Renewing underwriting in commercial lines with Mahima Agarwal and Susanne Ebert

The fast-evolving nature of risks, challenging market conditions related to high inflation, geopolitical headwinds, environmental challenges, capital constraints, and new talent requirements have altered how commercial-lines insurers think about the future of underwriting. McKinsey spoke with Mahima Agarwal, an associate partner in the London office, and Susanne Ebert, a partner in the Frankfurt office, to understand more about how commercial-lines insurers can renew their underwriting function to expand relevance and increase resilience in a volatile world.

McKinsey: How has the commercial-lines industry performed in the current macroeconomic environment?

Mahima Agarwal: Despite recent macroeconomic challenges, most commercial-lines insurers have experienced strong performance, largely driven by the favorable rate environment. We recently looked at the performance of commercial-lines insurers over the past few years. While premiums for commercial lines have been growing, rate hardening has driven most of the growth. After adjusting for rate growth, we saw that premiums were behind GDP growth, indicating a decline in the relevance of commercial lines.

We expect to see some challenging times ahead because of rate increases slowing and pressure from high inflation. A high inflationary environment causes increases in premiums driven by increasing claims costs and reserve requirements. Clients react by reviewing their insurance coverage to try to reduce costs.

McKinsey: How can commercial-lines carriers expand their relevance in a volatile world?

Susanne Ebert: The nature of underlying risks is evolving faster than ever, and there is an increased protection gap, driven e.g. by increasing frequency and severity of natural-catastrophe risks, the transition toward a net-zero economy, and the evolution of cyberrisks. To expand relevance, insurance carriers can innovate with new products, policy design, and advanced pricing models. For instance, to provide coverage for the transition to net zero, underwriting of risks for decarbonization technologies is required. This is challenging because carriers lack historical data, so they are required to take an unaccustomed, forward-looking approach. In addition, innovative services to prevent and mitigate risks are critical. For instance, in cyber, leading carriers partner with specialized cybersecurity firms to help clients reduce cyberthreats by providing threat intelligence, consulting, and employee training. To close the existing protection gap, carriers also have to fight tightening capacity in both traditional reinsurance capital and alternative capital markets and find ways to raise additional capital.

McKinsey: How can insurers address the lack of capital and raise additional capital to close the protection gap?

Mahima Agarwal:Think about capital strategy more broadly. For example, insurance-linked securities [ILS] markets are primarily used only for natural-catastrophe risks. Investors were hesitant to invest in ILS because the increase in natural catastrophes over the past several years has diluted the expected performance from catastrophe focused ILS funds. But ILS markets could cater to broader risks, such as cyber-related risks, liability, and intellectual property related risks. Varying the risk profiles could help diversify funds and combine lines of business to attract more or different investors. Partnerships with alternative capital markets also tend to be more strategic and longer term; they allow reinsurers to think about the type of risks they could transfer rather than retain on their books.

Insurers can also think about using the public–private partnership model for risk types for which the cost of insurance exceeds the expected premium. This model has historically been used to handle risks such as floods and terrorism, but it could expand to handle climate-related and energy transition–related risks. Notably, at COP27, governments advocated support for a climate fund that would be financed by wealthier countries to support poorer economies during the energy transition.

McKinsey: How are capabilities and talent requirements changing in underwriting, and how can insurers modernize to navigate this challenging market environment?

Susanne Ebert: To modernize, companies must recognize that successful underwriting is more than risk selection and pricing. It requires a comprehensive set of technologies and capabilities––hard and soft skills. Commercial-lines insurers must attract and retain talent while developing the capabilities of experienced staff further.

To position themselves in a competitive labor market and fill the gaps left by the retiring baby boomer generation, commercial-lines insurers should refine their employee value proposition. For example, they can emphasize the unique opportunity commercial-lines insurance provides for global, cross-sector work and collaboration on a multidisciplinary team, actively shape and update roles also targeting candidates with tech expertise or a science background, and adapt to a hybrid work environment. Many carriers are investing heavily in data and analytics to develop more advanced underwriting capabilities. To succeed, carriers have to transform capabilities while transforming their underwriting culture. They should offer experienced underwriters opportunities to learn new skills and shift mindsets to enable data-driven underwriting.

McKinsey: How can commercial-lines carriers contribute to global sustainability goals?

Mahima Agarwal: In 2023, insurers that are part of the Net-Zero Insurance Alliance will disclose their underwriting portfolios and enabled emissions. This transparency will help commercial-lines insurers actively reduce the emissions associated with their underwriting portfolio by catering it towards areas with a low emissions intensity or with a clear decarbonization pathway, technologies supporting the net-zero transition, and offer ways to support clients on their path towards net zero.

Commercial-lines players also have promising opportunities for product innovations and innovative insurance coverages to help push decarbonization, such as alternative risk-transfer solutions to support renewable energies.

McKinsey: What actions can insurers take to respond to the current challenges, the fast-changing nature of risks, challenging market conditions, capital constraints, and new talent requirements?

Susanne Ebert: Insurance carriers will need to invest and take decisive actions in response to these challenges. First, they should define their distinctiveness clearly to remain competitive in the market beyond competitive pricing. Focused, specialized carriers with a clear value proposition typically gain an advantage. Second, they should invest in product innovation, more sophisticated pricing, and risk prevention and mitigation services to develop holistic solutions for their customers to protect against risks. Third, they should secure capital by establishing alternative avenues for capital and partnerships, which would also address investors’ concerns on long-term profitability. Finally, they should reinvent their employee value proposition and develop the capabilities to address the risks of the future.

Responding well to current market challenges can offer ample opportunities for insurance carriers to expand their relevance and increase resilience of their clients in a volatile world by closing existing protection gaps.


Mahima Agarwal is an associate partner in McKinsey’s London office. Susanne Ebert is a partner in the Frankfurt office.

Find more insights on commercial P&C insurance here: