The future of insurance: Creating value, finding focus

| Podcast

The insurance industry struggles to create economic profit, but amid COVID-19’s enduring changes, opportunities await.

In this episode of McKinsey on Insurance, Kweilin Ellingrud speaks with Alex D’Amico, Henri de Combles de Nayves, and Bernhard Kotanko about the latest research from McKinsey’s Insurance Practice, the Global Insurance Report 2022. In this conversation, they discuss how they envision the industry changing further and what insurers can do to advance sustainably. The full report can be found on

An edited transcript of their conversation follows. For more episodes of McKinsey on Insurance, our podcast series about the trends, disruptions, and strategies that are reshaping the insurance industry today, subscribe to the series on Apple Podcasts, Google Podcasts, or Spotify.

Kweilin Ellingrud: One of the biggest headlines coming from McKinsey’s Global Insurance Report 2022 is that the insurance industry is struggling. Against the backdrop of persistent low interest rates and pricing pressures, around half of insurers globally are not earning their cost of capital. Productivity improvements have also been limited.

Bernhard, I’d love to turn to you. The Asia–Pacific region saw the biggest drops in profits, especially in life insurance. How do you see the environment evolving in Asia?

Bernhard Kotanko: Thank you, Kweilin. The past two years have been challenging for Asia, which, we should note, is a heterogeneous portfolio of countries. What we have seen there is a decline in volumes and profit, especially in Japan, but also in some more challenging quarters for China, which drove down numbers overall. However, Asia outside Japan remains the global growth engine for insurance, especially in life and health lines, and we expect this to continue.

But these past two years also called out the clear need to professionalize the business model, especially to move away from a pure capacity-build model toward a more customer-oriented and professional model that better uses digital to be more productive.

Kweilin Ellingrud: Henri, what about in Europe? What are you seeing there?

Henri de Combles de Nayves: In Europe, we’re seeing a real bifurcation between the winners and the losers after these past two years. In a way, this is a result of the “superstar phenomenon”: 10 percent of all firms across industries are capturing 80 percent of the value created. We see this at the economy level, at the city level, and at the sector level. And this has not escaped the insurance industry. We’ve moved as an industry from being moderately value-creating to being value-destroying, and the trend is extremely strong at the company level.

That’s especially the case in Europe, and we’ve observed that smart players are making bold moves to have a great positioning: they are reallocating their capital and focusing on areas where they believe they can scale locally, where they believe they can invest for growth and innovation, and where they can make improvements in their productivity.

Kweilin Ellingrud: In the United States, we’re seeing insurers do some of the same things: feeling the pressure from low interest rates, trying to innovate on the product side, but also being quite concerned about capital-intensive products and looking elsewhere for growth. Alex, investors seem to be circling the industry. What’s catching your attention?

Alex D’Amico: Well, Kweilin, you’ve hit on it. We are seeing real movement here in the industry by insurers that are looking to differentiate themselves with investors. Frankly, many have spent the past few years cleaning up their balance sheets; exiting capital-intensive, opaque books of business; and trying to simplify their business models and move toward more fee-intensive wealth- and asset-management products. Insurance carriers that have done that successfully have been fairly well rewarded.

Interestingly, we’re also seeing brokers take disproportionate economic share within the distribution ecosystem—but that shouldn’t be a surprise. Across our economy, economic value is accruing to individuals and platforms that are closest to consumers, and the insurance sector is no different.

Across our economy, economic value is accruing to individuals and platforms that are closest to consumers, and the insurance sector is no different.

Alex D’Amico

We’re paying close attention to the role of private equity in the industry. Private equity has been a major force over the past few years. Private capital has enabled the restructuring of balance sheets for publicly traded insurers and is uniquely well positioned to hold some of these longer-dated and perhaps more volatile liabilities. They certainly like the “sticky assets” that come with these books of business. That’s going to continue and will reshape the industry.

Kweilin Ellingrud: Henri and Alex, what role do you expect M&A to play in the industry in the coming years?

Henri de Combles de Nayves: We expect the overall pace of M&A activity to increase, though it’s going to come mostly from the life side rather than from property and casualty [P&C] insurance. This is mainly, as you can imagine, because of macro challenges: some regions of the world have sustained low interest rates, and other regions are experiencing inflation. Insurance carriers are also facing challenges in having attractive, sustainable ROE, which, for life insurers, is the main driver of market valuation.

We expect some consolidation on the P&C side, although it will be less prominent than in life insurance—especially because there’s a downward pressure on pricing as well as real competition between a lot of insurers that are chasing the same types of clients.

Want to subscribe to the McKinsey on Insurance podcast?

Alex D’Amico: I agree. In the United States, you’re going to continue to see balance-sheet restructuring through M&A as well as reinsurance. But, that said, there’s only so far that play can run before insurers need to position themselves to think about growth. As I like to say, “You can’t shrink yourself to glory.” So at some point, once insurers are done with the surgery on their back books, they’ll need to start thinking about where they’re going to get economically accretive growth.

M&A will play a big role in that, but it won’t be “bet the company” M&A, because our research has found that such an approach rarely reliably generates economic value. Instead, we think it’s actually going to be a series of smaller, more programmatic deals that enables players to acquire capabilities and gain access to products and markets to accelerate growth. So that’s the direction that we see M&A heading—certainly a story that’s going to continue to permeate and shape the industry.

Kweilin Ellingrud: We’ve talked a lot about the pressures that insurance carriers face. Bernhard, for CEOs who are focused on value creation, what advice would you have?

Bernhard Kotanko: In our report, we identified a total of nine strategic imperatives to capture real value in the future. If I bucket those into headlines, I would say the first one is to be bold about innovating your propositions to be much more customer-centric. That will help you create more specific, personalized advice and tap into new segments, be it retirees or a single-person household.

The second bucket is to aspire ten times higher with your digital transformation. That ranges from core technology transformations to the play in digital ecosystems to the creation of digital hybrid advice and engagement models.

And the third headline is to change the character, the nature, of insurance companies—you could say not only to do things but also to be. And that includes the posture on environmental, social, and governance practices; that includes the posture on talent and new ways of working; and that will also showcase the CEO as a role model in these pivotal times of change.

Kweilin Ellingrud: Bernhard, I particularly like the theme of reimagining the culture and ESG and also the theme of talent. Many senior leaders across insurance have been struck by increasing attrition rates, which could be used as a positive or could cause a very defensive posture.

But as you see attrition rates increase, can you recruit talent from a broader network across the country or even internationally? That’s been a real challenge, particularly for skills that are harder to find—like analytics and digital—where, historically, insurance carriers have had a tougher time competing against fintechs and insurtechs to find that talent.

Bernhard Kotanko: This is a critical topic. Insurers need to change how they present themselves in talent markets—they need to emphasize the critical role of insurance and the value it creates for society. Doing so will attract new, more diverse talent. It’s going to be important to be much less siloed by looking at purely technical insurance talent.

Insurers need to change how they present themselves in talent markets—they need to emphasize the critical role of insurance and the value it creates for society.

Bernhard Kotanko

Kweilin Ellingrud: Alex, what advice do you have for CEOs focused on value creation?

Alex D’Amico: I would offer several thoughts here. One is, think about your operating model and your level of enterprise agility. I’m not talking about agility from a classic digital or agile perspective. Rather, how quickly does the organization make decisions? How quickly and rapidly does the organization move capital and investment dollars across the portfolio? We believe companies that can do that faster have a unique competitive advantage.

Second, I would take a hard look at capital allocation and make sure that I’m excited about the areas where I’m allocating my capital. I should believe that I can compete to win in those segments and that the underlying growth trends in those segments are putting wind in my sails.

Third, I would look at product innovation. We’ve seen recently, as an example, that mortality and longevity products in the US with morbidity riders have been incredibly popular. We’ve also seen the growth of RILAs [registered index-linked annuities] in the United States. So there are real returns for product innovation in this market.

And then, finally, I would look hard at my cost structure—not to take costs to the bottom line but to try to free resources and create capacity for reinvestment and transform the company from the inside out. The cost of technology is only going to increase, but the returns for having industry-leading tech are there. The question is, as an insurance carrier, how do you pay for technology in a low-interest-rate environment? And that requires real allocation of budget.

Kweilin Ellingrud: Henri, what would your advice be for CEOs focused on value creation?

Henri de Combles de Nayves: We’ve talked a lot about productivity, but I think they also need to have a growth mindset. Investors have been interested in considering the kinds of growth that provide the most value. That’s something that the industry, particularly in Europe and in the United States, has put aside in the past few years. Asia–Pacific is very interesting because it’s a growth region.

Investors have been interested in considering the kinds of growth that provide the most value. That’s something that the industry, particularly in Europe and in the United States, has put aside in the past few years.

Henri de Combles de Nayves

Bernhard, what are Asian insurers doing to grow? What’s their secret sauce?

Bernhard Kotanko: First of all, they are of course focused on the right markets, especially Asia excluding Japan. Both China—as well as ASEAN [Association of Southeast Asian Nations] markets—and India are growing fast. About 50 percent of all global growth comes from these regions, according to our research.

It’s also then a question of which performance metrics you really look at. On the life insurance side, investors in Asia tend to place more value on new business and overall top-line growth. Whereas in other areas of the world investors might focus on ROE, in Asia investors also take into account multiples on the umbrella coverage. Many Asian insurers’ returns on equity are lower than those of their global peers in Europe or North America, but still, they enjoy overall higher multiples because they yield better growth rates. I think that’s a lesson for European and North American insurers—that it’s not just about finding the resources but also about further fostering growth.

Alex D’Amico: Bernhard, one question: If I’m a Western insurance CEO and I’m looking to participate in the higher growth rates and better returns that we’re seeing in Asia, what advice would you have for me? Do I go organic and greenfield? Do I acquire my way in? Do I establish a joint venture?

Bernhard Kotanko: It’s a great question and one that many of our clients are grappling with. It’s fair to say most global insurers have presence in Asia–Pacific; some are pretty big. The overall challenge is how to go native on this while appreciating the diversity in these growth markets—how to build strong local franchises, rather than just rolling out global business models. And last, how to appreciate some of the volatilities that come with this process and manage the risks accordingly.

However, in the United States and in Europe, there is an interesting dynamic in creating value from back books and enforcing management on both the liability and the asset sides. Alex, this is something many of the Asian insurance carriers are less mature in. What would be some of the learnings from there?

Alex D’Amico: Well, I think that the game has really shifted with the emergence of private capital and financial sponsors who are buying a significant portion of the books, as well as the emergence of new reinsurance structures. And as that continues to evolve, we think that we’re going to continue to see more restructuring through the partnerships that are emerging with sophisticated credit and private-equity firms. That said, there continue to be blocks of businesses that financial sponsors have not had the appetite to address, like portions of the variable annuity space, as well as long-term care more broadly. We think what’s needed there is operational excellence, advanced analytics, and trying to manage what has frankly been, for some insurers, an intractable problem, a significant drain on their balance sheets, and a significant tug on their valuations.

Kweilin Ellingrud: How do you think about insurance carriers shrinking their balance sheet and what comes next?

Alex D’Amico: In the past five or six years, we have seen publicly traded insurers—fewer of the mutuals—shrinking their balance sheets. And, in doing so, they have attracted what we would call “deep value investors” who are attracted to the capital-return story. The challenge for many of these insurance carriers now is once they’ve exhausted their ability to prune their balance sheets, they have to be able to attract deep value investors; otherwise, those investors will rotate out of the stock and force the insurers to attract new segments of investors. If that’s the case—and we think that there’s a high probability that will occur at some point—these insurers need to show growth, profitable growth, to attract excitement and interest for further shares.

On the mutual side, interestingly, we think that as publicly traded insurers have pulled back from traditional life and annuities books, there’s an opportunity for mutuals to step in and see growth, and frankly, to meet the need for these products. We think that mutuals have, by dint of their capital structure, a unique opportunity here to help push the industry forward.

Kweilin Ellingrud: It’s clear that global insurers need to embrace the strategy for value creation. That’s going to require a hard look at portfolios, slimming some things down, refocusing on others, and making some tough decisions. Alex, Bernhard, Henri, thank you for the discussion today. Thank you to our listeners as well, and be sure to download the report on

Explore a career with us