Report warns industry at 'inflection point'

Consultancy McKinsey & Company has released a report outlining the stark challenges facing commercial property and casualty (P&C) insurers globally, including the threat of “losing relevance” in a rapidly changing risk landscape.

Commercial carriers have not always kept pace with structural changes in the nature of risk, which are accelerating more rapidly than ever, according to the report.

“This is the most critical challenge that the insurance industry is facing today,” the report says. “The nature of risk is evolving faster than ever. Commercial carriers must step up to fulfill the societal desire for resilience in a volatile world by closing protection gaps or risk losing relevance.”

The report lists rising frequency and severity of natural catastrophes, the transition toward a net-zero economy and the evolution of cyber risks as the three trends in particular that are causing protection gaps to increase.

“These demonstrate the most pressing coverage gaps for commercial carriers,” the report says. “In addition, evolving supply chains and the evolution of trade and commerce will affect lines such as marine and business interruption.”

The report says commercial P&C premiums have delivered strong financial performance following the soft market of 2013 to 2018. The annual premium growth rate for commercial P&C lines has hovered at 6-8% since 2018 and combined ratios have been improving.

But the industry is at an “inflection point” as it faces a 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 says.

McKinsey says rates in some lines are starting to soften as capacity returns and at the same time rising claims inflation and growing competition from distributors are squeezing profits.

“But opportunities exist as well. Some commercial carriers are expecting meaningful investment returns due to the increase in interest rates,” the report says.

“The race to decarbonise underwriting portfolios—with nuances depending on geographies—is challenging and calls for new capabilities but also offers opportunities for growth.”