Productivity is key for Australian insurers as they seek sustainable earnings in the face of rising underwriting expenses, McKinsey & Company says in a new paper.

Underwriting costs have risen about 20% over the past seven years as insurers invest in risk and compliance capabilities and modernise technology in response to increased climate and general risks.

“Much of this investment is ongoing and has yet to deliver meaningful productivity benefits,” McKinsey says.

“With a challenging outlook coming into view for the Australian insurance sector, the time to act is now.”

The consultancy says the industry should target efficiency gains across labour, IT and third-party spend, which are labelled the three major productivity levers.

“As markets soften, insurers are likely to increase their focus on efficiency and productivity over the next three to five years. Productivity is not a new topic for Australian insurers. Businesses have restructured, changed operating models and set up capabilities overseas to deliver incremental improvements.”

McKinsey says a focus on the three levers could drive down costs by 15%-30%.

“Globally, insurers have demonstrated the capacity to deliver step changes in their cost base. Moreover, with accelerated technological developments, the potential to do so in a sustainable and rapid way is greater than ever.”

Click here for the report.