Cost, capital and consolidation trends reshape growth agenda

Over the last decade, most global insurers prioritised profitability over growth.

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As a long-term strategy, increasing dividends and returning capital to shareholders without replacement from new profit streams was always tenuous, but the Covid-19 pandemic made it even riskier. In response, many insurers have acted to restore growth, ensure their ongoing financial viability and increase their relevance to customers – all of which will help them attract capital investment.

While cost optimisation is part of the equation for future growth, significant investment is also necessary. Insurers need to establish leaner and more flexible cost bases to free up capital to invest in digital transformation initiatives, especially those that take advantage of powerful new technologies.

Many insurers have sought to rationalise their portfolios by selling underperforming books of business, exiting certain lines of business, or leaving specific markets or regions.

These moves have been largely driven by investor demand for strategic focus and simpler business models. Size, the strategic north star for many insurers during the last decade, is eclipsed by specialisation as new players focus on niches (e.g., automotive coverage for millennials).

Increasing domestic consolidation further demonstrates why and how globalisation is less important than it used to be. Except for reinsurance and specialty lines, most insurance markets are domestic. That means in-market scale is more likely to drive results than planting more flags across markets. Buying growth (e.g., acquiring viable players in emerging markets) has also become too expensive.

During the last decade, private capital has driven big shifts in the industry landscape, largely through the purchase of back-books of policies, though insurance-linked securities, catastrophe bonds and reinsurance sidecars have also made a mark. Private capital firms have shown the sophisticated investment capabilities and management discipline to create policyholder and shareholder value.

In the past, many insurers owned asset managers, mainly to provide products to their customers; today, however, asset managers own insurers to boost fee income and assets under management. “Alternative” capital is now a misnomer, given its prevalence across the industry. But it has opened up exciting new possibilities for insurers that can find the right partners to execute the right growth strategies.

Digital transformation will be essential to all growth strategies. The pandemic demonstrated how quickly the industry can change and how much business could be done digitally. To meet rising customer expectations and innovate at scale, insurers must offer the rich, intuitive experiences that are the norm in other industries. New products must be more flexible and accessible, while offering higher-order value (e.g., financial wellbeing). In the back office, advanced tech enables data analytics at scale and real-time underwriting for more granular pricing and faster product development.

Such new capabilities will require substantial investments. But it’s important to remember how digitisation reduces long-term costs even as it enhances customer experiences. For some insurers, geographical contraction and portfolio rationalisation can fund digital expansion. Others will seek to partner with private capital providers or collaborate with fintechs or large tech platforms.

The bottom line: a new era for growth

After a decade of sluggish growth and a focus on near-term returns, insurers are vigorously pursuing long-term growth. Market conditions are on their side. Better tech and ample private capital have redefined what’s possible. Fresh and creative thinking will be richly rewarded. Restoring historical growth rates is easier said than done, but it’s essential to the industry’s future health. That future starts by directing capital to the most dynamic parts of the business, investing in those capabilities that deliver a clear edge, innovating to address millennials’ expectations and executing transformation programmes that optimise cost structures for the long term.