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Why are insurers barely earning the cost of capital
ASIA PACIFIC
The pandemic may have taken a huge toll on the insurance industry, however, there are still issues, like persistently low interest rates and digital challenges, that remain unresolved that consistently puts a drag on profits, according to a report by management consulting firm McKinsey & Company.
The COVID-19 pandemic may have been the major driver in the industry’s distress today, however McKinsey said past issues have now taken on an even greater urgency resulting in Asia Pacific’s insurance industry barely earning the cost of capital.
“After decades of stable returns, insurance is now a value-destroying industry in which half the players do not earn their cost of equity,” McKinsey said.
The report identified three ‘structural factors’ challenging the industry’s growth: persistent low interest rates; pricing pressures driven by fee transparency, digital attackers, and lowercost options—pressures that in some markets are aggravated by price comparison websites; and organic demand that is growing only slowly in mature markets.
The latter 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.
In the global life insurance segment, growth has been subdued.
The non life-sector, especially in Asia and Europe has seen the lowest growth rate in recent years.
Insurtech’s role
McKinsey said that a distinctive digital customer experience—from attackers or incumbents—will be a prerequisite for industry-beating growth.
As such, insurtechs are poised to drive digital innovation and disruption in the industry, as insurtech investments worldwide grew from $1b in 2004 to $14.6b in 2021.
“More than 40%t of insurtechs are focused on the marketing and distribution segments of the insurance value chain, enabling them to solve customer pain points through a digitally enhanced client experience that could pose a competitive threat to incumbents. And whilst some of these players have seen their share,” McKinsey said.
McKinsey adds that the traditional approach of many insurers will find themselves challenged by superior technology and healthy margins in insurance service business to own the whole value chain, forcing traditionally insurers to form partnerships or make outsize investments to keep up.
A value-destroying industry?
McKinsey blamed the ‘structural factors’ it identified as the reason behind the industry’s
These issues have plagued the industry for a decade
limited value creation in recent years.
“Not only has the overall insurance industry destroyed value in the past years, but its positioning has eroded from 2005–2009 to 2015–2019, with insurance brokers as the exception,” McKinsey said.
However, McKinsey emphasised that these problems are not caused by a few underperformers rather it is industry wide. 54% of listed insurers ,representing 52% of the global industry’s equity, had a return on equity (ROE) below their cost of equity over the past five years. This have raised questions about the long term economic viability of their business model.
“In summary, after decades of stable returns, insurance is now a value-destroying industry in which half the players do not earn their cost of equity,” McKinsey said.
Indian insurers forbidden from advertising services not part of cover
INDIA
Insurers, especially motor insurers were ordered by the Insurance Regulatory and Development Authority of India (IRDAI) to stop advertising services that are not part of the insurance cover.
Furthermore, general insurers were forbidden to display discounts with reference or comparison to rates of the erstwhile tariff and they have to ensure that the discounts and savings on the premium, which may be applicable only under extreme or exceptional scenarios, shall not be displayed as examples.
According to the IRDAI, some general insurers enter into service agreements with motor workshops and garages for the purpose of providing motor insurance claim services for repair of accident vehicles.
The said services, in addition to claim services, extend to certain assistance services not related to insurance claims such as free pickup and drop of vehicle, body wash, interior cleaning, and more.
“Whilst the bundling of the above facilities with insurance is left to the motor service providers, the general insurers issuing advertisements of the said services, projecting them as benefits provided within the insurance cover is unacceptable,” the IRDAI explained in a circular to general insurers.
The IRDAI stressed that the main objective of service agreements with motor garages/workshops shall only be providing insurance services for claims of accident vehicles and they cannot arbitrarily expand to include the scope of services which are not relevant for insurance claims.
The regulator said this is ‘unacceptable’
