With more than $3.8 trillion, the global insurance market reached an all-time high in terms of capital in the first quarter of 2014, creating challenges for growth for insurers. “We’ve nearly doubled insurance capital since 2008 ($2.4 trillion),” said Kathleen Monaghan, a consultant on Aon Benfield’s Inpoint strategy team, “and there’s a need to innovate to continue to help policyholders.” Doing so requires an understanding of immediate and evolving risks and opportunities that are impacting industry trends and growth strategies, both here and abroad.
“We think of markets (geographies) and risk as evolving together, with events that are constantly developing,” said Monaghan, who plots markets and risks along a Cartesian plane assigning ratings from emerging to developed to better understand opportunities. The results are then grouped among four quadrants:
- Developed markets/developed risk
U.S. healthcare, U.S. small commercial, and UK auto. Monaghan states “These opportunities are evolving but for the most part understood from a coverage and pricing standpoint.”
- Emerging markets/emerging risk
Chinese cybersecurity and African mining “These are on the frontier but should still be under consideration for future coverage,” said Monaghan.)
- Developed markets/emerging risks
- Emerging markets/developed risks
International motor, Brazil SME, and Brazil crop
Discovering opportunities requires assessing data through a structured, three-filter framework: profitability, scale, and growth (filter one); demographics, political stability, and regulatory environment (filter two); and distribution channels and competitive landscape (filter three). Monaghan states “From there, an insurer will have thoughtfully filtered its opportunities to those that it can execute on organically or through M&As or partnerships.”
U.S. growth opportunities
Current growth opportunities in standard products in the U.S. are more limited, said Monaghan, noting the competitiveness of the U.S. insurance landscape.
Monaghan illustrates the use of these filters in the U.S. starting with the 14 P&C minor statutory lines of business in 50 U.S. states and the District of Columbia (714 total opportunities). Applying filter one (profitability, scale and growth, leads to 59 opportunities. Of those, 15 opportunities exceed $500 million and outpace average growth and loss ratio, which are then filtered for regulatory considerations and demographics (filter two), resulting in eight opportunities. Finally, those eight are analyzed based on the competitive landscape and other risk factors (filter three), yielding just three high value growth opportunities in the United States: TX-Liability, VA-Liability, and IL-Liability. “This does not mean that there are only three opportunities in the entire U.S., but rather, this is a framework for making decisions about where to grow,” Monaghan said. A final investment decision must consider product differentiation, channel dynamics, changing legislation, and individual capabilities. According to Monaghan, “There are certain areas where you might be better suited for growth. You need to consider your expertise, which can impact your ability to outperform.”
International growth: An overview
While the U.S. currently commands the largest share of the global P&C market, followed by Japan, China, Germany, the UK, and France, Monaghan foresees an imminent shakeup at the top, with China displacing Japan as the second largest market by 2017 and (perhaps) the U.S. in the not-too-distant future. “We wouldn’t be surprised if China is the largest market within 10-15 years … China is growing so quickly.”
Among the top 20 global markets, China and Australia skew high for both performance and growth metrics, while the U.K. and the U.S. lag behind in both of those measurements.
International growth: Assessing opportunities
To identify the markets with the most growth opportunities, carriers must look beyond premiums and losses to barriers of entry and the regulatory environment, assessing each by how it can differentiate (a reflection of accessibility/distribution and product innovation, among other factors).
Any growth estimate must be balanced by a look at the trends that can impact global direct written premiums (product innovation, government support) as well as global ceded written premiums (alternative capital writing reinsurance directly, evolving government support for reinsurance).
Monaghan works through each of these considerations before offering an assessment of high value, international opportunities. “Over the next five years, motor will continue to dominate the P&C market, followed by property.” While property is currently driving the most growth in developed economies, motor (followed by property) is driving the most growth in developing economies.
Returning to a market/risk analysis, Monaghan identified a number of specific growth opportunities, breaking down her assessment by grouping:
Developed markets/developed risks
- U.S. healthcare
“We believe that with the individual mandate, an expansion of Medicare, and the employer mandate, there will be $350+ billion from private exchanges entering the market.” However, she cautioned: “there is a lot of uncertainty still, the share [of private exchanges] is small but this could grow.”
- U.S. small and middle commercial
Carriers can differentiate here by adapting to new buying trends (online shopping) and emerging risks (cyber and employer liability)
- U.S. and UK auto
Monaghan quoted the NAIC, which believes in the next five years 20 percent of all vehicles may have usage-based insurance, which offers more control and transparency for customers and more accurate loss and cost estimates for carriers.
Emerging markets/developed risks
- International motor
China will achieve the most rapid growth and will remain the second largest motor market in the world, while Brazil and Norway are also skewing high for both growth and performance.
- Brazil P&C
Brazil has realized 5 percent average annual growth over the past several years, led by property (26 percent), liability (22 percent), and crop (20 percent).
Developed markets/emerging risks
- U.S. cyberinsurance
Monaghan said to look closely at whether there’s a gap between property and cybercoverage, a distinct opportunity. “The majority of small businesses are not covered but at risk,” she said, estimating the cyber market size at roughly $1.5 billion.
The reinsurance sector is also sitting on record capital and capacity, with growth opportunities coming with terrorism, crop, mortgage, and casualty. “Industry trends here require reinsurers to innovate and differentiate,” Monaghan said, with reinsurers needing to assess new business “beyond traditional reinsured risks.”
“There is a large amount of capital to deploy,” Monaghan concluded, summing up the state of the industry and what’s at stake for insurers. “Creativity and an expansive appetite will help the industry grow.”
Kathleen Monaghan is a consultant on the Inpoint strategy team based in Chicago. She presented at the fifth annual Plante Moran Insurance Conference, which brought together top executives from insurance organizations to explore a number of opportunities the insurance industry can leverage for continued growth and success.