The lack of returns after the cost of capital, muted growth, high volatility in earnings, the opacity of risks and sources of earnings and value, and lack of individual insurer performance mobility have caused the global life insurance industry to gradually lose its relevance with investors, particularly in the public markets, a report by the global consulting firm, McKinsey & Company said.
The report, “Global Insurance Report 2023: Reimagining life insurance”, said amid the increasing instability in the life and retirement industry over the recent decades, pockets of optimism and opportunity exist for insurers who can identify, invest in, and capitalise on their distinctive capabilities to meet the expectations of their owners and stakeholders.
Elaborating on the recent challenges, McKinsey said insurers haven’t been growing at the same rate as the economies in which they operate, while the industry has struggled to generate profitable returns after the cost of capital.
“This trend is most apparent in the United States, where the largest US life insurers’ share of market capitalization relative to other financial-services peers has decreased over the past 35 years—from 40 percent in 1985 to 17 percent in 2005 to only 9 percent in 2020,” McKinsey said.
McKinsey said shifting industry structure will create new opportunities for where and how life insurers create value, elevating the industry’s relevance to consumers and its attractiveness to investors.
It said insurers will have to chart a course through these shifts and choose their mode of value creation, which will be partly informed by their organisational goals and investor expectations.
“In the life and retirement industry, six themes dominate the investment attraction agenda: top-line or market share growth, diversification (via geographies and products), societal and customer impact, low volatility of results and dividends, ROE, and capital generation,” the report said.
“Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners. Even within the broader classifications of insurers, however, individual insurers will have unique situations—and thus unique expectations,” it said.
On how to respond to organisational goals and investor expectations, the report suggested that insurers backed by private capital and alternative-asset-management players could proactively develop new growth vectors, such as more flow-based business beyond pure legacy M&A and international or geographic expansion.
“They may also continue to strengthen risk management capabilities (given the relatively higher-risk profile of their investment portfolio), further enhance their investment management capabilities through more dynamic portfolio rebalancing, and develop additional sources of value creation beyond pure investment alpha (for example, by becoming more ingrained in operations and technology to find value),” it said.
For mutuals, McKinsey said they could innovate more in their product offerings to capture growth through distinctive product specialisation that better matches customer needs, as well as to transform their distribution and customer engagement capabilities. They could also focus on their operational efficiencies to bring down costs and focus on their quality of governance to improve productivity and capital allocation, it said.
On their part, stock-traded insurers need to address the issue of where they have unique competitive advantage and can generate capital, such as in certain geographies, lines of business, or parts of the value chain, McKinsey said.
“For example, these insurers may build or partner with others to achieve table stakes investment-management capabilities, which would help them compete with insurers backed by private capital or alternative-asset-management players and take advantage of opportunities that others are slow to capture. They might also want to find innovative ways to harness their growth opportunities and ensure they are properly valued by investors,” it said.