Drawing Lessons from the Past to Chart a Course for Insurers

Drawing Lessons from the Past to Chart a Course for Insurers

          
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Drawing Lessons from the Past to Chart a Course for Insurers

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  • The Boston Consulting Group began publishing its Collateral Damage series in October 2008. The publications track the evolution of the financial crisis and set out some practical steps that companies need to take in order to survive and thrive. This is our second Collateral Damage paper on the insurance sector.

    This paper presents success factors drawn from past crises. By looking at history, insurers can gain a clearer understanding of how this crisis will continue to affect their sector, along with the steps they must take to emerge from the turmoil as stronger competitors.

    The insurance sector has been hit hard by the financial crisis. Globally, it has lost about €800 billion in market capitalization since the end of 2007. Market values are down an average of 65 percent in the United States, 60 percent in Europe, and 48 percent in Asia. The root cause is often attributed to the most conspicuous asset bubble—the U.S. housing market—but that was not the only cause of the crisis. Other asset bubbles (such as stock markets and housing markets outside the United States) also contributed, and there are concerns that some have yet to deflate. A major contributor to these bubbles was the wide availability of cheap funding driven by the persistence of low interest rates over the last few decades.

    The financial crisis has had a profound impact on economies around the world. Problems in the U.S. real-estate market precipitated a liquidity crisis in the global banking system. Credit dried up for businesses and consumers alike, and demand plummeted. Industrial production, purchasing, and eventually trade declined drastically. Companies have been overwhelmed by the direct consequences of the downturn as well as by the uncertainty that continues to cloud the future. Over the last several months, institutions such as the IMF have repeatedly had to downgrade their economic forecasts.

    The crisis has created difficulties for the insurance sector, particularly life insurers. Compared with P&C insurers, life insurers are more dependent on asset returns and have less flexibility to change payout rules or pricing. Moreover, sales of new life-insurance products have fallen dramatically in many countries. The declines have been sharpest for unit-linked life products, which happen to carry low risk for the insurer. Rattled by the crisis, consumers are gravitating toward traditional insurance products and variable annuities, which hold considerably more risk for the insurer.

    The financial crisis and the economic downturn continue to raise troubling questions for life insurers. How will events develop? Which scenarios are likely to unfold and what will these mean for their businesses? What steps can they take now to overcome the turmoil and position their companies for growth? To answer these questions, we analyzed some of the most severe crises of the past century and their implications for life insurers in particular. Although the current crisis is often described as unprecedented—and it is unique in many ways—there are important parallels with the past.

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