P&C insurers in Asia face slower premium growth, low penetration rates and rising combined ratios (COR), particularly in emerging countries, says global management consultancy company McKinsey & Co.
Representing views from McKinsey’s Insurance Practice, Henri de Combles de Nayves, Bernhard Kotanko, Angat Sandhu, and Kazuaki Takemura set out an overview of the market in the report “Global Insurance Report 2023: The future of Asia P&C Insurance”.
The report says that in the decade before 2022, P&C insurance premiums in Asia grew about 5% a year—on par with growth in the Americas and outpacing growth in Europe, the Middle East, and Africa (EMEA). However, Asia’s growth slowed in the second half of that decade to a CAGR of just 3% from 2017 to 2022. EMEA also saw subpar growth of 3.6% during this period, but global growth held at 5%.
Low penetration
Premium growth isn’t keeping up with the region’s GDP growth. As a result, over the past 10 years, P&C insurance in Asia has penetrated only an estimated 2% of the addressable market in developed markets and 1% in emerging markets.
The primary factors behind this low penetration involve insufficient awareness, accessibility, and affordability of insurance, especially in emerging markets. Lower penetration can also be directly linked to the level of market sophistication, which is estimated based on factors such as P&C administrative ratios (indicating operational sophistication), level of competition, and the proportion of digital sales.
In addition, consumers in Asia tend to save money at higher rates than their counterparts in the United States, the United Kingdom, and Western Europe. On the one hand, this means Asian consumers may prioritise building their savings over spending on insurance premiums. This is especially likely if consumers believe their savings are meeting their immediate financial needs.
Rising combined ratios
Combined ratios (COR) in emerging Asia reached or exceeded 100% every year from 2017 to 2022, primarily driven by a higher expense ratio. In 2021, high inflation contributed to higher claims costs, particularly in property and auto insurance products.
The low-interest-rate environment has further compounded the pressure on underwriting results for P&C insurers, especially during the height of the pandemic.
Emerging Asia has a higher expense ratio than developed Asia, despite holding larger premium pools—$240bn compared with $216bn in developed markets, according to McKinsey’s Global Insurance Pools database. This is primarily because consumers in emerging Asia purchased more auto insurance, with an estimated increase of 7% per year from 2012 to 2022.
Dual-track approach
McKinsey suggests that insurers operating in Asia can drive a meaningful change in value by adopting a dual-track approach:
— Navigating the new world
In a rapidly evolving landscape, insurers must proactively engage with emerging opportunities and risks across mobility, cybersecurity, energy, climate change, and disruptive technologies such as generative AI. To succeed on this track, insurers will need to be agile, innovative, and forward-thinking, continually scanning the horizon for emerging trends and seizing opportunities as they arise.
— Optimising the core
While embracing new horizons, insurers should not neglect the potential for value creation within their existing operations. Achieving value chain excellence across key functions such as claims and underwriting (UW) is paramount. By streamlining and optimizing these core processes, insurers can enhance profitability and operational efficiency.
Moreover, insurers should leverage the rise of digital distribution channels to accelerate growth and improve customer engagement. The integration of digital tools and platforms will be instrumental in achieving these objectives.
Steering through both priority tracks simultaneously will require insurers to develop new implementation muscles and a culture of agility, adaptability, and continuous learning within their organizations. Insurers will need to work at a faster pace than ever, embracing innovation and readily experimenting with new technologies and business models.
For the research, Asia’s “developed markets” are Australia, Hong Kong, Japan, Singapore, South Korea, and Taiwan. “Emerging markets” include China, India, and Southeast Asian markets such as Indonesia, Malaysia, Thailand, and Vietnam.
