The property/casualty industry is undergoing a radical shift in its ability to leverage its risk management efforts, thanks in large part to technology, according to a new report. The result of this shift will be a firm-up in pricing and the ability of insurers to create and maintain competitive advantage.
Starting in 1979 and continuing through 2003, global research firm McKinsey & Company has offered a state-of-the-market perspective on the health of the property/casualty industry.
In “Journey III: The Next Frontier in Property and Casualty Insurance,” McKinsey reviews shifts in industry structure over the last 10 years, and offers a new perspective on whether any recent financial improvements are likely to be sustainable or simply the result of a hard market that will go back to a push for share, inadequate pricing, followed by poor returns.
“Our conclusion is that the recent period of attractive profits has been driven by a paradigm shift in the industry,” note the report’s authors.
Tackling the property/casualty industry’s history, its health and its prospects for the future, McKinsey introduces information technology as the latest major foundational pillar undergirding the potential success of the sector.
McKinsey examines the events surrounding industry returns since 2002, the sustainability of improved returns, and the implications for companies competing in a more disciplined and competitive market.
Within the report, its third such analysis, McKinsey notes a paradigm shift that has three implications: the exit of undisciplined capacity, upgraded and strengthened risk management skills and stronger foundational pillars.
For its first implication, McKinsey points to breakdowns in the risk management efforts of eight major companies that were either acquired or went bankrupt as having a trickle-down effect on industry pricing.
The second implication affecting the paradigm shift relates to improved or upgraded skills in the management of enterprise risk and capital, as well as product market management and transaction execution.
The third implication, notes McKinsey, relates to an upgrading of the three foundational pillars offered by the research firm in its last report, “The Journey Revisited.” Those three—performance management, financial disciplines and talent management—are upgraded further with the addition of a fourth pillar, information technology, namely due to its role in helping insurers differentiate themselves and win new business.
According to the report's authors, IT’s past role—helping insurers manage core business processes, was limited by two factors: First, most IT-driven innovation occurred in personal lines, with few meaningful advances in the commercial or specialty lines. Second, within personal lines, most of IT’s impact was within (rather than across) the silos of underwriting, claims and distribution.
Now however, IT is being used strategically to create competitive advantages and differentiation on three axes:
• True 360-degree customer analytics and insights are improving decision support in pricing, underwriting and claims. Personal lines carriers are already using IT for customer-centric decision support, and the best commercial players are now doing the same, surgically integrating disparate information from internal and third-party sources for decision support.
• Integrated information management and risk analytics are becoming increasingly important across lines of business, such as in exposures to localized events. The ability to evaluate risk information in an integrated manner will help differentiate leaders and laggards, especially in the commercial and specialty arenas in the next decade.
• Leveraging predictive modeling tools in traditionally judgment-based lines and extending electronic information collection deeper into the distributor network will drive better outcomes.
“IT processing and analytic capabilities will continue to improve the effectiveness and productivity of individual underwriters and underwriting teams,” say the authors.
The authors state that although it’s impossible to eliminate catastrophes or latent liability exposures, “the continuous investments in risk skills along with investments in growth skills focused on demonstrated areas of strength and an increasingly healthy industry structure will bode well for longer-term returns.”
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