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Life Insurers Should Focus on Focusing: McKinsey

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What You Need to Know

  • The consultants say making deals for the sake of growth has worked poorly.
  • They think life insurers should focus on what they do best.
  • They warn that if life insurers fail to act, asset managers, wealth managers and private equity firms could absorb the life insurance industry.

For life insurers, making acquisitions for the sake of getting bigger is often a bad idea, according to consultants at McKinsey & Co.

The consultants — who would like to help life insurers buy and sell businesses — talk about how life insurers should make deals now in a new global insurance report.

The report includes tables and charts. One chart, for example, shows that the five biggest U.S. life insurers generated only about 30% of 2020 U.S. life insurance premiums. The U.S. life insurance market was by far the least concentrated of the 12 national life markets included in the chart.

But the heart of the report is sections on how insurance company managers should improve their businesses.

The consultants look at the strategic imperatives, such as soft demand, low interest rates and changing accounting rules, that are shaping life insurers’ game board.

“Revenue growth is limited in most regions,” the consultants write. “Scale economies are proving elusive; and productivity is quite stagnant. As a result, economic profit — that is profit after cost of capital — in the insurance industry is practically at a standstill.”

The consultants then talk about “focusing the portfolio.”

The consultants note that efforts to increase size was a primary goal for 60% of recent acquisitions.

“The results have been meager,” the consultants say. “Scale does not seem to be producing higher return on equity. It turns that trying to achieve scale on a global scale has been a recipe for becoming average.”

Eventually, the consultants warn, wealth, asset management and private equity firms could take control of the life insurance industry.

The consultants suggest that, instead of trying to get bigger, life insurers should make deals that help them:

  • Focus on what they do best.
  • Outsource what they do poorly to other companies.
  • “Insource” what they do very well, by selling great, low-cost support services to other companies.
  • Expand in businesses that are similar to providing life insurance, such as managing assets.

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(Photo: Emilia Mariana Ungur/Shutterstock)