Building New Businesses: Strategies for Insurers to Leap Ahead
Executive Summary
The insurance industry faces significant challenges in maintaining relevance due to sluggish growth in mature markets, particularly in North America and Europe, where property and casualty (P&C) and life premiums have seen a decline relative to GDP. Despite efforts to boost growth through new business initiatives, the industry's track record is lackluster, with only 19% of newly launched insurance businesses becoming viable large-scale enterprises.
Industry Struggle and New Business Priorities
- Declining Growth: Insurers in North America and Europe are grappling with stagnant growth, with developed markets tracking or falling behind GDP growth rates. The U.S. saw a notable decrease in P&C and life premiums as a percentage of GDP between 2005 and 2022.
- Inadequate Shareholder Returns: While shareholder returns have somewhat recovered, insurers' performance has generally lagged behind the broader financial sector, especially in recent years (2016-2021).
- Emerging Value Pools: There is a growing demand for addressing value pools like cyber in P&C and middle-market consumers in life and retirement, but these have not been scaled effectively.
New Business Initiatives and Challenges
- Focus Shift: Many insurers are shifting their focus to new business initiatives to respond to changing customer expectations, create new revenue streams, and protect against disruption.
- Limited Success: Despite increased attention, insurers have struggled significantly in scaling new businesses, with only 37% of new businesses contributing at least 20% of their parent company’s total revenues, compared to 50% across other sectors.
- Investment vs. Outcome: Higher investments in new businesses (average capital expenditure of $42 million per business) have not translated into commensurate returns, with one-third of new insurance businesses failing to break even.
Strategies for Success
- Target Existential Challenges: Insurers must focus on addressing existential challenges within the industry, particularly in serving clients in markets that are becoming uninsurable due to new and rising risks.
- Address Underserved Segments: Opportunities exist in serving underinsured populations, such as those in the gig economy, by offering innovative insurance solutions.
- Enhance Customer Experience: Improving customer experience, especially in areas where traditional insurance products fall short (complexity, infrequency of purchases, and discretionary nature), is crucial.
Key Areas for Innovation
- New and Rising Risks: Addressing challenges like insuring intangible assets, cybersecurity, and physical risks like climate change, by partnering with start-ups and developing real-time risk tracking capabilities.
- Fee-Based Complementary Services: Expanding into fee-based services that complement core insurance offerings, such as reputation management in the social media age or adaptation and resilience services for climate impacts.
- Investment in Technology and Talent: Committing to the right talent, technology, and CEO involvement to derisk new ventures and increase the likelihood of success.
By focusing on these strategies, insurers can improve their chances of successfully launching and scaling new businesses, thereby enhancing their competitiveness and driving growth in an increasingly challenging landscape.
