McKinsey believes the third European Community insurance directive next year will cause 'another brutal increase in competition that will put in jeopardy the fortunes of the majority of Europe's traditional insurance providers'.
The traditional multi-line insurers are expected to suffer a collapse in profits as they lose business to low- cost specialists such as Direct Line.
Customers' increasing concern about insurance costs will encourage them to seek cheaper cover or to opt for self-insurance, leading to a 20-25 per cent fall in premium volumes.
Michael Muth, a McKinsey director, expects that many insurance companies will be taken over by rivals and by other financial institutions.
The new owners will maintain the distribution networks but will close back-office administrative activities. Writing in the latest edition of the McKinsey Quarterly, Mr Muth says insurers are poorly placed to respond to the challenge.
Instead of having a flexible, small- company ethos with close links to their markets, 'Their situation today is virtually the opposite: a gigantic, all-powerful head-office, a functional orientation, an organisation structure with six to eight layers that removes managers from the front line of the market and delays business decisions, and a strong cultural bias for volume instead of profit.'
Dealing through agents and brokers has left insurers out of touch with their customers. 'There is no other industry in which so little information exists about customer needs,' Mr Muth writes.
He believes composite insurers must move away from attempting to offer all kinds of cover, and concentrate on those areas where they have an advantage and are able to become market leaders - becoming 'multi- specialists'.
Past success has made insurers 'unduly conservative and cautious about change at a time when radical new thinking is imperative. Data from the leading business schools show that talented young managers avoid careers in insurance . . . . All this will have to change.'
Although General Accident, Commercial Union and Royal Insurance will this week report much-improved results after the huge losses of recent years, Mr Muth said even a full recovery will not make the UK industry very profitable.
Mr Muth does not agree with those who believe that the leading UK insurers are too small to compete with the giant European insurers like Allianz, Generali and Union des Assurances de Paris. He believes an important benefit of size will come from sophisticated analysis of risk, enabling better underwriting.Reuse content