Rising take up of electric vehicles (EVs) is just one of many challenges facing property and casualty (P&C) insurers in Australia and other developed markets in Asia, consultancy McKinsey says in its latest report on the sector.

Worsening loss ratios, slowing premium growth and a rapidly changing business landscape are other hurdles that can mar long-term earnings if insurers fail to respond appropriately, according to the Global Insurance Report 2023: The future of Asia P&C Insurance.

“The Asia property and casualty sector is at an inflection point…Asia’s industry has seen a slowdown in growth, variation in profitability, and fragmentation across most markets,” McKinsey says.

“A more profound issue is the sector’s deteriorating profitability, especially in the more developed segments of Asia.”

The consultancy says the emergence of formidable challenges, such as a surge in catastrophic claims and the relentless escalation of operational expenses, has exerted substantial pressure on the sector’s financial health.

“Simultaneously, newer and more complex risks are surfacing – most notably, the growing prevalence of cyberattacks and the rapid adoption of EVs.”

McKinsey says these emerging risks amplify the need for robust insurance solutions capable of adapting to an ever-shifting landscape of threats and vulnerabilities.

Loss ratios in Australia were especially high, says the consultancy. From 2019 to 2021 Australia’s loss ratios exceeded the average of the past 12 years.

On EVs, the McKinsey report says adoption of battery-powered vehicles has grown significantly in Australia and this has created new challenges for auto insurers and direct complications for claims management.

“To start, EVs tend to have a different risk profile than internal combustion engine (ICE) cars,” the report says.

The majority of EVs are newer vehicles with pre-accident values about 50% higher than ICE vehicles. EV repairs also take 14% longer to complete and are 25.5% more expensive than repairs on ICE vehicles.

“Based on these trends, insurers need to fundamentally rethink two dimensions of auto insurance: product and pricing, and distribution,” says McKinsey.

Insurers also need to think about increased climate risks, cyber risks, and other operational challenges as these factors will have an increasingly significant impact on their businesses.

“To compete, insurers need to improve their risk management capabilities, develop products, and generate value from these emerging risks by gaining a deeper understanding of market dynamics and solidifying their market position in this space,” says McKinsey.

Australia is categorised as a developed market along with Hong Kong, Japan, Singapore, South Korea and Taiwan in the McKinsey report.

In Australia the top five P&C insurers combine for 69% of gross written premiums in 2021, down from 75% in 2016.