The insurance industry has to change, and as KPMG points out in a report last week, minor tweaks just aren’t going to cut it.

The digital revolution and the increasing focus on customers, combined with the pressures of a soft market, have left the industry needing to reinvent itself in a hurry.

“[Insurers] will need much more fundamental changes to their business models and their operating models than ever before,” the report says.

“Success in the insurance industry of the future will not come from simply tweaking the status quo. Insurers will need to change virtually every part of their business if they hope to not just survive, but thrive.”

Some recent reports by insuranceNEWS.com.au suggest this is already starting to happen.

Munich Re is looking to bail out of primary insurance in Australia altogether, for example, and Zurich is taking the relatively radical step of merging its life and general operations.

As the pressure builds up, companies are indeed having to take radical steps to restore profitability. There’s little room for “carrying” loss-makers any more.

Munich Re candidly admits Great Lakes Australia (GLA), established in 2007, has not lived up to expectations. It didn’t get the profits it wanted, and in such a soft cycle, maybe that’s unsurprising.

GLA’s gross written premium last year was $500 million, but it made an underwriting loss.

JP Morgan believes the planned disposal will have negligible impact on financials for the group. “The decision to sell is a positive in our view, because it signals the group’s determination to focus on profitable operations,” it says in a note.

GLA provides capital for a significant number of underwriting agencies. Two of its biggest partners are major travel insurance and emergency assistance provider Cover-More and Calliden spin-off Calibre Insurance.

Its establishment in the Australian market wasn’t without its difficulties, and some industry leaders have always expressed reservations about a major reinsurer running a primary insurance operation.

In 2011 GLA’s new marine offshoot was effectively closed down less than a year after it was established, apparently in response to protests to Munich Re in Germany by European insurers with significant marine operations in Australia.

Market sources have told insuranceNEWS.com.au Cover-More felt it wasn’t getting enough out of its deal with GLA, and was “putting the squeeze” on the German company.

Certainly Cover-More has moved swiftly to say the sale will have “limited impact” on its business.

In a note to the Australian Securities Exchange, CEO Peter Edwards says there is an agreement in principle to move to a “less volatile” underwriting payment mechanism by July 1. This agreement also allows Cover-More to “explore commercial arrangements with alternative underwriters”.

Munich Re is already talking to potential GLA buyers, and wants the deal wrapped up as quickly as possible. But until that time, it has pledged to continue supporting its agency partners under existing agreements.

It says its exit from primary insurance is specific to Australia and New Zealand, and its global strategy remains unchanged.

However, in Europe it has launched a €1 billion ($1.52 billion) restructuring plan to return its regional primary insurer Ergo to profitability.

About 1800 jobs in Germany will be axed as a result.

“We believe the Great Lakes news means Munich Re is reviewing all its operations,” the JP Morgan report says.

It will be interesting to see where the GLA business ends up.

The Zurich move to combine the management of its life and general insurance businesses by July 1 is a global initiative, and local management has not yet detailed what this will entail in its regional operations, but it’s likely to result in change at the management rather than operational levels. Zurich is scrambling to become more efficient in its key markets and is dropping out of business lines where it doesn’t see sufficient opportunities.

Other insurers will follow Zurich’s example if the combined effects of a depressed investment market and intense competition don’t ease over the next 12-18 months.

We are likely to see further significant changes in the local market.

“Rates have been tough for a while,” one industry insider says. “There has got to be some pressure and clearly it is starting to have an impact.

“We could be at the cusp of some significant change.”

Most insurance companies are already undergoing that “significant change” as they struggle to keep up with rapidly developing challenges and opportunities.

For some, the level of change is as traumatic as it is dramatic. For others it’s more a case of tinkering at the edges – for now – and hoping the global economy recovers in time.

Standing still is no longer an option.