance players, particularly in multiline insurance where about around 60% of players are trading below book value. Talent shortage McKinsey is not the only one ringing alarm bells for the industry. Deloitte also has a similar opinion, although it sees talent shortage as the biggest threat at the moment.
Half of the industry players do not earn their cost of equity after decades of stable returns
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HONG KONG BUSINESS | Q3 2022
In a poll they did amongst global insurers, respondents said they expect to increase headcount in most of their functional areas this year. Deloitte, however, said, “The big question insurers face is where will all that talent come from, and how will they be able to recruit and retain the skill sets to maintain and advance increasingly digitised business operations?” An example of this talent shortage is already seen in Hong Kong. According to a survey by the Hong Kong Federation of Insurers last February, one out of three international insurers in Hong Kong are thinking about cutting back on their operations due to talent shortage. About 30% of respondents are mulling on relocating their global and regional teams, leaving only Hong Kong-focused staff behind. Even Hong Kong’s Insurance Authority reported that it is understaffed by around 10%. Fight for consumers Another hurdle that insurers must face is the ongoing ‘fight for customers’ with insurtech disrupters. It is not a stretch to say that insurtech is the one driving digital innovations in the industry. Trust in insurtech is growing with investments increasing from $1b in 2004 to $7.2b in 2019 to $14.6b in 2021. The main advantage of insurtech is that it is able to solve customer pain points through digitally enhanced client experience because they are more focused on the marketing and distribution segments of the insurance value chain. McKinsey said this is a potential threat to incumbent insurers because it believes that a distinctive digital customer experience—provided by both insurtech and insurers—will be a prerequisite for industry-beating growth. “Beyond distribution, superior technology and healthy margins in insurance service businesses will challenge the traditional approach of many insurers to own the whole value chain—they will be forced to form partnerships or make outsize investments to keep up.”
