Commercial property and casualty (P&C) insurance carriers have been delivering strong financial performance in recent years despite the widespread disruption caused by the COVID-19 pandemic and other global events, according to a recent McKinsey report.
The report noted that premiums have been driven by extensive risk-adjusted rate hardening on a year-on-year basis, resulting in an annual premium growth rate that has remained steady at 6-8% since 2018, alongside improving combined ratios.
However, McKinsey’s analysis found that commercial carriers are facing a “critical inflection point” amid the continuing cycle of economic uncertainties, including inflation, geopolitical headwinds, environmental challenges, and capital constraints.
“This gradual acceleration of macroeconomic trends across multiple events that are pressuring the insurance industry is different from previous shocks,” the report said, outlining some critical challenges that need to be addressed.
According to McKinsey’s global insurance report, rates in some lines are beginning to soften as more capacity becomes available. While hardening continues in certain areas, with some carriers even maintaining limits despite inflation, the rising cost of claims and increased competition from distributors has been putting pressure on profits.
Despite this, the report noted certain opportunities for growth, such as meaningful investment returns resulting from higher interest rates. It identified the need to transition towards underwriting portfolios that have lower carbon emissions as another growth opportunity, even as they present certain challenges depending on geography.
The nature of risks is also “evolving faster than ever” before, according to the report, particularly in areas of natural catastrophes, the net-zero transition, and supply chain and cyber risks. As a result, commercial carriers should work to address protection gaps instead of “stepping back and reducing their exposure.”
The report added that these challenges are being exacerbated by tightening capacity in both traditional reinsurance capital and alternative capital markets.
“The full extent and duration of the capacity squeeze are still uncertain given the strong hardening observed in January 2023 renewals,” the report noted.
Finally, the McKinsey report urged commercial carriers to prepare to navigate “the new nature of risks” by transforming their capabilities and talent as “underwriting and claims shift from an art to a science.”
In response to these challenges, the report said commercial carriers must define a “clear source of distinctiveness” in order to protect their margins by competing beyond rates. This could be achieved by expanding relevance through product innovation, more sophisticated pricing, and risk prevention and mitigation solutions.
Carriers were also told to secure capacity through innovations in the use of alternative capital and to address investor concerns about long-term profitability. Additionally, the report said carriers must reinvent their employee value proposition and develop their capabilities to address future risks using a more scientific approach.
