McKinsey: P&C Insurers On Earnings Trend That Is Likely To Continue

NU Online News Service, Jan. 14, 10:17 a.m. EST

Property and casualty insurers have seen a shift in earnings over the past eight years, becoming profitable after years of poor returns, something a consulting firm said is a major and permanent shift for the industry.

“The property and casualty insurance industry has created enormous value since 2002, signaling a paradigm shift that should lead to improved and sustainable results—and is unlikely to be reversed,” according to a report on the future of the industry released by the consulting firm McKinsey & Co.

The report titled “Journey III: The Next Frontier in Property and Casualty Insurance—The Challenge of Profitable Growth” said that from 2003 through 2009, the U.S. p&c industry produced $99 billion of pre-tax earnings in excess of cost of capital, reversing a cumulative loss of $108 billion from 1988 through 2002.

According to the report, this paradigm shift that the p&c industry is undergoing is rooted in several factors:

• The exit of undisciplined capacity:  between 1992 and 2003, eight major companies with $1.5 billion in premiums left the industry.
• Strengthened risk management skills at four levels:  enterprise risk management, capital management, product market management and transaction execution.
• The upgrading of performance management, financial discipline and talent management in the industry.

This paradigm shift has three major implications for p&c insurers, according to the McKinsey report:

1. Companies need to make continuous improvements in risk management.
2. Profitable growth is increasingly important in driving wealth creation.
3. Companies must continually upgrade performance management, financial discipline and talent management, while also using information technology to differentiate themselves and create competitive advantages.

“While we expect industry profitability to remain strong on a normalized basis, we believe that the industry’s overall growth levels will remain sluggish, driven by excess capacity, an increasingly competitive environment and declining exposure bases,” the report added. “Companies that develop growth skills, which are still undeveloped in the p&c industry, will gain significant competitive advantages.”

McKinsey went on to say that to grow profitably in today’s more disciplined and competitive marketplace, p&c companies must:

• Convert customer-focused initiatives into meaningful incremental revenue streams by increasing cross-selling and up-selling, increasing renewal retention, and investing in their brand.
• Focus on four distribution levers: managing agency appointments, managing the new business marketing funnel, strengthening the value proposition to distributors and product development.
• Pursue new market opportunities, tapping new markets or reaching current markets in new ways, by broadening their underwriting appetite, developing alternative distribution channels or expanding internationally.

Copies of the report, either in print or .pdf, are available by e-mail at no charge at FS_External_Relations@mckinsey.com.