A four-year study conducted by McKinsey & Company revealed the existence of a power curve within the insurance industry akin to the 80:20 Pareto Principle.
Over the course of the study, the top 20 per cent of insurers generated an annual average profit of $764 million, compared to just $26 million for the middle 60 per cent.
After four years of observing the haves and the have nots, the McKinsey team identified five key ‘moves’ for insurance carriers wanting to find themselves on the right side of the $738 million disparity.
Some companies find themselves weighed down by legacy products that deliver limited profits and steal resources away from growth opportunities. Instead, the McKinsey team suggest focusing time and dollars on higher return-on-equity (ROE) pursuits, across both strategic lines and products. This is particularly important given the competitive pricing environment. Optimising their business mix to reallocate 60 per cent of surplus helped insurance carriers move their profits in the right direction – and was consistent with findings across other industries which showed the regular reallocating of resources delivered better results (gains of 3 – 4 percentage points). The other alterative was divesting underperforming assets.
Invest in Growth OpportunitiesReinvesting earnings in profitable and well-performing businesses is a reliable way to increase economic profit, however finding these opportunities can prove challenging. Carriers that actively pursue entry into new markets and introduce disruptive products and services will achieve higher margins (and ROEs} thanks to reduced competition at the vanguard.
Strategic Mergers & AcquisitionsStrategic or programmatic mergers and acquisitions involve executing a series of deals where no individual deal is larger than 30 per cent of market cap and the total over ten years is greater than 30 per cent of market cap. Utilising multiple, small transactions can simplify integration, reduce engagement with competitive bidding and give insurers access to new business opportunities without taking a significant financial risk.
Optimise Underwriting Efficiency
- Reinvesting earnings in profitable and well-performing businesses is a reliable way to increase economic profit, however finding these opportunities can prove challenging. Carriers that actively pursue entry into new markets and introduce disruptive products and services will achieve higher margins (and ROEs} thanks to reduced competition at the vanguard.
Better underwriting with lower loss ratios is an important factor that can differentiate insurers and lead to higher profits. Underwriting margins can be improved by segmenting or accessing certain customer segments or risk data analysis.
Although low loss ratios are crucial for success, insurers can greatly benefit from improving their overall efficiency, increasing revenues per employee and lowering expense ratios where possible.
In the wake of COVID-19, there will be a dramatic wave of efficiency and retooling that will occur over the next few years, and many industry executives are embarking on these high-ambition, enterprise-wide efficiency journeys now. When looking to drive next-gen operational value, program investments should be thought through with long-term cost-benefit implications in mind. Investing in such capabilities requires careful planning across all available options, including third party service providers, insurtechs and fintechs, platforms and tools.
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