The insurance industry has proven its resilience in recent years, weathering billion-dollar natural catastrophe events, increased cyber risk and now a pandemic, but this resilience will be tested unless insurers can adapt to the fast-changing risk landscape, says a new report by McKinsey & Co.

Insurers will need to reinvent themselves across the value chain to stay relevant, says McKinsey, identifying several forces that will shape the industry in the years ahead:

• Risks are becoming more complex due to technological advancement, changing customer behavior and expectations, cyber threats, and the economy’s evolution. These changes have placed increased importance on product innovation, intangible assets and compliance. P/C insurers will need to adapt their go-to market strategies, embrace modularity in their product offerings, reallocate capital between personal and commercial lines, and compete to insure new types of risks such as machine-learning liability.

• Catastrophe losses are getting higher and the majority remain uninsured, often forcing governments to provide post-disaster relief for uninsured losses or even subsidize insurance or reinsurance. An industry-wide coalition and more collaboration with governments and regulators can help P/C insurers better address natural disasters and climate risk. Carriers will need to overcome behavioral biases in risk selection and pricing. In high-risk areas, insurance may need to become mandatory, and using an opt-out option rather than the current opt-in would also significantly increase insurance penetration. Stronger public-private collaboration can clarify what is insurable and not, by whom and under which conditions, and who will pay for future losses, while government insurance voucher programs can help address affordability issues.

• A shift to solutions and service as well as the growth of ecosystems is reshaping distribution. Carriers will need to look at their relationship with end customers in the context of purchasing journeys (buying a car, going on vacation, buying a home) and decide how to embed solutions and services alongside insurance coverages. Insurers must sharpen their value propositions and reconsider their cost structure and capital allocation if they want to differentiate themselves.

• Almost a quarter of P/C insurance jobs could be displaced by automation by 2030, and the remaining roles will require higher digital proficiency. Leaders will need to focus on building the talent and expertise needed to integrate technology into operations and support customer engagement. Insurers must enhance their value proposition to attract the next generation of employees.

The report is: State of Property & Casualty Insurance 2020: The Reinvention Imperative