Insurance Industry

Preparing for Digital Disruption

Carriers need to digitally design their entire customer journeys -- from considering a new policy to being reimbursed on a claim.
By: | March 22, 2017 • 5 min read

Are insurance companies prepared for digital disruption — and do they know what it really takes to completely transform their organizations?

If the insurance industry is to remain an important service to customers, then the reality and adoption of digital is critical, said Johannes-Tobias Lorenz, a senior partner in McKinsey’s insurance practice and one of the lead authors of the report, “Digital Disruption in Insurance: Cutting Through the Noise.”

“A straight-forward process for this kind of change requires all elements of the value chain to be rethought and new business models to be explored,” Lorenz said. “This is a hugely exciting, but challenging journey for companies, and so we’ve shared thoughts, experiences and some guidance on how management can drive the transformation.”

“Executives don’t know when disruption will happen, where it will come from,” said Tanguy Catlin, the report’s other lead author and a senior partner in the practice.

Tanguy Catlin, senior partner, McKinsey & Co.

“They don’t know how to digitize their operations, how to prioritize the millions of initiatives across their organizations, how to address challenges of legacy IT infrastructures – a long list of questions.”

There are advantages to being an early adopter. A recent McKinsey survey of more than 2,000 executives in industries affected by digital disruption showed that the companies with the highest revenue and earnings growth led the disruption or were fast followers, “making big bets across their businesses on innovative products, digital processes, and even entirely new business models.”

McKinsey’s report and related articles on its digital disruption website provide “a comprehensive framework for how to finally make sense of this so-called ‘digital transformation,’ ” Catlin said.

Insurers first need to develop a “digital strategy” to determine how to capture value and reduce risks, Catlin said.

Companies can capture value by digitizing their existing businesses to make them faster and more efficient for customers, but they can also capture new value by innovating their business models, products and services.


As part of their digital strategy, companies need to invest in certain foundational capabilities, including technology, analytics and “design thinking — a way of getting much closer to what the customer needs,” he said.

As part of this, companies need to build their “digital DNA.” This requires evolving their culture, upgrading their talent and adopting agile operating models. Finally, insurers must create a roadmap for the transformation so it will have maximum impact.

Digital Trends

Digital disruption is forcing insurers to contend with three trends:

  • A shift toward preventing risk rather than insuring against it;
  • The increasing power of those companies that own and analyze data; and
  • The investment of huge amounts of capital in insurance-related capital market instruments by institutional investors seeking high returns.

An example of focusing on preventing risk is the way auto insurers have promoted the work of manufacturers on collision avoidance, blind-spot assist and adaptive cruise control to be fitted into new cars.

By 2020, 20 percent of vehicles globally are expected to come with safety systems, reducing the number of accidents and “thus the value of personal auto insurance policies,” according to McKinsey.

“Entirely self-driving cars could become ubiquitous in the next two decades, at which point liability is likely to shift from individual drivers to manufacturers,” the authors wrote. “In the United States, we estimate auto insurance premiums could decline by as much as 25 percent by 2035 due to the proliferation of safety systems and semi- and fully-autonomous vehicles.”

The woes of reinsurers as institutional investors pour money into insurance-linked instruments on the capital markets should be a cautionary tale for the primary markets, McKinsey said.

Advances in digital technology could disintermediate the primary markets, it said.

Johannes-Tobias Lorenz, senior partner, McKinsey & Co.

“It is conceivable, for example, that a manufacturer of sensors that gather data about weather conditions in order to optimize fertilization could turn to investors to back an insurance product for crops, using the same sensors to indicate whether weather conditions were harsh enough to damage them,” the authors wrote.

Insurers can accelerate innovation by forming strategic partnerships, investing in startups that have digital expertise and/or by creating in-house expertise, according to the report. They can use all three approaches, but are likely to emphasize one or another for strategic reasons.

“There are some things we want to do ourselves from scratch, and we have the capabilities, but sometimes we take equity investments,” according to Aviva’s chief digital officer Andrew Brem, who is quoted in one of the report’s articles.

“There isn’t one size fits all. Depending on our situation, we will partner, we will invest, we’ll build ourselves. And that gives us all ways to plan.”

An example of a strategic partnership is a joint venture between Allianz SE and Chinese internet firm Baidu, which enables the German-based insurer to customize offers by using data on consumers’ online behavior, such as promoting flight insurance to those who have purchased plane tickets.

“This not only gives Allianz a new way to sell insurance, it also grants the company access to the vast Chinese market, which it had trouble cracking on its own,” according to McKinsey.

The authors pointed to a few examples of insurers investing in digital startups, such as AIG’s bet on Human Condition Safety, a provider of wearable devices aimed at maintaining workplace safety; or Hartford Steam Boiler’s (HSB) investment in Augury, which uses sensors and analytics to monitor heating, ventilation and air conditioning systems, improving maintenance and helping to prevent breakdowns. HSB already uses drones for site inspections.

Innovation labs are also a growing trend. Insurers like AXA, MetLife, and Aviva have set them up “with a mandate to coordinate the development of ideas and support the scaling-up of the most promising ones,” the authors wrote.


Carriers need to digitally redesign entire customer journeys — from the moment a customer considers taking out a new policy to the moment of purchase, or from the moment a customer needs to make a claim to the moment of reimbursement, according to McKinsey.

That necessitates an integrated approach: the digitization of customer-facing processes and the seamless automation of back-end ones.

“Simply hooking digital assets — a digital sales channel or a snazzy new service app — onto an analog business model does not make a digital business,” the authors wrote.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

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The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.


R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.


R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]