McKinsey Global Insurance Report 2023

Over the past decade, our publications have chronicled the increased instability the life insurance and retirement industry has experienced. They’ve also reckoned with the trends that have been causing industry players to rethink their operating models, such as digital transformations; the rise of environmental, social, and governance (ESG) concerns; and the shifting economic environment. More important, they’ve worked to inspire insurers to consider new avenues for value creation.

In February 2022, the inaugural McKinsey Global Insurance Report offered a comprehensive overview of the challenges and opportunities facing the global insurance industry.





The 2023 report will be released in chapters and builds on that work with a new level of granularity and precision of recommendations for how insurers can accelerate growth and exceed performance targets.

This chapter covers life and retirement, including the major forces at play in the current life insurance industry, several ways insurers have adapted, and opportunities that life insurers and stakeholders can consider going forward—as well as the fundamental implications for their business models as a result.

Four paramount forces creating opportunities and obstacles for the industry

Over the past decade, the life and retirement industry has experienced increasing instability. Four paramount forces will continue to shape the industry globally over the coming decade.

1. Growing awareness of personal risk, and uncertain availability of socially funded benefits

More citizens are realizing that they are personally responsible for their future health and retirement costs: advanced economies’ governments have become more indebted, and government health and retirement programs—such as the United States’ Social Security program and Japan’s National Pension System—are experiencing funding gaps, resulting in a nearly $41 trillion global pension gap.





This realization, however, is creating opportunity for insurers in the industry.

2. Near-term tailwinds from rising nominal rates, but real rates may remain low for long

Nominal interest rates will remain elevated in the foreseeable future as central banks look to get inflation under control. This is in sharp contrast to what we have seen over the past two decades, which have largely consisted of quantitative easing and ultralow nominal rates. In the near-term, life insurers may use these tailwinds to passively capture growth opportunities, especially as asset rotations on the investment side happen quicker than adjustments on the liability side, which results in higher spread.

3. The growing role of technology

Customer expectations are increasing when it comes to level of service, including the desire to integrate digital technology with conventional products. As such, many companies have shifted their business models to increase their adoption of disruptive technologies such as cloud computing and applied AI and have used more agile ways of working, as well as new talent attraction strategies.

4. Rise of Asian economies and the return of geopolitics

A new middle class has begun to emerge in Asia and other developing economies. In China, India, and Southeast Asia, the middle-class population is projected to grow to 1.2 billion people by 2030 and make up nearly 14 percent of the total global population.





However, seizing the full potential of these opportunities won’t be easy given renewed geopolitical risks and concerns.

An industry at the crossroads

These forces have been affecting industry performance, shifting the sources of value creation and accelerating structural changes. A look at the current dynamics in the industry offers a compelling case for action.

Disappointing performance and declining industry relevance

A confluence of factors, some in direct control of life insurers and others exogenous, has deeply affected the industry’s performance in recent years.

Nominal GDP growth has far outpaced premium growth. Life insurers have faced several challenges delivering growth and returns. In the past two decades, economies grew faster than insurance premiums, indicating insurers haven’t been growing at the same rate as the economies in which they operate. In the United States and Europe, nominal GDP grew at a CAGR of 4 percent over the past 20 years, but premium growth grew at a CAGR of 2 percent. In Asia (excluding Japan), economies grew at a CAGR of 10 percent while premiums grew just 3 percent.

The industry has struggled to generate returns in excess of cost of capital. Over the same period, the industry struggled to generate profitable returns after the cost of capital. Insurers have also struggled to change their performance relative to peers: of insurers that were in the bottom quintile of performance, nearly two-thirds remained in the bottom quintile ten years later.

Carriers have still not structurally addressed their cost base. Compared to other industries, life insurers have still not structurally addressed their cost base. Since 2003, costs as a share of revenues have increased by 23 percent for life insurers—compared to a 5 percent increase for P&C insurers—while other industries, including asset management, have been able to address costs. While these structural costs have been rising for two decades, the imperative to address them may have arrived.

Life insurers’ relevance in capital markets has declined. The lack of returns after cost of capital, muted growth, high volatility in earnings, opacity of risks and sources of earnings and value, and lack of individual insurer performance mobility have caused the global life insurance industry to gradually lose its relevance with investors, particularly in the public markets. This trend is most apparent in the United States, where the largest US life insurers’ share of market capitalization relative to other financial-services peers has decreased over the past 35 years—from 40 percent in 1985 to 17 percent in 2005 to only 9 percent in 2020. This is according to McKinsey analysis of data of the top 20 publicly traded life insurers, banks, and asset management and securities brokers in the United States.

Sources of value shifting

The value pools and sources of creation across the life insurance industry are not homogenous. Carriers face choices in products, components of the value chain, and geographies.

Huge dispersion in growth hot spots. While overall industry performance has been disappointing, across the globe there are some notable pockets of growth and opportunity. In the United States, products that provide principal protection with some upside based on market performance (fixed and fixed-indexed annuities and variable universal life, for instance)—as well as simple, protection-oriented products (such as accident and health products distributed through worksite channels)—are expected to grow more than 5 percent between 2021 and 2026. Over the same period, market-oriented annuity products where the customer bears most or all of the risk are expected to decline by more than 5 percent.

Value creation shifting to investment alpha. As interest rates have declined over the past two decades, the importance of investment alpha as a source of competitive advantage has increased. Despite near-term nominal tailwinds, low-for-long real rates will continue this shift toward investment alpha. Returns on conservative investment allocations have plummeted below the cost of holding traditional insurance liabilities, and in an environment in which it is cheap to raise capital, life insurers gain competitive advantage from growing high-yield assets.

Carriers are now weighing the risks and fiscal costs to operate in developing economies. Companies have started to rethink what it means to be a “global insurer.” Historically, life insurers looked toward markets that were similar to theirs—which also tend to be closer geographically—to expand market share and drive top-line growth. As technological advancements accelerated the globalization process, insurers began to expand globally, particularly into Asia, to diversify their portfolios and increase valuations. As the economics of the world have changed, insurers are weighing the risks and fiscal costs to operate in several regions.

Big structural changes in motion

Entrants and new sources of capital are disrupting and pushing the structural evolution of the sector.

Private capital–backed platforms gaining relevance. The past decade has seen a continuous rise of private capital–backed platforms—typically fully or partially owned by alternative asset managers, which find the life insurance industry attractive for several reasons. Primarily, they’re enticed by the opportunity to drive improvement in performance and by the potential to access “permanent” capital in form of a stable pool of liabilities, which can be deployed into various asset strategies, from traditional fixed income to more structured products or alternatives.





In turn, they can generate more predictable fee-based earnings streams while reducing the overall fundraising burden. In the United States alone, private capital–backed platforms account for almost $292 billion in general account reserves, making up about 9 percent of the industry stock, according to our analysis. These platforms also have significant market share in some categories of new business generation: among the leaders within each product line, private capital–backed platforms accounted for 40 percent of fixed-indexed annuities sales in 2021, up from 7 percent in 2011, and 19 percent of fixed-rate deferred annuities sales in 2021, up from zero a decade prior.

Structural shift toward more independent, third-party distribution. In recognition of the power of earning streams from distribution, investors have tended to reward the capital-light earnings generation of pure-play distributors, such as brokerages, independent marketing organizations, and field marketing organizations. Those players have generated 2.6 times the TSR of life insurance companies since 2010 and currently trade at nearly 2.8 times the price-to-earnings multiple of their life insurance counterparts.

Beyond continued innovation and the shift in value toward distribution, the industry is also experiencing a structural shift toward more independent distribution. Many companies have moved away from captive or affiliated distribution because of the increased commoditization of many insurance and annuity products and the increasingly open technology architecture and choice offered by insurance distributors. In the United States, third-party distributors are increasingly becoming more dominant, expanding their share of the market from 49 percent in 2010 to a forecasted 55 percent in 2021; conversely, proprietary distribution networks are declining in prevalence, from 30 percent to 26 percent during the same time period. In Europe and Asia, we can see a similar—although smaller—increase in third-party distributors. In the same timeframe, Europe increased its market share from 17 percent to 18 percent, and Asia increased its share from 8 percent to 11 percent. Within Asia, the share of third-party distribution is still low overall, and select insurers with high-quality, proprietary distribution will continue to see high value creation from this model.

On the horizon: Fundamental reimagination of life insurance business model

Insurers will have a dizzying number of options available to them in the coming years—as will investors. In the balance of this report, we detail how insurance companies will shift their priorities in the near future and how different types of insurance models can help determine how best to meet the objectives of their investors. The question is clear: what strategic strengths can insurers depend on to generate growth in the coming turbulence?

Four ‘unbundled’ business models to drive value creation

Traditionally, insurers have achieved profit and growth by identifying attractive products and markets, such as individual protection and annuities, and structuring their end-to-end value chain to support these products and markets. Ownership of most of the value chain was important to simplify operations and maintain control over the end-customer experience. Today, the industry is reconsidering this approach to the value chain in two notable ways: product bundling and functional unbundling.

When it comes to products, those that meet the needs of the same customer segments—such as retirement and wealth and asset management services or group and retail sales—are converging, which is pushing insurers into new territory. Some insurers will even go so far as to branch into the health and protection ecosystems if there is a demand from their customers.





Insurers are also expanding and evolving their product shelf, shifting the mix away from traditional and balance sheet–heavy products to capital-light products and combining distribution points to create a simpler, more integrated customer experience.

Looking ahead, insurers will increasingly “unbundle” their value chain and focus on sources of distinctive value creation while seeking partnerships or leaving the other parts of the value chain to those who are advantaged. Unbundling helps uncover value within the integrated business model and focuses on distinctiveness while creating new sources of growth and value.

Four insurance functions will take center stage during this change: product design and underwriting, balance sheet management, distribution, and technology and administration. Insurers can start by determining how the strengths of their business model map to these four functions (exhibit). Balance sheet specialists, for example, might consider finding a distribution partner, while distribution specialists tend to be best served by partners in product design and underwriting or balance sheet management. Those insurers can then use those strengths to differentiate themselves, achieve profitable growth, and appeal to investors.

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Imperatives and priorities for life insurers

This shifting industry structure will create new opportunities for where and how life insurers create value, elevating the industry’s relevance to consumers and its attractiveness to investors. Insurers will have to chart a course through these shifts and choose their mode of value creation, which will be partly informed by their organizational goals and investor expectations. In the life and retirement industry, six themes dominate the investment attraction agenda: top-line or market share growth, diversification (via geographies and products), societal and customer impact, low volatility of results and dividends, ROE, and capital generation.

Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners. Even within the broader classifications of insurers, however, individual insurers will have unique situations—and thus unique expectations. Below we offer a simplified overview of how four broad insurance models could respond to organizational goals and investor expectations by using their strengths to differentiate themselves in the industry.

Insurers backed by private capital and alternative-asset-management players. As they look to the future, these insurers will want to proactively develop new growth vectors, such as more flow-based business beyond pure legacy M&A and international or geographic expansion. They may also continue to strengthen risk management capabilities (given the relatively higher-risk profile of their investment portfolio), further enhance their investment management capabilities through more dynamic portfolio rebalancing, and develop additional sources of value creation beyond pure investment alpha (for example, by becoming more ingrained in operations and technology to find value).

Mutuals. As they look toward the future, mutuals may want to innovate more in their product offerings to capture growth through distinctive product specialization that better matches customer needs, as well as to transform their distribution and customer engagement capabilities. They also might have to focus on their operational efficiencies to bring down costs and focus on their quality of governance to improve productivity and capital allocation.

Stock-traded insurers. Going forward, stock-traded insurers need to address the issue of where they have unique competitive advantage and can generate capital, such as in certain geographies, lines of business, or parts of the value chain. For example, these insurers may build or partner with others to achieve table stakes investment-management capabilities, which would help them compete with insurers backed by private capital or alternative-asset-management players and take advantage of opportunities that others are slow to capture. They might also want to find innovative ways to harness their growth opportunities and ensure they are properly valued by investors.

State-owned insurers. As demand for life products changes and becomes more specific for each consumer, state-owned insurers should develop innovative products that are better suited to evolving customer needs. They also need to keep up with the pace of digital transformation seen in the private sector, all while balancing these large investments with their solvency position. Finally, these insurers may have to address talent attraction—for example, to improve their underwriting capabilities and compete with insurers in the private sector.

Life insurers have responded to broader trends and industry shifts by reevaluating their traditional business models. The industry will face persistent challenges in the coming years, such as returns after cost of capital and geopolitical risks, as well as new challenges and uncertainty, such as high inflation and volatile macroeconomic environments. Nonetheless, there are pockets of optimism and opportunity for those who can identify, invest in, and capitalize on their distinctive capabilities to meet the expectations of their owners and stakeholders. Ultimately, a changing industry landscape can allow insurers to overcome current performance challenges by transforming both where and how they generate value.