How Insurance Companies can Sustain Profitable Growth Through the Market Cycle

How Insurance Companies can Sustain Profitable Growth Through the Market Cycle
August 27, 2024 8 mins

How Insurance Companies can Sustain Profitable Growth Through the Market Cycle

How Insurance Companies can Sustain Profitable Growth Through the Market Cycle

For insurers, making decisions on where and how to deploy capital becomes more difficult during times of volatility.

Key Takeaways
  1. Opportunities for profitable growth are abundant for insurers with the insights and agility to execute and generate sustained high performance.
  2. Higher growth rates can equate to higher returns for mature risk portfolios. Conversely, carriers with low growth often struggle to cover their cost of capital.
  3. Insurers that consistently out-perform through the cycle share common traits and have invested in technology and people to capture data to inform better decisions.

As talk turns to market equilibrium and stable rates, how can insurers continue to respond to customer demand while covering their cost of capital and remaining sufficiently profitable? Evidence-based decision frameworks can help leaders make better decisions with clarity and confidence, even in the most challenging environments.

Growth Opportunities: The Protection Gap and Transformative Trends 

There is no shortage of opportunity for those seeking first-mover advantage. According to Aon’s 2024 Climate and Catastrophe Insight report, only 31 percent ($118 billion) of the economic losses in 2023 ($380 billion) were covered by insurance. This 69 percent protect gap highlights the opportunity to support global communities. 

Transformative trends are also shaping the future risk landscape, creating $200+ billion of market potential for insurers by 2030, as identified in Aon’s whitepaper. Addressing these trends will enable insurers to respond to evolving customer demand, while increasing the industry’s relevance, growth and diversification. 

Addressing the Risk and Reward Trade-Offs

Insurance leaders are tasked by their boards and shareholders with maintaining hard-fought gains and delivering profitable growth. This is heightened in a market where pressure is building from evolving risks that range from climate to geopolitical tensions. 

Against this challenging backdrop, how do insurers:

  • hold on to profitable and strategically important business when the supply of capital is outstripping demand and placing downward pressure on rates? 
  • deal with problematic areas before they become detrimental to the performance of the company? 
  • identify new opportunities to diversify and establish future sources of profit?

What Makes Insurers Best-In-Class? 

Aon analyzed the performance of 100 (re)insurers across the globe operating in different segments of the property and casualty insurance market. The results show high variance in return on average equity, which is important as it measures the performance of a company based on its average shareholders' equity. 

Higher growth is correlated with higher returns, especially when insurers reach a level of scale and maturity. The study also found that size is not the primary determinant of success and that insurers can deliver impressive returns with selective and client-focused strategies.

Global (Re)Insurer Return x Growth Matrix

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Only a few companies are achieving spectacular return on average equity. Aon's analysis identified the key seven traits of these outperforming companies:

  • Risk appetite: Clarity on risk tolerance, well-defined risk appetite and corresponding portfolio strategies
  • Speed and agility: Fast to enter and expand in new risk categories; the first-mover advantage is pronounced with long-term financial benefits
  • Data and analytics: Advanced analytics capabilities with high-quality internal data, augmented by data ingestion from multiple third-party sources and supported by investment in state-of-the-art technology 
  • Underwriting: Innovative underwriting techniques that reduce cost of acquisition through automated underwriting, use of delegated authority to third parties like managing general agents (MGAs) and participation in broker facilities
  • Talent: Top underwriting, claims and actuarial talent united in achieving the same purpose for the company; attracting diverse talent with expertise from industry or in vital areas like data science
  • Distribution: Excellent distribution management capabilities to guide underwriters to areas of greatest opportunity and to help brokers and clients manage through tricky renewal periods, maintaining relevance while setting expectations in advance and limiting unwelcome surprises
  • Capital: Sophisticated, analytics-driven strategies that flex between available sources of capital —reinsurance, debt and equity — in response to market conditions. Aligning capital decisions to an insurer’s risk appetite/tolerance, including the strategic use of reinsurance, leads to more consistent results over time  

Evidence-based decision making underpins these seven categories and is critical to survival and success in volatile markets. 

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Leaders who have access to reliable and robust information and intelligence on their business and the changing context in which they operate, will be the winners.

Paul Campbell
Global Growth Leader, Strategy and Technology Group, United Kingdom

Lessons Learned from Lower Returns

Leaders who do not excel in evidence-based decision-making risk falling behind the pack, consistently delivering combined ratios that are multiple percentage points higher than the market

In the worst-case scenario, insurers can see uncontrolled performance deterioration. This occurs as rates become inadequate to cover expenses and the cost of capital. Additionally, signings may drop precipitously in the best performing areas of a portfolio, leading stakeholders to lose confidence in the leadership team's ability to match or stay ahead of the market. Share prices decline and capital is more difficult to attract — and the cost of capital goes up.

The bottom quartile performers over five years in our analysis have weaker growth records and returns on equity below the cost of capital. The insurers in this quartile also share common traits:

  • Risk appetite: Reactive to market conditions; risk appetite and portfolio decisions are often taken following shocks to results in segments or business units; constantly remediating parts of the portfolio, mis-timing exit and entry and missing out on profitable growth opportunities through the market cycle.
  • Speed and agility: Slow to respond to emerging trends and new opportunities; lingering caution from the past makes them reluctant to play in areas where they perceive outcomes to be too unpredictable; they lose out on early mover advantage in establishing market share or wait too long to take advantage of favorable market conditions.
  • Data and analytics: Rely too much on internal expertise and data and build technology in-house, resulting in insular and incomplete insights on risk and unwieldy legacy systems that are creating rigid and unresponsive processes
  • Underwriting: Believe strongly in the art of underwriting and their ability to pick and price the best risks in the open market; suspicious of automated and algorithmic underwriting, broker facilities and follow-market plays.
  • Talent: Struggle to attract top talent and dependent on long-tenured staff; do not tend to bring in as many people with backgrounds from outside the insurance industry; have reward structures that create silo mentality and aversion to risk-taking.
  • Distribution: Allow line underwriters to control independently broker and client relationships with a view to maintaining objectivity and autonomy in risk selection and pricing; this can limit information exchange and leave underwriters making decisions without consideration of portfolio effects and with incomplete data; and it can bring uncertainty and unwelcome surprises into the renewal process for clients.
  • Capital: Inconsistent reinsurance strategies and unstructured decision-making lead to higher costs of capital. Poor data quality and lack of transparency with reinsurers can create a lack of trust, a more opportunistic approach and lower quality panel.

Leadership teams of insurers with historically weaker performance face many challenges. They need to drive hard for growth without risking debilitating results. Gathering reliable insights to make the right decisions on where to invest energy, resources and capital for the best returns is a good starting point.

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It’s important to set a coherent strategy, risk appetite and target portfolio so leadership teams can proactively manage expectations of stakeholders. Those who act fast stand the best chance of setting a trajectory to top quartile performance.

Paul Campbell
Global Growth Leader, Strategy and Technology Group, United Kingdom

Three Actions to Take Today to Sustain Profitable Growth

The best insurers make forward-looking decisions grounded in data and analytics. Leaders do the hard work to structure a clear-headed approach to sustaining profitable growth, putting them in the best possible position to protect and maintain their results through the market cycle. These three steps can help guide you along the way:

  1. Define a clear strategic vision: What do you want to be known for? How do the clients and the market see you today? What are the key characteristics to be successful? Identify sources of data on market opportunities and build robust profitable growth strategies.
  2. Invest in data and analytics: Recruit data and tech savvy people from outside the industry if necessary and upgrade technology to augment decision making across the business, especially at the point of underwriting.
  3. Create an enterprise profitable growth capability: Bring together cross-functional expertise and be scientific about growth. Examine all the inputs required for a robust decision-making framework to maximize returns on capital
Aon’s Thought Leader
  • Paul Campbell
    Global Growth Leader, Strategy and Technology Group, United Kingdom

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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