Commercial property and casualty (P&C) insurance is at a critical point as the industry faces mounting economic pressures, including inflation, capital constraints, geopolitical challenges, and climate change-driven catastrophes.
According to McKinsey’s 2023 global insurance report, commercial carriers risk losing their relevance if they don’t fulfill the demand for resilience and plug protection gaps.
But Shannon Varney (pictured), one of the report’s authors and a partner at McKinsey, said that while carriers are being challenged, it’s also a time for brokers and MGAs to step in.
“This moment is a big inflection point for the commercial insurance industry,” Varney told Insurance Business.
“We see this as a critical time to provide real solutions for their insureds as the nature of risk is changing and new sources of risk are emerging that weren’t as acute or as severe as previously.
“These solutions shouldn’t just be provided by carriers; this is the time for brokers to come together with carriers to put forward risk solutions that address the growing protection gap.”
Varney acknowledged ongoing tension between carriers and brokers as the insurance distribution channel evolved, particularly amid the rise of managing general agents (MGAs).
In the US, MGAs grew at 10% per annum between 2012 and 2021, more than double the rate of industry premiums. according to McKinsey’s data.
Carriers have felt pressure from distribution partners that arguably fare better in the race for talent and capital, and that need less capital to run their business than commercial carriers. This compounds the economic pressures that carriers already face.
“If you think about where the value has accrued over the last several years, it’s very clear that the total returns have skewed towards the brokers,” he said.
“Some distribution partners are also looking increasingly like insurance businesses. Several large brokers own MGAs, so they’re performing functions historically that was only played by carriers, such as underwriting risks.
“A growing percentage of the overall top line for these brokers comes from underwriting. As a carrier, you’re thinking, ‘That’s scary for me, because they’re doing my job.’”
What can carriers do to address their declining relevance? One solution would be to compete on distinctiveness rather than price, the McKinsey report noted.
Commercial carriers that double down on their investment in specialty lines consistently outperform their generalist peers in terms of premium growth and profitability.
Carriers also need to innovate to address the most significant risks of our time, such as natural catastrophes and cyber risks. Adopting alternative solutions such a parametrics, or tailoring insurance products to certain segments will ensure that gaps are covered.
To address the lack of capacity, carriers should tap into alternative capital and access public-private partnerships.
Finally, attracting and retaining skilled talent should go hand-in-hand with investments in advanced analytics, workbenches, and external data sources, the report urged.
With risks evolving faster and increasing in magnitude, the entire commercial P&C industry needs to come together for their insureds.
“Given the disruption that we see in the broader economic and political environment, it’s a unique time for global commercial insurers to play a meaningful role in facilitating commerce,” said Varney.
“We’re not totally naive to the fact that this tension [between brokers and carriers] exists and will continue to exist in this market.
“However, it is imperative that we see multiple parties leaning in as part of the solution, and that includes brokers, carriers, the public sector, and insureds.”
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