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State of property and casualty insurance 2020

McKinsey 22 Apr 2020 12:00

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The insurance industry is often perceived as complicated and slow moving. Yet insurance is one of the largest global industries, generating more than $5 trillion in annual revenue. It plays a critical role in today’s economies, offering financial protection and risk mitigation to individuals, small businesses, large corporations, nonprofit organizations, and even governments. As a whole, property and casualty (P&C) insurance represents $1.6 trillion in premiums (about one-third of the insurance industry) and remains one of the few industries that has yet to be disrupted.

The three Rs: Resilience, relevance, and reinvention

As a notable achievement in the financial-services world, the insurance industry has grown economically stronger in the past two decades after sustaining $45 billion (2020 prices) in insured losses from the terrorist attacks of September 11, 2001—then the costliest event in the history of insurance globally. And in the past few years, natural disasters have led insurers and reinsurers to pay hundreds of billions of dollars in claims, an unprecedented amount of losses. Despite these claims payments, the most recent natural disasters have been earning events for insurers, not solvency ones—perhaps a testament to the industry’s resilience. But this resilience will be tested in the years to come through the changing severity and frequency of disasters coupled with limited flexibility to balance market-driven price responses in the changing risk level, continued low interest rates, and changes to the traditional business model.

In fact, as innovation and technology significantly transform entire industries, P&C overall has largely been running in place. Industry growth relative to GDP is flat or even negative in several developed markets, valuations in the sector are often lower compared with adjacent financial-services sectors such as banking and asset management, and new talent acquisition isn’t prioritized, despite more than one-quarter of its most experienced professionals soon retiring in key geographies. Furthermore, despite improvements in labor productivity, overall cost performance has not improved in the past 15 years. The P&C industry is being outpaced on total productivity by sectors from automotive to telecommunications to banking. In the face of current and emerging advances in fintech and digital distribution, the P&C industry’s existing operating model faces challenges and risks losing economic relevance.

Variations across markets

Navigating an evolving risk landscape: Six shaping forces

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The biggest unknown factor is how the industry resolves coverage for business interruption. This will be a true test of the relevance and resilience of the industry. In addition, the crisis poses challenges to industry operating models and may act as a catalyst for changes in them across the entire value chain. It is also likely to reinforce the need to accelerate product innovation and digital transformation, efforts that were already underway at many companies. Lastly, the COVID-19 crisis highlights the potential for public–private partnerships. Because pandemics affect so many people and businesses at the same time, they are typically considered uninsurable by the market alone. This opens the possibility for insurers and governments to collaborate further on improved pandemic risk assessment, risk communication, and financial protection.

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