Preparing for Digital Disruption
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.
“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 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.
“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.