Worsening affordability looms as a major test for insurers after they relied mainly on rate increases to drive premium growth, McKinsey & Company says in a global report.

In Australia, rates for home and motor cover rose nearly 13% last year, mirroring trends in other developed markets.

In the US, the world’s largest personal lines market, motor prices surged 16%.

“Thus, consistent with North America, many other mature markets did not expand coverage to new customers or new risks,” the report says. “Growth has been fuelled by rate increases.”

The report says affordability strains will continue and may emerge in more regions, as the cost of cover is not expected to ease.

Rising asset prices, increased repair bills and higher reinsurance rates have added to the cost of providing insurance.

The report says Australian house prices have increased 35% since 2019, with implications for the industry. 

“Underlying asset prices have risen and increased total insurable value. While we expect asset prices (and total insurable value) to normalise relative to income, climate change and resulting increases in physical risk will continue to pressure affordability in select markets.

“The challenge for the industry is to find ways to continue offering affordable insurance.”

McKinsey sees opportunities for the industry to innovate, expand coverage and increase its relevance despite the challenges.

An ageing population and evolving customer purchasing patterns present opportunities to rethink capabilities and offerings, while new technology – particularly generative AI – and distribution can be used to spur innovation.

In Australia, distribution beyond banks has accelerated as customers grow accustomed to buying insurance online. Digital sales accounted for 31% of premium last year, up from 16% in 2019.

“Distribution is getting closer to the customer as players embed the purchase of insurance into broader purchases of goods and services. New mobility models will force carriers to rethink their approach to distribution, pricing, product design and claims processing. 

“We are positive about the industry’s outlook as it pivots toward sustained, profitable growth.”