DIGITAL DISRUPTION IN INSURANCE: CUTTING THROUGH THE NOISE - MCKINSEY
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Digital disruption in insurance: Cutting through the noise
Contents
Preface 1
Facing digital reality 6
A strategy for a digital age 18
The age of innovation 27
Capturing value from the core 38
Partnerships, scale, and speed: The hallmarks of a successful IoT strategy 50
Modernizing IT for a strategic role 55
The promise of blockchain 66
The advance of analytics 72
The value of robotic process automation: An interview with Professor Leslie Willcocks 81
Building momentum for cultural change 86
A roadmap for a digital transformation 95
Digital Quotient: Where does your company stand? 106
Preface There is a lot of noise out there. Insurance CEOs constantly hear about digital marketing, digital distribution, digital IT architecture, and digital attackers, as well as digital technologies such as telematics, automation, and machine learning, to name but a few hot topics. What is harder for them to discern is the bigger picture. What does success look like for an insurer in a digital world, and how is it achieved? This compendium—“Digital disruption in insurance: Cutting through the noise”—helps paint that picture by drawing on McKinsey’s experience in the industry and that of some 30 executives whom we interviewed. Importantly, we spoke not just to incumbents but those who are helping to force change in the industry, including for example giant technology companies, companies that promote the use of data-collecting sensors in our homes and cars, and newcomers to insurance. All shared their insights on what is happening in insurance and why, and where success lies. The compendium’s underlying premise is stark—but some executives are beginning to face up to it. They know that staying competitive in a digital word will require far more than the addition of a direct sales channel or a few automated processes. Even the term “digital transformation” can underplay the response required, suggesting as it does that the change needed is purely technological. What is actually required is a fundamental rethink of the corporation, for which digital technology is but the catalyst. It forces companies to rethink the sources of revenue and efficiency. It forces them to rethink the organizational and talent model. And ultimately it forces them to rethink the business model and the role they will play in an ecosystem that cuts across traditional industry boundaries. They will have to reinvent themselves. Resistance to what lies ahead is futile. Insurance has been relatively slow to feel the digital effect owing to regulation, large in-force books, and the fact that newcomers seldom have the capital needed to take insurance risk on to their balance sheets. But the industry is not impregnable. Companies that fail to adapt will weaken under the pressure exerted by those that use digital technology to slash costs and get better returns on their investments. And they will be left floundering once digital’s relentless force ultimately breaches both the industry’s business model and boundaries. Already, in personal auto insurance, we see how sensors fitted in vehicles will be likely to put premiums under pressure as driving becomes safer. And we have only to glance at other industries to understand how, in a world in which data and analytics are king, powerful new digital competitors with large customer bases in their core businesses can rapidly invade new ones. Chinese e-commerce giant Alibaba now also owns one of the world’s largest technology finance company, with financial services and products that include insurance.
Acknowledging the urgency to undertake a digital transformation—both to reap its rewards and
fend off threats—is one thing. Knowing how to manage one is quite another. Ask any executive
who is the midst of the task, and they will attest that it is a formidable effort that touches every part
of the organization, and that there is no rule book that will guarantee an easy ride. This remains
virgin territory because no one in insurance has yet completed a transformation—it could take
as long as a decade. Nevertheless, lessons are emerging that will answer the burning questions
posed by those about to embark on the challenge, questions such as:
Where should I start, with cost-cutting or growth initiatives? And should I let a thousand flowers
boom, or pick selectively?
Do I need to rip out my IT systems and start again?
Do I need to set up a new, digital unit, and if so, will it cannibalize my other business?
How do I attract all that new, whizzy talent I will be needing—and will these newcomers really
understand what makes my company successful?
Do I need a chief digital officer?
Our heritage makes us risk averse. But now I am being told we need to experiment and
innovate. How do we change—safely?
This compendium explores the answers to those questions. We hope it will help executives
to understand where value lies in a digital world, at the same time as offering a clear, practical
approach for capturing it.
Tanguy Catlin Johannes-Tobias
Senior partner, Boston Lorenz
McKinsey & Company Senior partner, Düsseldorf
McKinsey & Company
Preface
McKinsey would like to thank these experts who shared their views on digital
developments in the insurance industry, helping to inform the articles in this
compendium.
Tom King Linus Lundberg Adam Lyons Bill Madison
Senior director Head of enterprise Founder and CEO CEO, insurance, for the
Pegasystems partnerships TheZebra.com risk solutions business of
Nest LexisNexis
Naveen Agarwal Brad Auerbach Sandeep Bakshi Andrew Brem
Chief customer officer US industry manager CEO Chief digital officer
Prudential Facebook ICICI Prudential Aviva
Eldes Mattiuzzo Steven Mendel Andrew Rose Marcus Ryu
CEO Co-founder and CEO President and CEO Co-founder and CEO
Youse Seguros Bought by Many Compare.com Guidewire Software
Matthew Donaldson Jennifer Fitzgerald Eric Gewirtzman
CEO CEO CEO
BGL Group PolicyGenius BOLT
Clara Shih Scott Simony David Stachon Jakub Strand
Founder and CEO Head of industry CEO CEO
Hearsay Google CosmosDirekt Allianz, Czech Republic
Stefan Heck Caribou Honig
CEO Co-founder
Nauto QED Investors
John Straw Leslie Willcocks
Investor Professor of technology, work,
Bought by Many and globalization
London School of Economics
Department of Management
4 Raising your digital quotient McKinsey Digital 5
Digital technology destroys value. 24-hour access and quick delivery, clear,
That might sound counterintuitive relevant information about a product’s
given the extent to which it can make features, particularly in relation to
business systems more efficient—and pricing, and innovative, tailored services
companies are urged to embrace its many designed for the digital age. They have
possibilities. Yet new McKinsey research the same expectations whatever the
shows that although digital technology service provider, insurers included.
propels some companies to become clear And as Matthew Donaldson, CEO of
market winners, for many more its impact UK-based BGL, the company behind
depletes corporate earnings and the the comparison site Comparethemarket,
overall value of an industry.1 Consumers, points out, although some insurers are
not companies, are often the ultimate holding back from the commitment
winners. needed to meet these expectations,
demand must ultimately be satisfied.
So it is likely to be in insurance. For a long
time, the traditional insurance business
model has proved to be remarkably Automation can reduce
resilient. But it too is beginning to feel
the digital effect. It is changing how
the cost of a claims
products and services are delivered, and journey by as much as
30%
increasingly it will change the nature of
those products and services and even
the business model itself. We firmly
believe that opportunities abound for
incumbent insurance companies in this
new world. But they will not be evenly
shared. Those companies that move
swiftly and decisively are likely to be those
Facing digital reality that flourish. Those that do not will find
it increasingly challenging to generate
In the shorter term, fulfilling this goal is
a chance for insurers to improve profits
attractive returns. in their core business. Higher customer
satisfaction, driven by the improved
A triple prize: Satisfied customers, service and faster processing times
lower costs, higher growth that digitization delivers, is itself a driver
Regulation, product complexity, and insurers’ large
of profit through increased customer
balance sheets have kept digital attackers from insurers’ The goal must be to meet customers’ retention.2 At the same time, by digitizing
gates. That is changing, but in ways incumbents should expectations, which have been their existing business, carriers can
transformed by digital technology. remove significant cost across the value
embrace. They can flourish in the digital age—if they move Customers want simplicity—one-click chain, further increasing customer lifetime
swiftly and decisively. shopping, for example. They want value. Automation can reduce the cost
1 Jacques Bughin, Laura LaBerge, and Anette Mellbye, “The 2 Alex Rawson, Ewan Duncan, and Conor Jones, “The truth
case for digital reinvention,” McKinsey Quarterly, February about customer experience,” Harvard Business Review,
2017. September 2013, hbr.org.
6 Facing digital reality Digital disruption in insurance: Cutting through the noise 7
of a claims journey by as much as 30 they take a guest through AirBnB, for want to take risk on to their balance insurance (Exhibit 2). They are not about to
percent, for example. example. sheets because of the capital they need overturn today’s value chain. But there are
to offset it. And they have the advantage longer-term trends afoot that might.
There are revenue improvement of underwriting skills built on years of
“Insurers of the future
opportunities too. The notion that experience and proprietary data. Eroding advantages
insurance is a low-engagement,
disintermediated category in which
customer relationships can be delegated
will play more of a This resilience explains why the industry
as a whole lags behind many other sectors
Insurers are threatened by three trends:
a shift toward preventing risk rather
to agents and brokers is increasingly risk avoidance role in its digital maturity. But the situation is than insuring against it, the increasing
and less of a risk
obsolete. Instead, digital technology and changing. Money now pouring into the power of those companies that own and
the data and analysis it makes available industry suggests it is no longer regarded analyze data, and the investment of huge
give insurers the chance to know their
customers better. That means they can mitigation one.” as impregnable. Venture capitalists
globally invested $2.6 billion in insurtechs
amounts of capital in insurance-related
capital market instruments by institutional
price and underwrite more accurately, in 2015, and nearly $1.7 billion in 2016. investors seeking high returns.
and better identify fraudulent claims. — Andrew Rose, CEO of (Exhibit 1). Although these newcomers are
They can also offer clients more tailored populating every part of the value chain, Risk prevention. Digital technologies that
products—auto insurance that charges US insurance comparison their focus to date has been on the more give rise to ever-increasing amounts of
by the mile driven, for example. And they website Compare.com easily accessible slivers of the industry— data and ever more penetrating insights
can offer them in a more timely manner. mainly distribution, particularly in P&C might make for more accurate pricing
In an analog world, an insurer will be
unaware when a customer holding a This is all good news for insurers,
home insurance policy puts that home particularly at a time when low interest
on the market. In a data-rich digital rates and tighter regulation constrain Exhibit 1
world, that need not be the case, and performance. But while opportunities
the knowledge that a home is up for abound, there is no guarantee that
sale becomes an opportunity to offer today’s incumbents will be the ones
The growth of insurtechs
Insurance tech funding, $ millions
new home cover, new auto cover, and to capture them. Digital is opening the
perhaps a life product to help cover a gates to new attackers that will erode
2,650
mortgage on the new house. their advantages.
Longer-term growth opportunities Attackers at the gate
reside in innovative insurance products 1,690
and protection services. Concerns Complex regulation was and remains
about cyber security will create demand a deterrent to new market entrants.
from companies and even households So is the size of incumbents’ in-force
for products that prevent and protect books which, coupled with customers’ 740
against the breach or loss of data, and tendency in P&C and particularly life
damage that might ensue. And more insurance not to switch providers, 223
products fit for a sharing economy makes it hard for new entrants to rapidly
will surely emerge—for homeowners capture market share. Moreover, 2013 2014 2015 2016
who suddenly become hoteliers when incumbents have the advantage of large
capital reserves, as start-ups seldom Source: CB Insights
8 Facing digital reality Digital disruption in insurance: Cutting through the noise 9
Exhibit 2
reduce maintenance and downtime, or business model, whereby premiums
improve health. This logically leads to a collected from low-risk policyholders
Where insurtechs are focusing model whereby consumers pay not for contribute to the claims of high-risk ones,
Share of innovations in Insurtech database premiums in order to be compensated for could fall apart.
Number of innovations as % of total in the database¹
10% damages they might incur, but for gadgets
or services that predict and help prevent Auto manufacturers are arguably close
that risk. “Insurers of the future will pay to changing the game for insurers. The
more of a risk avoidance role and less of fitting of connected devices as standard
8%
p&c 8% 4% 17%
4% 17%10% 10%7% 7% a risk mitigation one,” says Andrew Rose, in cars is not far off, potentially giving
CEO of US insurance comparison website manufacturers unique access to data that
Compare.com. The value creation from could accurately ascertain the risk of their
underwriting thus diminishes. customers, as well as ready-made access
health
5% 5% 3% 11%
3% 11% 8% 8% 6% 6% to drivers in need of an insurance product.
The power of data and its analysis. Data How would incumbents fare in such an
and analytics are changing the basis evolving ecosystem?
of competition. Leading companies
Leading companies
life3% 3% 2% 2% 9% 9% 5% 5% 2% 2% use both not only to improve their core
operations but to launch entirely new
business models. Insurers have valuable
historic data. Yet in a few years’ time, will are using data and
Product
development
Marketing Distribution Pricing² Claims they be able to keep pace and still add
underwriting value when competing with
analytics not only to
¹ ~500 commercially most well-known cases registered in the database (excluding wealth management related innovations)
newcomers that have access to more improve their core
² Includes underwriting and policy issuance
Source: McKinsey Panorama Insurtech Database
insightful, often real-time new data culled
from the Internet of Things (IoT), social operations but to
media, credit card histories, and other
digital records? Knowledge about how
launch entirely new
of risk, but they also help mitigate risk,
reducing premiums. Take auto insurance.
of safety systems and semi- and fully-
autonomous vehicles.
fast someone drives, how hard they brake,
or even (more controversially) what they
business models.
Forward collision avoidance, blind-spot get up to as displayed on social media is
assist, and adaptive cruise control are The same shift toward risk prevention is arguably more revealing data on which to Institutional investors. For more than a
already fitted in many new cars, making apparent in other sectors. In the home, assess risk than simply age, zip code, and decade, large institutional investors have
vehicles safer. Already, 20 percent of sensors can send an alert to the owner if past accident record. (Facebook recently been pouring money into insurance-
vehicles globally are expected to come a risk of flood is detected, automatically moved to prevent its users’ online activity linked instruments on the capital markets
with safety systems by 2020, reducing shutting off the water system if there is no being used by insurers in the United in search of non-correlated returns
the number of accidents and thus the response, and in commercial properties, Kingdom—proof of the potential power of and higher yields in a low interest rate
value of personal auto insurance policies. connected devices on manufacturing access to good data.) environment, disintermediating reinsurers
Entirely self-driving cars could become equipment can give owners early warning in the process. To date, they have
ubiquitous in the next two decades, at of maintenance requirements. Smart And what if those with the necessary focused mainly on reinsuring property
which point liability is likely to shift from devices that monitor health are also data and analytical skills and platforms catastrophe risk—a sum of $70 billion in
individual drivers to manufacturers. In the increasingly popular. There are two main that reach millions—a Google or an 2015. But now they have their eyes on the
United States, we estimate auto insurance effects. Data from connected devices can Amazon—not only offered well-targeted, primary market. For the moment, interest
premiums could decline by as much as 25 be used to assess risk more accurately. tailored products, but also began to centers on “short-tail” lines of business.
percent by 2035 due to the proliferation But it is also a powerful tool to lower cherry-pick low-risk customers? If they Yet ultimately, why would, say, a large
risk—to prevent accidents in the home, did so in significant numbers, the insurers’ manufacturer of sensors that gathered
10 Facing digital reality Digital disruption in insurance: Cutting through the noise 11
data about weather and soil conditions of just one or two innovation cycles. Retail could more than double profits over Second, in a digital economy, the
to optimize agricultural productivity music, book stores, travel, and media the course of five years. In the longer effects of a shrinking economic pie are
not consider offering a crop insurance are some of the high-profile sectors that term, however, earnings from traditional compounded by the fact that the pie
product to farmers, with the backing of have already felt its force, transforming business will face headwinds as driving will not be evenly divided—the result of
investors? The data gathered would aid their economics and sometimes toppling becomes less risky owing to the use of economies of scale and network effects.
risk analysis, and payments could be what were once industry heavyweights. sensors and telematics or because, in Hence, not all carriers will be able to
triggered automatically (and cheaply) The question for incumbents is therefore the case of autonomous cars, liability sustain the performance described in the
when sensors detected damaging whether they are nimble enough to rise is transferred to manufacturers. Fifteen analysis above. For many, digital’s threats
weather conditions. to the opportunities that digital offers. years on, profits for traditional personal might well outweigh the opportunities.
The evidence that they will need to move lines auto might fall by 40 percent or more Again, the signs are already apparent. In
A large incumbent
quickly is compelling. from their peak (Exhibit 3). direct auto insurance in Spain, Germany,
could more than Uneven distribution of rewards
double profits over
Exhibit 3
First, digital diminishes value. McKinsey’s
5 years by digitizing
global survey of a wide range of industries Profit projection for an auto insurer digitizing its business
has shown that digital technology
existing business. shrinks revenue growth at an average
rate of 3.5 percent a year and growth in
Future profits as a percentage of today’s profits
earnings before interest and tax (EBIT) at
220-300 Can be augmented through
an average rate of 1 percent a year. For innovation in new coverages and
Despite these potential threats, our view is some industries, the figure is as high as 20-60 value-added services
that today’s carriers, many of which have 12 percent for revenue and 10 percent for
a century-old record of creating value EBIT. 75-275
120-200 60-100
for their policyholders and shareholders,
15-55
remain in a strong position to flourish in a Our analysis of auto cover, the insurance
digital age. For the time being, they have segment that has been first to feel digital’s 100
expertise no one else has, making them impact, suggests a similar dynamic
valuable partners in the ecosystems is unfolding in the insurance industry.
that are evolving to offer consumers US auto insurers have already lost on
both risk prevention and risk mitigation average $4.2 billion in underwriting profit
services. They still have large balance a year over the past five, with expenses
Today’s Growth, loss 2025 Impact from Shift in Loss and 2035
sheets that enable them to underwrite and losses consistently outweighing profits and expense Profits2 improved liability to expense ratio Profits2
large pools of risk. And they have the trust premiums. They should expect further ratio vehicle commercial improvements4
improvements1 safety3,4 lines4
of policyholders who need to know their annual profit declines of between 0.5
insurance company will still exist when and 1 percent if they fail to use digital Short-term improvement Long-term decline
they make a claim or their policies mature, technology to improve efficiency and
perhaps decades from now. effectiveness. 1 Assumes a 3 to 5 percentage point improvement in loss ratio, a 2 to 4 percentage point improvement in operating expenses, and a 6 to 8 percentage point improvement
in direct sales conversions
2 Includes growth in investment income as well premiums. Investment income modeled as a flat percentage of premium in each year
But for many carriers, the window of In the shorter term, corrective measures
3 Includes impact of semi- and fully autonomous vehicles
opportunity is narrow. Once cracks could lead to huge profit improvements. 4 Assumes a 25 percent reduction in premiums as a result of telematics and sensors and a 50 percent risk transfer to commercial product liability
appear, digital technology has the power By digitizing existing business, our
to break business models within the space research suggests, a large incumbent Source: Digital and Auto Insurers Value at Stake Analysis, McKinsey, 2016
12 Facing digital reality Digital disruption in insurance: Cutting through the noise 13
and the United States, a single player has
captured the lion’s share of profits, up to
bets—to innovate products or reshape
the value chain, for example—rather than
its impact to date in industry after industry, it
would be foolhardy to bet against it.
“I believe the
70 percent, leaving a long tail of sub-scale, following in others’ wake. In insurance, this consumer will win
and that the desire for
often unprofitable carriers competing for is borne out by the companies featured What it takes to transform rapidly and
the remainder (Exhibit 4). in Exhibit 4: HUK24, Direct Line, and at scale
Third, the winners will be those that move
Progressive were all first movers.
Against this backdrop, we interviewed low-cost, transparent,
decisively. Our cross-industry research
showed that those companies that
A similar dynamic is likely to play out
across the industry. Digital technology
some 30 executives in incumbent and
attacking companies to understand their
high-quality digital
initiated disruption fared best, generating will take longer to disrupt more complex views on how the industry is changing services will have to
revenue and EBIT growth that was on
average between one and two percentage
business lines, such as life insurance, and
technological innovation may disrupt them
and how to respond. The single message
most constantly repeated was the be met.”
points higher than that of more ad hoc in ways we cannot yet foresee. But given need for incumbents to accelerate their
responders. These companies made big response (see box, “The need to commit
to speed”). Most know they cannot afford
— Matthew Donaldson,
to wait until evolving technologies turn the CEO, BGL Group
Exhibit 4 market upside down and the competitive (Comparethemarket)
advantages they enjoy today evaporate.
If history tells them anything, it is that
The “winner-takes-all” effect
they need to get ahead of the curve. And largest profits, and insurers must fight for
Direct auto insurance underwriting profit Market leader Players 2-4 Rest of industry
they will need to do so at scale, ultimately them. Their success will depend upon
transforming the entire business. What offering superior products and services.
holds them back, however, is deciding how Technical underwriting skills alone will not
Germany, 2015 Spain, 20151 US, 20152 to address the challenge given its enormity. suffice.
€, million €, million $, million
48 83 499 The new value drivers Efficiency (cost savings) and effectiveness
(higher returns). Digital technology puts
Success will be grounded in recognizing margins under pressure as premiums fall
64 the drivers of value in a digital age. There are under the weight of price competition and
five of these. as new ways of mitigating risk emerge.
Under these conditions, insurers will need
394
76 Technological leadership and innovation. to harness digital to make their operations
HUK24 25 Direct Line 56 Progressive 347 Winning companies will need to do more more efficient, aggressively lowering costs.
105 than follow technological trends and They will also need to make them more
7 innovation. They will need to lead them. effective by, for example, improving the
Innovation is a vital component of a digital accuracy of their pricing and underwriting
Profits Losses Total Profits Losses Total Profits Losses Total transformation. to improve loss ratios.
Customer ownership. Incumbents have Scale and network effects. In a digital
-15
not had to worry much about customer world, initial investments are sizeable but
ownership. Their only competitors have marginal costs are close to zero. Scale
1 Does not include “other technical results” been other insurers, and most have felt therefore matters. It also delivers network
2 Includes results only for direct U.S. auto writers Progressive, USAA, GEICO and Amica
secure enough to cede customer contact to effects, helping to build a company’s
Source: INESE, McKinsey Insurance Database Germany, AM Best (statutory filings)
intermediaries. Today, however, customer access to more and better data, talent, and
access and “ownership” are keys to the partners to the extent that it becomes a
14 Facing digital reality Digital disruption in insurance: Cutting through the noise 15barrier to entry for others. Some companies Insurers should not underestimate the
have built hyper-scale data platforms that changes that digital will bring to their
enable them to blur traditional industry industry and the challenges they will
VOICES: The need to commit to speed definitions by spanning product categories pose. Neither should they overlook the
and customer segments, creating new significant short-term profit improvements
ecosystems and value chains in the that are within their grasp if they digitize
“There are times when we talk to carriers about integrating a line of
process. their core businesses, nor shy away from
code into their app to integrate more into Facebook, and the answer
innovating to be part of an exciting future
we get is, ‘Well, our next release cycle isn’t for another eight months.’
Speed and agility. The strength of an that is unfolding for the industry. If they act
The ability to speed up those release cycles is a variable that we see
insurer’s in-force book will not protect it decisively, they will be among its leaders.
with those carriers that are not just talking the talk, but taking action.”
indefinitely. Incumbents need to move
—Brad Auerbach, US industry manager, Facebook
quickly to compete with digital competitors
that have the agility to keep pace with Tanguy Catlin is a senior partner
“You have to believe that tomorrow somebody’s going to attack you.
evolving technology and customer needs. in McKinsey’s Boston office, where
And you have to be acting very, very fast. The second that you slow
That means letting go of slow decision- Christopher Morrison is an associate
down, somebody’s going to pass you. Insurance companies operate
making processes and outdated ways of partner. Johannes-Tobias Lorenz is a
on slower timescales. You can’t do that. The market will pass you by.”
working, and adopting a new culture and senior partner in the Düsseldorf office, and
—Andrew Rose, president and CEO, Compare.com
talent base that is more comfortable with Holger Wilms is an associate partner in the
experimentation, testing and learning, and Washington, DC, office.
“Companies need to commit to speed. Insurance is a highly regulated
sometimes even with failing.
industry and it is not easy to move quickly, but the fact is consumers
are moving at exceptional rates. So the companies that will stand
A roadmap for the future
out are the ones that are going to find ways to move a bit faster, at the
pace of the people they’re insuring.”—Scott Simony, head of industry,
These new value drivers will inform the
Google
roadmap insurers chart to transform
their businesses and secure their future
“We see some carriers that understand this is the beginning of a
competitiveness. They will shape their
reinvention of the auto insurance model, but we also see many that are
strategy, helping them to understand the
still scared of technology, a bit like the utility world was a few years ago,
forces that are disrupting the industry.
where people said, ‘You know what, I’m fine running my coal plants, I
They will make clear the huge value to
don’t want to know about all this renewable technology because it’s
be created by digitizing their current
only going to hit in the generation after I retire.’ But car makers are
businesses, as well as the imperative to
adopting the technology quite rapidly. Five, ten years out we’re going to
innovate. They will demonstrate the need
see some very, very major effects.”—Stefan Heck, CEO, Nauto
for significant investments in IT and a
change in perspective whereby IT becomes
“Insurance companies that are really good at risk management are
a strategic function, not a cost center. They
thinking traditionally—that if you spend enough time, one year, two
will make plain the new capabilities required
years, thinking and planning, the outcomes you generate would
to take full advantage of IT’s potential,
be [the result of ] the time spent. But the pace of change is so fast
including automation, advanced analytics,
that by the time you have thought through things, the market may
and blockchain. And they will highlight the
have already moved on.”—Naveen Agarwal, chief customer officer,
importance of culture and talent change if
Prudential
the transformation is to be successful.
16 Facing digital reality Digital disruption in insurance: Cutting through the noise 17The verdict is clear: those insurance digital strategy, and is critical to building a
companies with the most advanced leadership position.
management practices related to digital
strategy, capabilities, culture, and Building a digital strategy
organization outperform their peers.1
Yet relatively few incumbents have so The definition of a digital strategy is no
far defined a comprehensive digital different from that of any other strategy.
strategy—the foundation from which It is a set of integrated, hard-to-reverse
all else logically follows if they are to choices, made for the future, in the face of
compete in a digital world. Instead, they uncertainty, with the purpose of creating
package together tactical or incremental and capturing economic surplus.2
initiatives that individually drive modest
With competitive
performance improvement—some
digital marketing, a new sales channel, or
some degree of automation, perhaps—
while leaving significant value potential landscapes
untapped and their futures in doubt.
changing fast, it can
Why? Part of the answer lies in the extent be hard to know
just how digital
to which carriers have been protected by
regulation and the strength of their in-force
books. In addition, CEOs with limited
tenures might be wary of upsetting what technology will
has served them relatively well—and are
play out, and hence
where to place big
likely to be more circumspect when the
future is so uncertain. With competitive
landscapes changing fast, it can be hard
to know just how digital technology will bets.
A strategy for a digital age
play out, and hence where to place big
bets. Yet hesitation is not an option. In
insurance, as in other industries that have The building blocks of a digital strategy
felt the force of digital disruption, those likewise resemble those of any other
that move fastest to adapt are likely to take strategy: a diagnosis of where and why a
a disproportionate share of the profits. company makes money in the present,
Few insurers have defined a comprehensive digital strategy a forecast of how that might alter in the
fit to withstand attackers at the gate. The starting point is to Hence, a means of discerning clearly the future, an understanding of the potential
understand the sources of disruption. sources of opportunity and disruption pathways to success, a portfolio of
in digital technology lies at the core of a initiatives, and then a commitment to
driving change.
1 Tanguy Catlin, Ido Segev, and Holger Wilms, “The 2 Frederick W. Gluck, Stephen P. Kaufman, A. Steven
Hallmarks of Digital Leadership in P&C Insurance,” Walleck, Ken McLeod, and John Stuckey, “Thinking
McKinsey & Company, August 2016. strategically,” McKinsey Quarterly, June 2000.
18 A strategy for a digital age Digital disruption in insurance: Cutting through the noise 19What is different in a digital age is the followers. These leaders made bets on Exhibit 1
speed and potential magnitude of digital processes across the value chain,
that change, upending old business on innovative products, and on new
models and rapidly building entirely business models.
The digital tipping point
new ones. Circumventing the need To stay competitive, incumbents’ strategic focus should shift
tipping point 1. To what extent
to build traditional fixed assets, the Companies that procrastinate over such from digitizing the existing business model to disrupting it
will digital
as digital technology takes hold
likes of Amazon, Netflix, Uber, Airbnb, bets risk disappearing. In insurance, as technology
transform the cost
and a host of fintechs have disrupted in other industries, it takes a while for structure of the
business?
incumbents in the space of a few years customers and companies to embrace
by using digital technologies, data, and digital technology, but as the pace of 2. Will digital
analytics to create value without owning, change accelerates incumbents’ scope technology disrupt
supply and
respectively, physical shops, cable to adapt diminishes. There comes a demand?
connections to viewers’ homes, car tipping point where those that have not Current position of most carriers in segment.
fleets, hotels, or bank branches. adapted their strategies fade away—as Mainstream 3. Will digital
customers technology give
in traditional print media, for example. adopt birth to new value
commercial
propositions and
insurance
The insurance industry might have been
insurance
insurance
The prerequisite of
personal
markets?
Advanced
relatively slow to feel the digital effect, incumbents
life
adapt to new
a digital strategy is
but personal lines in P&C cover look set model 4. Will digital
on a steep trajectory toward the tipping technology give
Laggard birth to hyper-scale
an understanding point, with small commercial lines
just behind. Life insurance and large
Early adopters
embrace the new
incumbents die platforms?
of the threats and
models
commercial insurance, with longer-term, Innovative
startups begin to
often more complex contracts, have
opportunities that
New trends disrupt business
emerge models
further to go (see Exhibit 1).
digital technology
time
Second, companies need to review their
poses. strategies frequently as technology,
consumer behavior, and competitors
Focus on digitizing
existing business model
Focus on innovative products,
services, and business models
evolve ever more rapidly. The five year
All these considerations will transform strategic review—once a staple of
certain aspects of how companies board-level strategies—is increasingly
manage their strategies, even though outdated. Recall that five years ago, the
the foundations remain the same. In the iPad, now ubiquitous, had been on the
first instance, companies need to be market for only 18 months, Netflix stock
bolder. A McKinsey survey of more than was taking a beating after the company And fourth, when conditions do change, The catalysts of disruption
2,000 executives in industries affected suggested it would spin off its DVD they will need the discipline and agility
by digital technology shows that the delivery business, and Spotify had just to reallocate management time and The prerequisite of a digital strategy is
companies with the highest revenue launched in the United States. resources swiftly. As Klaus Schwab, an understanding of the threats and
and earnings growth looked for digital chairman of the World Economic Forum, opportunities that digital technology
opportunities across all elements of their Third, companies need to build a wider memorably said, “In the new world, it is not poses. A review of what peers and
business model, not just one or two, range of strategic options because the big fish which eats the small fish, it’s newcomers are up to can help in this
and either led the disruption or were fast conditions can change so quickly. the fast fish which eats the slow fish.” regard and presage what the future might
20 A strategy for a digital age Digital disruption in insurance: Cutting through the noise 21hold. The problem here, however, is that
there are hundreds of insurtechs to track,
commissions, could be attacked by
companies that are able to automate
Digital technology can cater to demand
more precisely so that customers are
Digital technology
with more appearing as venture capital advisory processes and apply advanced no longer obliged to buy elements of a can cater to demand
pours into the industry (to the tune of $1.7
billion). They cannot all be monitored,
analytics to improve pricing and
underwriting. McKinsey estimates that
package they do not want. iTunes makes
it unnecessary to buy a whole album, more precisely so
and it is a sure bet that although some will
succeed, most will vanish. It is therefore
up to 40 percent of P&C and life insurers’
expenses are locked up in their top 20 to
for example. This unbundling makes
businesses vulnerable to disruption,
that customers are no
important to focus on the nature of the 30 core end-to-end processes—costs particularly if they cross-subsidize parts longer obliged to buy
elements of a package
disruption rather than on the would-be that digitization can reduce, and in some of their offering, as insurers do, with direct
disruptors, with a view to getting ahead cases, eliminate. sales channels covering the cost of more
of it—in other words companies must
understand both what is happening,
expensive agency channels.
they do not want.
and why. Only in this way, according to “It doesn’t matter how Aware of what is afoot, some carriers,
much business you
Tom King, senior director at US software such as Progressive, enable customers to poured money into insurance-linked
company Pegasystems, will insurers be “name their price” and choose elements instruments on the capital markets
able to respond promptly to changes in
the market.
sell today, it’s whether of a policy that fit their budget—the level
of deductibles, for example. Some offer
in search of non-correlated returns
and higher yields, disintermediating
or not you can identify pay-as-you-go auto insurance whereby reinsurers in the process. Some are now
where [future] profits
Our research suggests that digital drivers are charged by the mile. And investing in primary markets, a move
technology can disrupt in four, non- some use data on, for example, driving that digital technology could accelerate.
mutually exclusive, ways. It can transform
the cost structure of a business system. and losses lie, and habits, to price products in a way that
more precisely reflects an individual’s
It is conceivable, for example, that a
manufacturer of sensors that gather
It can disrupt supply and demand. It
can create new value propositions and
what you need to risk. These developments amount to an
“unbundling” of coverage, better matching
data about weather conditions in order
to optimize fertilization could turn to
markets. And it can create hyper-scale
digital platforms. There are thus four
jettison.” the protection provided to the protection
required.
investors to back an insurance product for
crops, using the same sensors to indicate
questions companies should ask in order whether weather conditions were harsh
to start building a strategy. – Tom King, senior director Digital technology also has the power enough to damage them.
at US software company to unleash supply. YouTube has made
1. To what extent will digital technology
transform the cost structure of the
Pegasystems it easy and inexpensive for millions of
individuals to become published video
3. To what extent will digital technology
give birth to new value propositions
business system? producers, unlocking a supply of content and markets?
that previously would have been too
Netflix took movie rentals and rethought 2. To what extent will digital technology costly to distribute. In insurance, complex There are myriad ways of using digital
the business around them, then went disrupt supply and demand? regulation and capital requirements have technology to improve value and offer new
from DVD delivery to owning one of the restricted supply in primary markets as propositions, such as making purchases
world’s largest video streaming services. In the analog world, economics can make start-ups seldom want to take insurance simpler and faster, adding fresh elements
In a digital world, all businesses are likely it hard to cater precisely to individual risk on to their balance sheets. But start- to a product or service, using data
to be disrupted if they rely on a physical demand. Think of the hefty package of ups are targeting accessible slivers of and analytics to make products more
distribution network and involve manual supplements bundled together in Sunday the industry, primarily marketing and relevant, or removing costs incurred by
processes that can be automated. It is newspapers. Most consumers do not distribution. And institutional investors intermediaries. Examples are emerging
easy to see how traditional insurance read everything, but the economics of are hovering. They have already of carriers using it to reward consumers
models, often reliant on agents with distribution mean they get it anyway.
22 A strategy for a digital age Digital disruption in insurance: Cutting through the noise 23with benefits for behaving in a way that companies can learn from the analysis of inventing new value chains. For example, reveal the need for a portfolio of initiatives
aligns with their own interests—such that data and the more it will be possible to Uber has signed a deal with Volvo to that grapple simultaneously with two
as US insurer John Hancock offering mitigate risk, reducing the need to insure invest in the development of self-driving strategic imperatives.
customers discounts on products and against it. That hits the volume of demand, taxis in the United States; testing began in
services, as well as lower premiums, in but risk mitigation becomes a new value Pittsburgh in September 2016.3 Apple has The first is the need to capture short-term
return for leading healthy lifestyles. Some proposition in the process. used its unique data, infrastructure, and value. In the early stages of disruption,
digital attackers are making it possible product platform to push into the world digital technology invariably starts to
to buy complex products such as life New value propositions can also lead of finance with Apple Pay. And Chinese transform the cost structure of the
insurance online, while others are using to the establishment of new markets, e-commerce giants Alibaba, Tencent, and business system and disrupt supply and
internet crowd sourcing to negotiate better by matching supply and demand in JD.com have leveraged their volumes of demand, posing opportunities and threats
deals with insurers for “long-tail” insurance pioneering ways. The likes of Uber, Lyft, data to offer microloans to the merchants to incumbents. To respond, they will need
products. Policies for pug dogs and and the Chinese ride-sharing company that operate on their platforms. By using to digitize their businesses in order to
diabetic travelers fall into this category. Didi Chuxing use digital platforms with real-time data on merchants’ transactions cut costs, grow revenues, and improve
location-based mapping technology to build its own credit scoring system, the customer experience. Essentially,
to match would-be passengers with Alibaba’s finance arm has been able to however, the business model will remain
New value the drivers in closest proximity, along achieve better non-performing loan ratios the same.
propositions can lead
with analytics to make dynamic pricing than traditional banks.4
adjustments and encourage drivers to
to the establishment meet demand in peak periods. It is a far
cry from passengers trying to hail a taxi
Insurers will need to consider what
their role might be in the ecosystems
By understanding
of new markets, by in the street. In insurance, online price developing around these data platforms, the catalysts for
disruption and
aggregators have established markets and where value lies in owning and
matching supply to help consumers compare prices and analyzing data.5 Will, say, a large car
and demand in
bypass the traditional agent distribution
model.
manufacturer that fits sensors as
standard in vehicles amass enough data regularly reviewing
pioneering ways. 4. Will digital technology give birth to
to dominate an ecosystem that brings
together insurers and other service
their businesses,
hyper-scale platforms? providers such as telecom companies, companies will be
able to lead the wave
repair shops, road side assistance,
And there are new products for new Digital technology can give rise to telematics providers, and legal services?
risks—protection against cyber risk, for
example, or cover for “sharing economy”
companies that build platforms on a
massive scale. Their size, the huge A heat map for capturing value
of disruption as it
risks such as those to which car owners amounts of data they amass, and the gathers strength, not
drown in it.
are exposed when they decide to become depth of analytical talent they deploy— The process of understanding these
cab drivers for Uber. along with the network effects they forces and analyzing the value at stake will
generate—are hard for others to match
3 “Uber and Volvo to develop self-driving cars,” Financial
Some value propositions are emerging and thus create barriers to entry.
Times, August 18, 2016.
that threaten to undermine the existing 4 China’s digital transformation: The internet’s impact on Drawing up a heat map that examines
insurance model. The more real-time data Moreover, these companies’ skills and productivity and growth, McKinsey Global Institute, July the value at stake throughout every
2014.
becomes available, from sensors in cars capabilities enable them to blur traditional 5 Nicolaus Henke, Jacques Bughin, Michael Chui, James
business line will indicate the extent of
or on drones, devices installed in homes, industry definitions by spanning product Manyika, Tamim Saleh, Bill Wiseman, and Guru Sethupathy, the opportunity—the cost savings an
“The age of analytics: Competing in a data-driven world,”
or monitors worn on our bodies, the more categories and customer segments and auto carrier could make by digitizing and
McKinsey.com, December 2016.
24 A strategy for a digital age Digital disruption in insurance: Cutting through the noise 25automating the claims process, say—as innovating for the future risks cannibalizing
well as the threat if it fails to respond—the profits in the here and now, along with
fall in profits that would ensue if customers organizational upheaval.
were to gravitate toward price-driven
aggregators and comparison sites, The answer lies not in reverting to a
for example. The “hot spots” will help strategy of incremental improvement.
a company decide where to prioritize Competition in a digital age rules this
initiatives, although this will depend also out. Rather, it entails fully grasping where
upon whether it has the capabilities to value lies, in order to shape and sequence
pursue them, and upon regulatory issues. initiatives in ways that meet strategic
imperatives while maximizing quick pay-
The second strategic imperative will be backs to protect the performance of the
to look beyond today’s business for fresh business. Understanding the catalysts
sources of value. Pondering the potential of change has to be the starting point,
for new value propositions and markets, helping to reveal where value-creating
and for hyper-scale platforms will suggest opportunities lie and where value is at risk,
how digital technology might disrupt and ensuring companies disrupt before
not just elements of the value chain but they are disrupted.
the entire business model. The higher
up the digital curve a business line rises, Tanguy Catlin is a senior partner
the more imminent such disruption is in McKinsey’s Boston office, where
likely to be, and the greater the need for Christopher Morrison is an associate
innovation. The exhibit shows how the partner, and Kurt Strovink is a senior
strategic focus shifts as digital’s influence partner in the New York office.
on an industry grows. In P&C lines it is
already apparent that the traditional model The authors would like to thank Jacques
is being reshaped by data and analytics Bughin, Laura LaBerge, Jay Scanlan,
that make it easier to mitigate the risks we
insure against today. By understanding
and Ido Segev for their contributions to
this article. The age of innovation
the catalysts for disruption and regularly
reviewing their businesses, companies will
be able to lead the wave of disruption as it
gathers strength, not drown in it. Insurers have a choice: be disrupted or be the disruptor
with new products, services, and business models.
Delivering on these imperatives will prove
a hard balancing act for CEOs, faced
with the constant pressure of the next
earnings report. Although digitizing the
existing business will reap rewards, it can
require significant investment that pays
off after several years. At the same time,
26 A strategy for a digital age Digital disruption in insurance: Cutting through the noise 27Digital technology is disrupting industry Cybercrime Exhibit 1
after industry—and quickly separating
winners from losers. The spoils are going Companies today run on data, which
to the boldest innovators. A McKinsey makes cyber insecurity a major concern.
survey of more than 2,000 executives in An intrusion can not only disrupt business
Leading trends among insurtechs
industries affected by digital disruption but also cause great harm to a company’s
Innovations as % of database total1
shows that the companies with the
“It’s hard for big
highest revenue and earnings growth
led the disruption or were fast followers,
1 Big data/machine learning 20
making big bets across their businesses
on innovative products, digital processes, carriers to innovate as 2 Software as a service/cloud 21
they have so much to
9
and even entirely new business models.
contend with already 13
3 Usage-based insurance
Most insurers, though, do not have
innovation in their DNA. Regulation has
curbed incumbents’ ability to experiment, —industry headwinds, 4 IoT 12
while limited competition has given them
no particular need to do so—the size
legacy issues. But 5 Digital/Roboadvisory 10
of their in-force books makes it hard for they need to be in the Emerging ideas
game, right now.”
new entrants to build market share, and 6 Gamification 9
start-ups seldom want to take risk on
to their balance sheets because of the
7 Peer-to-peer insurance 4
capital required to offset it. But innovate
they must. Although there is significant
— Caribou Honig, cofounder
opportunity to capture value in the of QED investors 8 Blockchain 4
short term by digitizing their current
business, they will get left behind if they fail 9 Micro-insurance 3
simultaneously to use digital technology to
innovate and build new business. reputation, particularly if customer
1 ~500 commercially best-known cases registered on database. Innovations focusing purely on insurance
information such as credit card data is
Source: McKinsey Panorama Insurtech database
Exhibit 1 shows where insurtechs are compromised. Consumers too are at
concentrating their innovation efforts. risk, from identity theft, loss of financial
To help companies think through assets, and unauthorized credit card
where innovation lies, we look at three use. Opportunities for carriers include for companies to source supplies, Digital technology not only creates
broad areas—new kinds of risk, new prevention services and insurance manufacture goods, and sell their the risk, it also provides many of the
approaches to underwriting, and new integrated into the offerings of software wares anywhere in the world. But the solutions. Using the connected sensors
value propositions. And we discuss how providers (see box, “The cybersecurity rising complexity of supply chains also and monitors that comprise the Internet
companies are organizing themselves to opportunity—that few are seizing”). multiplies risk. There are more points of of Things (IoT), it is possible to track the
develop ideas and accelerate innovation. vulnerability, and disruption in any part location of inventory and finished goods
Global supply chains of the chain can quickly affect the entire as they travel on trucks, ships, and
New risks business. There is thus growing planes. Predictive analytics can then
Digitization and ubiquitous data demand for equally sophisticated be applied to data on claims, weather,
Insurers have an immediate opportunity communications have enabled supply chain cover. and other factors to enable insurers to
to write cover for new types of risk that are companies to build global supply chains. underwrite the supply chain risk more
emerging in a digital age. These complex networks make it possible precisely.
28 The age of innovation Digital disruption in insurance: Cutting through the noise 29“We ... create
New solutions are emerging. For car
rides, Uber supplies drivers with limited
The cybersecurity opportunity—that few are seizing liability cover when its app is turned on
and a driver is available. Its commercial communities of
cover kicks in when a fare enters the
individuals, on
whose behalf we
Cybercrime presents rapidly multiplying risks for businesses and consumers. Having car. For drivers of BlaBlaCars (a service
almost quadrupled between 2012 and 2015, from $112 billion to more than $400 billion,1 that operates in France and the United
the estimated cost of cyber breaches is projected to reach $2 trillion in 2019, or almost as
much as India’s GDP for 2015.2
Kingdom), Axa offers a combined
personal and commercial package. negotiate with the
Various forms of cover are emerging for
insurance industry to
bring them a better
Yet the insurance industry has not leaped at the opportunity to sell protection against this
new risk. The global insurance pool in 2015, according to Lloyds, was just $2.5 billion. homeowners participating in Airbnb and
deal than they could
other short-term home rental platforms
Part of the problem is demand; awareness of the risk remains limited. There are also such as Alterkeys and 9Flats.com. The
supply-side issues. Insurers are unsure how to model cybersecurity risk and still have
not decided what they can cover economically. Few have written “full” cyber cover to
platforms offer protection for damage by
tenants that cannot be resolved by the get on their own.”
compensate customers for all possible losses, including data theft, business disruption, owner, but with significant exclusions.
property damage, and personal injury, and a lack of reliable information on historical Carriers such as US-based Proper, which —Steven Mendel, founder
breaches makes pricing difficult. Moreover, there are few standards for cover and the law have long offered insurance to owners
differs according to jurisdiction. Perhaps most important, technology and the capabilities of vacation rental properties, are adding and CEO of Bought By
cover for short-term rentals. Still, most
of hackers continue to evolve more rapidly than cybercrime protection methods.
traditional homeowner policies do not Many
Nonetheless, a risk this large should be the basis for a successful line of business cover commercial uses of properties. As
for companies that are able to innovate. They would need to invest in understanding the sharing economy grows, there will problem. For example, they are enabling
the drivers of cyber risk, which would require them to hire experts who understand surely be more opportunities to innovate a form of low-cost, micro-crop insurance
the technical issues as well as the underwriting process, or enter partnerships and provide relevant insurance products. for farmers in emerging economies that
with organizations that have those capabilities. They would also need to develop does not require claims adjusters to trek to
comprehensive histories of cybersecurity breaches and create compliance frameworks New underwriting approaches remote locations to settle claims. Instead,
to measure enterprise risk. Given the magnitude of the risks involved, though, insurers use data analytics to determine
incumbents with strong balance sheets could have an advantage in cybercrime Digital technologies enable new ways to if severe weather, low rainfall, or other
insurance. provide traditional cover and underwrite factors would have damaged crops, and
traditional risks, often by using individual pay claims based on their analysis. This
1 State of Security Survey, Symantec (2013); Lloyds of London; World Economic Forum. rather than group data. They are also vastly reduces settlement costs, making
2 Juniper Research.
being used to reach new customers. it possible for insurers to offer affordable
policies to farmers in the developing world.
Micro-insurance
On-demand insurance
The sharing economy consumers to “share” unused capacity Traditional, loss-based insurance can
(a car ride, the use of a spare room) for be prohibitively expensive to provide In addition to facilitating the underwriting
New kinds of risk are emerging from the a fee. This turns a car owner into a cab for small amounts of cover. New data of small amounts of cover, real-time data
sharing economy that has grown from driver and a homeowner into a hotelier, streams and data analytics address this can enable the provision of “episodic” or
digital technology’s capacity to match and alters the nature of the insurance
supply and demand. Online platforms cover that the driver and homeowner
such as Uber and Airbnb enable require.
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