Global Insurance Report 2023: Closing the personal P&C protection gap

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Despite a slowdown during the height of the pandemic, personal property and casualty (P&C) insurance has seen annual growth of 3 percent since 2019. Personal lines still represent more than half of global P&C gross written premiums (GWP), but a growing protection gap in both developed and developing countries indicates that insurers struggle to design products fit for the evolving and emerging risks that modern personal-lines consumers demand.

The protection gap has a number of direct and indirect causes. In developed economies, customers’ personal P&C insurance needs are changing significantly and rapidly—particularly when it comes to motor insurance, given that connected cars and the sharing economy are transforming pricing models and risk profiles. Extreme weather events are wreaking havoc, with increased flooding, tropical storms, wildfires, and droughts challenging traditional risk assessment and underwriting models in property insurance. Cybersecurity risk is on the rise, and many insurers are struggling to properly quantify risk exposure, adjust terms and conditions, and consequently win the conviction of reinsurance capacity. And e-commerce is becoming indispensable,1Becoming indispensable: Moving past e-commerce to NeXT commerce,” McKinsey, November 15, 2022. bringing a heightened risk of online fraud and theft.

Developing economies’ populations also remain underinsured, with premiums largely for nonmandatory products such as homeowners’ insurance still representing a small portion of people’s income—mostly driven by limited purchasing power and a lack of awareness about the benefits of personal P&C protection. In Latin America, personal property insurance as a portion of income is just 0.12 percent of GDP, compared with 0.32 percent for Western Europe.2

The industry is growing overall, but a more granular assessment shows that locally focused scale largely defines a given personal P&C insurer’s competitive stance. Regional winners are likely to continue to retain market share, benefiting from the capabilities they employed to achieve their current leadership position and from their investment capacity going forward. More globally, personal P&C insurance will join all industries in contending with inflation in the near term, putting additional pressure on margins. Inflation will also have clear implications for traditional operating models—specifically by requiring faster feedback loops between the claims, actuarial, and pricing functions. Insurers must recalibrate their products, distribution, and technical models for a customer base and an employee pool with higher standards than ever.

This is the third and final chapter of McKinsey’s Global Insurance Report 2023.3Global Insurance Report 2023: Reimagining life insurance,” McKinsey, November 16, 2020; and “Global Insurance Report 2023: Expanding commercial P&C’s market relevance,” McKinsey, February 16, 2023. Excerpts of the report follow. Download to read the full report.

Personal P&C industry landscape

In 2022, the insurance industry surpassed $6.5 trillion in GWP, with P&C representing almost one-third of total revenues. The premium volumes of both the global insurance industry and P&C have recovered from the pandemic; however, global insurance profits still have yet to surpass prepandemic levels, and 2022 P&C profits lagged 2019 levels by about 10 percent, suffering from acute inflation.

Personal P&C insurance saw an average three-year CAGR of 3 percent from 2019 to 2022, compared with 1 percent during the height of the pandemic—better, but lagging P&C commercial’s growth of 7 percent since 2019, fueled by rate increases.4Expanding commercial P&C’s market relevance,” February 16, 2023. Personal lines represent more than half of GWP in global P&C, but current growth and profitability headwinds constitute a clear call to change the course and regain relevance in an increasingly complex near future.

Challenges facing personal P&C insurance

Despite the segment’s historically strong performance and resilience after the pandemic, half of P&C insurers are not earning their cost of equity, raising questions about the long-term economic sustainability of their business models. Unsurprisingly, public markets have taken note, with more than half of listed insurance companies trading below book value over the past year.5Creating value, finding focus: Global Insurance Report 2022,” McKinsey February 15, 2022.

Among others, we see five main forces driving challenges for the personal P&C insurance industry—inflation, new entrants, business model and distribution innovation, mobility disruption, and an explosion of data—which should also be looked at as opportunities.

Road map for personal P&C in 2023 and beyond

Going forward, insurance carriers can reignite growth by reclaiming their crucial role in society, covering risk where they are most needed, and enlarging the addressable market. The path to doing so will vary: in developing economies, protection gaps tend to be driven by consumers’ limited purchasing power and a lack of awareness about the benefits of traditional personal P&C products (particularly nonmotor ones); in developed economies, current risk frameworks are lagging the proliferation of new and evolving risks, from cyber to natural catastrophes (NatCats) to shifting mobility habits.

As demand for personal P&C insurance grows, insurers are even shying away from addressing the most critical protection needs. Indeed, insurance carriers are crucial to the communities and businesses in regions experiencing more severe climate events, but they are becoming increasingly uninsurable and, in some instances, have required government intervention—for example, in California due to wildfires and storms and in Florida and Texas due to hurricanes. Insurers are already pulling back from the NatCat segment in certain geographies: personal property direct premiums written (DPW) in Florida decreased by 2.0 percentage points from 2007 to 2021 and by 0.5 percentage points in California over the same period.6

To regain relevance and fuel growth, personal P&C carriers need to focus on capturing market tailwinds—namely new or new-product innovations—as well as on addressing four key success factors of distinctive capabilities: perfecting capabilities within specific distribution channels; enabling cross-functional collaboration and faster feedback loops between claims, actuarial and pricing; modernizing claims through advanced analytics and automation; and innovating to address an evolving risk landscape and to fully monetize customer relationships.

Getting started

As personal P&C carriers further develop and refine their approaches to address current industry trends and define their market position, several key considerations form central decisions they must make.

Decide where to play—geographically, by distribution channel, and by business line. Considering the clear importance of local scale to personal P&C market share and growth, many insurers will want to be mindful about investment decisions so that they create meaningful scale in their distribution or product strength. This might entail consolidating their largest domestic market positions in a core channel or even reassessing their readiness to exit the markets and segments without a path for scale. They’ll also need to determine what distinctive business areas they can use as leverage in each market to deepen their competitive advantage.

Increase speed and accuracy of insights by reimagining underwriting, pricing, and claims. Rapid change and the need for integrated solutions—from embedded distribution to usage-based insurance pricing and claims integration—will require a new level of collaboration. An effective feedback loop is critical to reacting faster than the competition, as is a plan for overcoming the traditional and well-known roadblocks to boosting organizational collaboration: siloed operating models, lack of data availability, sluggish technology systems, and so forth.

Focus on fully serving customers and society. Evolving customer needs and a more complex environment will require reinventing personal P&C value propositions to tackle the next frontier of risks and the new challenges our world is facing (for instance, NatCats, cybersecurity, and digital crime). Too many insurance carriers are doing the exact opposite, allowing their wariness of risk to widen the protection gap. Also, in developing economies, nonmotor-lines penetration in GDP is still lagging that of motor, pushing insurers in those regions to prioritize the diversification of personal lines. Going forward, the leaders in personal P&C will be those that embrace the industry’s role in society and ensure coverage is provided where it’s needed most, both in traditional core personal lines, such as motor and property, and in adjacencies, such as electronic warranties.

Determine your ecosystem role. As the global economy increasingly concentrates services and products into ecosystems, traditional distribution channels are being displaced by one-stop-shop solutions built around the customer and their convenience and preferences. Insurers can’t afford to sit on the sidelines of these ecosystems—but they also don’t necessarily need to construct an ecosystem or expanded capabilities from scratch. Insurers will need to start by considering what options are available, given existing customer relationships, and by defining the role they want to play: Are they aiming to become the preferred insurance provider of those better positioned to own such customer relationships? What capabilities do they need in any given scenario?

All told, personal-lines P&C carriers will continue to face numerous strategic market challenges and considerations in the 2020s—and establishing market relevance remains the most effective means of securing stability and growth. There is no right or wrong strategy. In fact, success may be defined more by how adeptly personal P&C carriers can envision their desired end state and adapt along the journey to reach it.

Download the full report, Global Insurance Report 2023: Closing the personal P&C protection gap on which this article is based.

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