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Digital disruption in : Cutting through the noise Contents

Preface 1

Facing digital reality 6

A strategy for a digital age 18

The age of 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 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 , digital , digital IT architecture, and digital attackers, as well as digital such as telematics, automation, and , 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 that picture by on McKinsey’s experience in the 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 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 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 , 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 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 , and the fact that newcomers seldom have the needed to take insurance 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 . And they will be left floundering once digital’s relentless force ultimately breaches both the industry’s and boundaries. Already, in personal auto insurance, we see how sensors fitted in 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 can rapidly invade new ones. Chinese e-commerce giant Alibaba now also owns one of the world’s largest technology company, with 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 , and that there is no rule that will an easy ride. This remains virgin territory because no one in insurance has yet completed a transformation—it could take as 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:

ƒƒ Where should I start, with cost-cutting or growth initiatives? And should I let a thousand flowers boom, or pick selectively?

ƒƒ Do I need to rip out my IT systems and start again?

ƒƒ Do I need to set up a new, digital unit, and if so, will it cannibalize my other business?

ƒƒ How do I attract all that new, whizzy talent I will be needing—and will these newcomers really understand what makes my company successful?

ƒƒ Do I need a ?

ƒƒ 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 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

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 , Czech Republic

Stefan Heck Caribou Honig CEO Co-founder Nauto QED

John Straw Leslie Willcocks Professor of technology, , Bought by Many and globalization School of Economics Department of

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 ’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 provider, insurers included. propels some companies to become clear And as Matthew Donaldson, CEO of 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 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 30% shared. Those companies that move swiftly and decisively are likely to be those that flourish. Those that do not will find In the shorter term, fulfilling this goal is Facing digital reality it increasingly challenging to generate 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 Regulation, product complexity, and insurers’ large lower costs, higher growth that digitization delivers, is itself a driver of 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 skills built on years of opportunities too. The notion that experience and proprietary data. Eroding advantages insurance is a low-engagement, “Insurers of the future disintermediated category in which This resilience explains why the industry Insurers are threatened by three trends: customer relationships can be delegated will play more of a as a whole lags behind many other sectors a shift toward preventing risk rather to agents and is increasingly in its digital maturity. But the situation is than insuring against it, the increasing obsolete. Instead, digital technology and risk avoidance role changing. Money now pouring into the power of those companies that own and the data and analysis it makes available and less of a risk industry suggests it is no longer regarded analyze data, and the of huge give insurers the chance to know their as impregnable. Venture capitalists amounts of capital in insurance-related customers better. That means they can mitigation one.” globally invested $2.6 billion in insurtechs 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 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, 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 , $ 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 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 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 in Insurtech database premiums in order to be compensated for could fall apart. Number of innovations as % of total in the database¹ <5% 5-10% >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 p&c8% 8% 4% 4%17% 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 health5% 5% 3% 3%11% 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 life3% 3% 2% 2% 9% 9% 5% 5% 2% 2% use both not only to improve their core operations but to launch entirely new Leading companies business models. Insurers have valuable historic data. Yet in a few years’ time, will are using data and ² Product Marketing Distribution Pricing Claims they be able to keep pace and still add development underwriting value when competing with analytics not only to newcomers that have access to more ¹ ~500 commercially most well-known cases registered in the database (excluding management related innovations) improve their core ² Includes underwriting and policy issuance insightful, often real-time new data culled Source: McKinsey Panorama Insurtech Database from the of Things (IoT), social operations but to media, card histories, and other digital records? Knowledge about how launch entirely new of risk, but they also help mitigate risk, of systems and semi- and fully- fast someone drives, how hard they brake, reducing premiums. Take auto insurance. autonomous vehicles. 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 properties, Kingdom—proof of the potential power of and higher yields in a low value of personal auto insurance . connected devices on 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 , 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 “-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 and soil conditions of just one or two innovation cycles. 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, Uneven distribution of rewards could more than Exhibit 3 double profits over First, digital diminishes value. McKinsey’s global survey of a wide range of industries Profit projection for an auto insurer digitizing its business 5 years by digitizing has shown that digital technology shrinks revenue growth at an average Future profits as a percentage of today’s profits existing business. rate of 3.5 percent a year and growth in earnings before interest and (EBIT) at an average rate of 1 percent a year. For 220-300 Can be augmented through 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 60-100 for their policyholders and shareholders, 120-200 15-55 remain in a strong 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 2025 2035 Growth, loss 2 Impact from Shift in Loss and 2 sheets that enable them to underwrite and losses consistently outweighing profits and expense Profits improved liability to expense ratio Profits large pools of risk. And they have the trust premiums. They should expect further ratio 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 But for many carriers, the window of In the shorter term, corrective measures 2 Includes growth in investment income as well premiums. Investment income modeled as a flat percentage of premium in each year 3 opportunity is narrow. Once cracks could lead to huge profit improvements. Includes impact of semi- and fully autonomous vehicles 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 bets—to innovate products or reshape its impact to date in industry after industry, it captured the lion’s share of profits, up to the value chain, for example—rather than 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 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, , and at scale and that the desire for Progressive were all first movers. Third, the winners will be those that move Against this backdrop, we interviewed low-cost, transparent, decisively. Our cross-industry research A similar dynamic is likely to play out some 30 executives in incumbent and showed that those companies that across the industry. Digital technology 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 business lines, such as , and and how to respond. The single message average between one and two percentage technological innovation may disrupt them 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. The “winner-takes-all” effect If history tells them anything, it is that they need to get ahead of the curve. And largest profits, and insurers must fight for they will need to do so at scale, ultimately them. Their success will depend upon Direct auto insurance underwriting profit Market leader Players 2-4 Rest of industry transforming the entire business. What offering superior products and services. holds them back, however, is deciding how Technical underwriting skills alone will not 1 2 Germany, 2015 Spain, 2015 US, 2015 to the challenge given its enormity. suffice. € €

The new value drivers Efficiency (cost ) and effectiveness 48 83 499 (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 25 56 347 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 of their pricing and underwriting

Profits Losses Total Profits Losses Total Profits Losses Total transformation. to improve loss ratios.

Customer . Incumbents have Scale and network effects. In a digital not had to worry much about customer world, initial investments are sizeable but -15 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 15 barrier 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 , 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 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 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 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 17 The verdict is clear: those insurance digital strategy, and is critical to 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 , with the purpose of creating package together tactical or incremental and capturing economic surplus.2 initiatives that individually drive modest performance improvement—some digital marketing, a new sales channel, or With competitive 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 to which carriers have been protected by regulation and the strength of their in-force just how digital books. In addition, CEOs with limited tenures might be wary of upsetting what technology will has served them relatively well—and are likely to be more circumspect when the play out, and hence future is so uncertain. With competitive where to place big landscapes changing fast, it can be hard to know just how digital technology will bets. play out, and hence where to place big A strategy for a digital age 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 Few insurers have defined a comprehensive digital strategy a disproportionate share of the profits. company makes money in the present, 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 19 What 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 to build traditional fixed , the Companies that procrastinate over such from digitizing the existing business model to disrupting it 1. To what extent as digital technology takes hold will digital 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 incumbents in the space of a few years customers and companies to embrace business? 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, , or 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 The insurance industry might have been propositions and Advanced markets? The prerequisite of relatively slow to feel the digital effect, incumbents life insurance adapt to new personal insurance but personal lines in P&C cover look set commercial insurance model 4. Will digital on a steep trajectory toward the tipping technology give a digital strategy is Laggard birth to hyper-scale point, with small commercial lines Early adopters incumbents die platforms? just behind. Life insurance and large embrace the new an understanding models commercial insurance, with longer-term, Innovative of the threats and startups begin to often more complex , have New trends disrupt business further to go (see Exhibit 1). emerge models opportunities that time digital technology Second, companies need to review their strategies frequently as technology, Focus on digitizing Focus on innovative products, poses. consumer behavior, and competitors existing business model 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 21 hold. The problem here, however, is that commissions, could be attacked by Digital technology can cater to demand there are hundreds of insurtechs to , companies that are able to automate more precisely so that customers are Digital technology with more appearing as 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 analytics to improve pricing and package they do not want. iTunes makes billion). They cannot all be monitored, underwriting. McKinsey estimates that it unnecessary to buy a whole album, more precisely so and it is a sure bet that although some will up to 40 percent of P&C and life insurers’ for example. This unbundling makes succeed, most will vanish. It is therefore expenses are locked up in their top 20 to 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 disruption rather than on the would-be that digitization can reduce, and in some of their offering, as insurers do, with direct longer obliged to buy disruptors, with a view to getting ahead cases, eliminate. sales channels covering the cost of more elements of a package of it—in other words companies must expensive agency channels. understand both what is happening, they do not want. and why. Only in this way, according to “It doesn’t matter how Aware of what is afoot, some carriers, Tom King, senior director at US software such as Progressive, enable customers to poured money into insurance-linked company Pegasystems, will insurers be much business you “name their price” and choose elements instruments on the capital markets able to respond promptly to changes in of a policy that fit their budget—the level in search of non-correlated returns the market. sell today, it’s whether of , for example. Some offer and higher yields, disintermediating pay-as-you-go auto insurance whereby reinsurers in the process. Some are now Our research suggests that digital or not you can identify drivers are charged by the mile. And investing in primary markets, a move technology can disrupt in four, non- where [future] profits some use data on, for example, driving that digital technology could accelerate. mutually exclusive, ways. It can transform habits, to price products in a way that It is conceivable, for example, that a the cost structure of a business system. and losses lie, and more precisely reflects an individual’s manufacturer of sensors that gather It can disrupt supply and demand. It risk. These developments amount to an data about weather conditions in order can create new value propositions and what you need to “unbundling” of coverage, better matching to optimize fertilization could turn to markets. And it can create hyper-scale jettison.” the protection provided to the protection investors to back an insurance product for digital platforms. There are thus four required. 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 it easy and inexpensive for millions of 3. To what extent will digital technology transform the cost structure of the Pegasystems individuals to become published video 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 23 with 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 the drivers in closest proximity, along achieve better non-performing ratios the same. New value with analytics to make dynamic pricing than traditional .4 propositions can lead adjustments and encourage drivers to meet demand in peak periods. It is a far Insurers will need to consider what to the establishment cry from passengers trying to hail a taxi their role might be in the ecosystems By understanding in the street. In insurance, online price developing around these data platforms, of new markets, by aggregators have established markets and where value lies in owning and the catalysts for matching supply to help consumers compare prices and analyzing data.5 Will, say, a large car disruption and bypass the traditional agent distribution manufacturer that fits sensors as and demand in model. standard in vehicles amass enough data regularly reviewing to dominate an ecosystem that brings pioneering ways. 4. Will digital technology give birth to together insurers and other service their businesses, hyper-scale platforms? providers such as telecom companies, companies will be repair shops, side assistance, And there are new products for new Digital technology can give rise to telematics providers, and services? able to lead the wave —protection against cyber risk, for companies that build platforms on a example, or cover for “sharing economy” 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 are exposed when they decide to become depth of analytical talent they deploy— The process of understanding these gathers strength, not cab drivers for Uber. along with the network effects they forces and analyzing the value at stake will drown in it. generate—are hard for others to match Some value propositions are emerging and thus create barriers to entry. 3 “Uber and Volvo to develop self-driving cars,” Financial Times, August 18, 2016. that threaten to undermine the existing 4 ’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 becomes available, from sensors in cars capabilities enable them to blur traditional 2014. business line will indicate the extent of 5 Nicolaus Henke, Jacques Bughin, Michael Chui, James 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 or monitors worn on our bodies, the more categories and customer segments and “The age of analytics: Competing in a data-driven world,” 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 25 automating 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 and Ido Segev for their contributions to insure against today. By understanding 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 27 Digital 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 1 shows that the companies with the Innovations as % of database total highest revenue and earnings growth led the disruption or were fast followers, “It’s hard for big Big data/machine learning 20 making big bets across their businesses on innovative products, digital processes, carriers to innovate as Software as a service/cloud 21 and even entirely new business models. they have so much to Usage-based insurance 13 Most insurers, though, do not have contend with already innovation in their DNA. Regulation has curbed incumbents’ ability to experiment, —industry headwinds, IoT 12 while limited competition has given them no particular need to do so—the size legacy issues. But Digital/Roboadvisory 10 of their in-force books makes it hard for new entrants to build market share, and they need to be in the 9 Gamification 9 start-ups seldom want to take risk on game, right now.” to their balance sheets because of the capital required to offset it. But innovate Peer-to-peer insurance 4 they must. Although there is significant — Caribou Honig, cofounder opportunity to capture value in the of QED investors Blockchain 4 short term by digitizing their current business, they will get left behind if they fail Micro-insurance simultaneously to use digital technology to 3 innovate and build new business. reputation, particularly if customer information such as data is 1 ~500 commercially best-known cases registered on database. Innovations focusing purely on insurance Source: McKinsey Panorama Insurtech database Exhibit 1 shows where insurtechs are compromised. Consumers too are at concentrating their innovation efforts. risk, from identity , 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 , 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 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. 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 New solutions are emerging. For car rides, Uber supplies drivers with limited “We ... create The cybersecurity opportunity—that few are seizing liability cover when its app is turned on and a driver is available. Its commercial of cover kicks in when a fare enters the individuals, on 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 whose behalf we the estimated cost of cyber breaches is projected to reach $2 trillion in 2019, or almost as Kingdom), offers a combined much as India’s GDP for 2015.2 personal and commercial package. negotiate with the

Yet the insurance industry has not leaped at the opportunity to sell protection against this Various forms of cover are emerging for insurance industry to new risk. The global insurance pool in 2015, according to Lloyds, was just $2.5 billion. homeowners participating in Airbnb and bring them a better 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 deal than they could supply-side issues. Insurers are unsure how to model cybersecurity risk and still have platforms offer protection for damage by not decided what they can cover economically. Few have written “full” cyber cover to 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 of hackers continue to evolve more rapidly than cybercrime protection methods. cover for short-term rentals. Still, most 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 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.

30 The age of innovation Digital disruption in insurance: Cutting through the noise 31 on-demand cover for short periods. Sure, will be donated. The idea is that peer Mendel (see “Playing to connectedness: Stefan Heck, CEO of Nauto, a US-based for example, is a mobile app for episodic group members who share an interest An interview with Steven Mendel of start-up that provides autonomous vehicle travel accident insurance bought on the in maximizing contributions to their Bought by Many”). technology, believes that as a result, some spot. Travelers look up their flights, enter causes will not attempt to inflate claims. 70 percent of loss events will disappear their personal data, and purchase cover One of the company’s executives is Personalized pricing in the course of ten years (see “Once in for the duration of the flight. behavioral scientist Dan Ariely, who says four-generation change: An interview with the Lemonade approach removes the Digital technologies increasingly enable Stefan Heck of Nauto”). European telecom operator Tele2 conflict between carrier and the insured carriers to assess risk on the basis of offers in that is inherent in traditional insurance. As data about specific consumers, rather The same shift toward risk prevention with , a Nordic insurer, for a result, he says that the company, which than general population data. Telematics exists in other business lines. Sensors in motorists whose insurance extends only began offering policies in September collect real-time information about an the home and devices that monitor our to domestic travel. When a driver crosses 2016, will be able to pay claims quickly individual’s driving habits to inform the health reduce the likelihood of accidents a border—from Poland to Germany, say— because it has less need to hold back pricing of auto cover, while data from or sickness. Accordingly, insurers are the insurer issues a text message offering payment until they can be verified. wearable devices such as fitness bands beginning to offer new services, often episodic cover while the vehicle is out of and apps that monitor adherence to in conjunction with partners, in the Poland. Another start-up, San Francisco- treatment can inform life cover— ecosystems that are growing around new based Trov, has an app that enables services that Sureify, a tech start-up, data. “The big difference in insurance in consumers to buy short-term insurance “The big difference uses to assist carriers underwriting the future is going to be service,” says on demand against loss or damage for in insurance in the personalized term life cover. Some carriers Eldes Mattiuzzo, CEO of Youse Seguros, items such as sports equipment and have experimented with using social the online insurance sales platform of computers. If they are about to take a ride future is going to be media data as a basis for underwriting Brazilian carrier Caixa Seguradora. on an expensive bike or take a laptop on and pricing decisions—but have met a vacation, the app can be used to switch service.” opposition from platform owners. the cover on and off. Another emerging form of on-demand insurance is usage- — Eldes Mattiuzzo, CEO of New value propositions “There isn’t one size based or pay-as-you-go cover—auto insurance by the mile, for example. Youse Seguros In the digital era, traditional insurance fits all. Depending models are threatened by the availability on our situation, we Peer-to-peer insurance of reams of data, much of it real-time, Bought By Many, a UK-based insurance that help mitigate risk. One of the will partner, we will Several start-ups have created peer-to- distribution company, groups those with biggest challenges on the horizon is the peer insurance services that aggregate similar insurance needs—diabetics, for development of autonomous vehicles invest, we’ll build customers for a group purchase. example, who often have trouble getting and advanced driver assistance systems Lemonade, a New York-based start-up travel insurance, or owners of particular (ADAS). These technologies will put ourselves. And that that has recruited veteran insurance breeds of pet. “We use a combination of passenger cars and other vehicles fully gives us all ways to industry executives, organizes peer search engines and social media to create or partially under computer control, groups around charitable and social communities of individuals, on whose reducing premiums as driving becomes plan.” causes. Consumers who purchase behalf we negotiate with the insurance safer, and ultimately shifting liability from homeowner or renter insurance on industry to bring them a better deal than the driver to the car manufacturer or its — Andrew Brem, chief digital Lemonade’s online platform designate a they could get on their own,” says the software vendor. ADAS systems, ranging cause to which unspent premium money company’s founder and CEO, Steven from adaptive cruise control to traffic officer of Aviva sign recognition, are already becoming common on passenger cars (Exhibit 2).

32 The age of innovation Digital disruption in insurance: Cutting through the noise 33 assistance services, car repair How insurers can develop ideas for Exhibit 2 workshops, rental car services and innovations more—all of which can be instantly accessed via a mobile app (Exhibit 3). To seize the opportunities and overcome Installation rates of ADAS1 technology Home insurers might become part of an the threats implicit in digital disruption, ecosystem centered on an app that helps incumbents have no choice but to home buyers take out insurance, and also innovate. Innovation must become a core values the property, predicts utility costs, capability. offers smart-home devices to monitor or flood risks, sends storm alerts, and, if a We see three ways for insurers to develop problem is detected while the homeowner new ideas and accelerate innovation: is away, offers to send out an inspector or by strategic partnerships, by repair person. investing in start-ups that have digital expertise, and by creating in-house Exhibit 3 Traditional OEMs claims assessors Repair 1 Includes installation of any of the following technologies: adaptive cruise control, collision mitigation, lane departure warning, blind spot detection, intelligent lighting, night vision, traffic sign recognition. shops

Source: McKinsey estimates; press

Telematics Insurance Claims solutions providers companies and analytics

Liberty Mutual, for example, is are emerging—a “one-plus-one-is-three collaborating with Nest, a manufacturer proposition” is how he describes it. “There of smoke detectors and other connected are products that we can provide, and a home products, to reduce homeowner set of insurance products, so the value risk. The insurer provides Nest smoke goes beyond reacting when something Core IT plat- Law forms/systems detectors to policyholders who agree to bad is happening, to helping customers Rental cars firms let the company check every month via prevent it from happening in the first wifi whether the batteries are working. place.” The homeowner gets discounted cover in Payment return. Linus Lundberg, head of enterprise In time, an auto insurer might be part Roadside providers assistance Police and partnerships at Nest, foresees a wealth of of an ecosystem that includes not court opportunities to build insurance products just telematics providers and car McKinsey & Company | 2 around the many connected products that manufacturers, but also roadside SOURCE: McKinsey

34 The age of innovation Digital disruption in insurance: Cutting through the noise 35 expertise. They can use all three speed: The hallmarks of a successful IoT Some insurers are funding technology    approaches, but are likely to emphasize strategy”). incubators. , for instance, one or another for strategic reasons. has set up an insurtech accelerator in This is the age of digital disruption. Across Andrew Brem, Aviva’s chief digital officer, Allianz, for example, has set up a joint Bangalore, India, to help start-ups develop industries, insurgents with digitally explains it thus: “There are some things we venture with Chinese internet giant Baidu products and services. Technology under enabled business models are challenging want to do ourselves from scratch, and we that enables it to use data on consumers’ development ranges from data analytics incumbents and their established business have the capabilities, but sometimes we online behavior to create customized for predicting health outcomes to artificial models. The incumbents have a choice: be take equity investments. There isn’t one offers. If an individual orders a plane ticket, intelligence for customer engagement. disrupted or be the disruptors. Those that size fits all. Depending on our situation, for instance, the system will automatically prosper in the digital future will be those we will partner, we will invest, we’ll build send an offer for flight insurance. This Insurers not only learn about new that choose to be disruptors and invest in ourselves. And that gives us all ways to not only gives Allianz a new way to sell technologies from these investments, they innovation today. plan.” insurance, it also grants the company also gain exposure to more agile ways access to the vast Chinese market, which of working. In other words, working with Alex Kazaks is a partner in McKinsey’s it had trouble cracking on its own. The start-ups helps older companies build a San Francisco office, Parker Shi is a senior Baidu partnership will, says Allianz CEO digital culture. Caribou Honig, founding partner in the New Jersey office, and Oliver Bäte, enable the insurer to “jump the partner of QED investors, which supports Holger Wilms is an associate partner in the “We’ll see a dramatic S-curve” in China. high-growth, data-led businesses, believes Washington, DC, office. working with start-ups is essential to “be in reduction in accidents AIG, meanwhile, has formed strategic the game.” The authors would like to thank Olga as real-time collision partnerships with IBM and other Yurchenko, an engagement manager in the technology vendors to boost its expertise In-house innovation factories Boston office, for her contribution to this warning and in risk analytics and cybersecurity. article. Insurers’ need for technology capabilities Our view is that innovation is too important increasing automation is likely to be a prime reason for embarking to be outsourced entirely. Accordingly, on partnerships. companies need to get very good at taking come into vehicles— ideas themselves and figuring out how to by 70 or 80 percent in Investing in start-ups commercialize them, roll them out on a large scale, and integrate them with existing the long term.” Whether through direct or venture processes, functions, and lines of business. investment, carriers can buy into new — Stefan Heck, CEO of Nauto companies to learn more about emerging One way to improve in-house innovation technology and its applications. AIG, is to build dedicated labs. These units for example, has invested in Human are set up with a mandate to coordinate Condition Safety, a provider of wearable the development of ideas and support Strategic partnerships devices aimed at maintaining workplace the scaling-up of the most promising safety. ’s equipment insurance ones. AXA, MetLife, and Aviva have all For most insurers it would be unrealistic subsidiary Hartford Steam Boiler (which launched labs in Singapore, where the to pursue innovation entirely under their already uses drones for site inspections) government has backed the development own steam. Partnerships can help them has invested in Augury, which uses of an insurtech industry and companies rapidly provide new types of policies or sensors and analytics to monitor heating, have access to the growing Asian market. ways of selling them, gain expertise, and ventilation, and air conditioning systems, AXA is looking at innovation in data storage play in ecosystems beyond the insurance improving maintenance and helping to and analysis, while MetLife’s LumenLab industry (see “Partnerships, scale, and prevent break-downs. focuses on innovations for healthy living.

36 The age of innovation Digital disruption in insurance: Cutting through the noise 37 There is plenty of talk about how digital data, and technical skills are valuable technology will affect consumers’ need business assets, but they need to be of insurance. The advent of autonomous catapulted into the digital age. That cars will reduce the requirement for auto will require the reinvention of the core insurance, for example, while monitoring business and the rethinking of decades- by the Internet of Things will lead insurers old beliefs and practices, with more rigor into businesses that help consumers and determination than most insurers mitigate risk rather than simply protect have shown in the past. Simply hooking against it. digital assets—a digital sales channel or a snazzy new service app—on to an analog Without doubt, insurers must take a hard business model does not make a digital look at what the future might hold and business. strategize accordingly. But in the nearer term, customers’ insurance needs will change less radically than the ways in which those needs can be met with digital Existing customers, technology—and there is considerable brands, data, and value to be had from a carrier digitizing existing business as a result. We estimate, technical skills are for example, that a typical large auto insurer could, over a five-year period, more valuable business than double profitability by harnessing the assets, but they need power of digital to attract and satisfy more customers, while simultaneously cutting to be catapulted into operating costs and improving pricing and underwriting accuracy. (See “Facing the digital age. digital reality” for further details of this analysis.) Instead, carriers need to digitally redesign Capturing value from the core It is crucial such value is captured, as it entire customer journeys—from the is only by digitizing the core that insurers moment a customer considers taking out will be in a position to compete over the a new policy to the moment of purchase, long term, however the industry evolves. for example, or from the moment a Insurers’ existing customers, brands, data, and technical Doing so will generate the funds for future customer needs to make a claim to the investment as well as build the skills and moment of reimbursement. That in turn skills are valuable business assets if they can be catapulted capabilities that will be the hallmark of will require an integrated approach: the into the digital age. successful carriers. digitization of customer-facing processes and the seamless automation of back-end Capturing this shorter-term value is no ones. easy task. Existing customers, brands,

38 Capturing value from the core Digital disruption in insurance: Cutting through the noise 39 Redesigning customer journeys components need to be addressed to points. (Exhibit 1 explains what underpins anxiety after a car accident. The success improve the underlying value levers of these figures.) In the past, trying to pull of many new, digital insurance companies Central to capturing value from the core the insurer’s business model. off this hat trick seemed an impossible lies not so much in the digital tools they business is recognizing how digital can task, but not today. As Oliver Bäte, CEO of deploy but in the experience those tools drive a fundamental shift in the way Allianz, said in a speech recently: “We can enable: a faster, more transparent, and companies interact with customers. No meet customer expectations that were too more intuitive approach to shopping for longer do customers have to contend “We’ve changed from expensive in the past. We can customize and servicing insurance. with what, from their perspective, are and individualize things and we can make slow and frustrating processes defined knowing everything them more flexible. Flexibility used to be The marriage of form and function. by a carrier’s internal functional upfront to trying the opposite of efficiency, and that is the Good must also marry form (the and technical limitations. Instead, paradigm that is disappearing because customer experience) with function (the digital technology and the redesign of and testing. Where you can offer a very efficient solution at value to the business). The design process customer journeys can help them to very low cost.” needs continually to check that both move quickly and seamlessly across we used to have are being met. Reducing time spent on channels and touchpoints, and deliver The fundamentals of a redesign the phone for simple sales and service personalized communications. Indeed, everything ready and transactions is an example of where digitization in other industries has led done before we put it Before considering the process for customer and business interests meet in a customers to expect nothing less than redesigning customer journeys, marriage of form and function. this level of ease and convenience. into action, now we companies need to take on board the fundamental elements that support it: The redesign of a customer journey can put it into action customer empathy, the marriage of form model has three components. The first and learn on the way.” and function, an iterative approach, and is design thinking—putting customers agile, cross-functional teams. A typical large at the center of the business and considering how best to meet their — David Stachon, CEO Customer empathy. Good design is based auto insurer could needs and how they interact with of German direct insurer on an understanding not only of what more than double the business at each stage of each customers say they want, but of what journey they embark upon. The newly CosmosDirekt might go unimagined if they are bound profitability over 5 designed journey is enabled by the by the present. Henry Ford put it like this: second component, automation and “If I had asked people what they wanted, years by harnessing analytics. These are used to anticipate The outcome is threefold: higher they would have said faster .” the power of digital. customer demands, shorten waiting customer satisfaction, greater efficiency, What they really wanted, of course, was times, personalize experiences, and and greater effectiveness. Our work something that was not just faster but automate simpler customer interactions suggests that in a claims journey for auto more comfortable and capable too. (a small auto claim, for example), insurance, for example, digitization can An iterative approach. In a digital era, while significantly reducing costs and raise customer satisfaction by between It is customer empathy that enables digital capturing value demands an iterative, complexity for carriers. A rapid launch of 10 and 15 points, improve claims companies to move beyond incremental, speedy development of processes and the redesigned journey is then ensured adjustment expenses by as much as 30 me-too improvements to drive step- services to keep pace with changing by the third component, agile working percent, and increase the accuracy of changes in customer experiences— technology and customer expectations. It methods, which are deployed across payments—by cutting down on fraud, perhaps mapping the progress of an is important that insurers feel comfortable the business, not just in IT. All these for example—by around 4 percentage incoming tow truck to relieve customer with the idea of testing products and

40 Capturing value from the core Digital disruption in insurance: Cutting through the noise 41 Exhibit 1

E ect of digitization on customer satisfaction, eciency and Greater eciency e ectiveness for an auto insurance claim A B

move from: High costs and low scalability C

<10% of customers report claims online and their data has be 40% of cases require on-site entered into the insurer’s systems manually by a claims handler appraisal of ~2 hours

20% of calls to call center are 100% of payments A customer satisfaction B efficiency for status requests triggered manually 1 Reduce claims-adjustment Increase NPS by expenses by Notification Claim Loss assessment/ Claims ~10-15 ppt ~20-30% of loss management repair settlement

30% of claims use digital tool 50% of loss payments for remote damage triggered and executed 60% of claims reported online by customers and agents with assessment or appointment automatically automatic feed into insurer’s systems selection 50% drop in status request calls owing to use of status messages to: 20-30% loss-adjusted expenses reduction

C effectiveness Improves accuracy of claims payments by ~4% Greater e ectiveness A B Higher customer satisfaction move from: High costs and low scalability A B C move from: Below-market satisfaction levels

C 15% of high- severity cases Straight-through processing <5% of cases steered into Fraud analysis conducted detected within 10 days reserved for glass claims only partner network sporadically at specific touch-points Wait up to 5 min in claims Several touchpoints with No transparency on status Wait up to 20 days for hotline and take ~20 minutes claims handler, claims of claim processing and payout to report a claim adjuster and repair workshop Notification Claim Loss assessment/ Claims Notification Claim Loss assessment/ Claims of loss management repair settlement of loss management repair settlement

Report of claim online within <3 Receive online a choice of Appointment with repair Real-time processing and min options for claim workshop/claims adjuster payout of settlement: 65% of high- severity cases 50% of claims automatically >50% of cases steered into Continuous fraud monitoring scheduled online settlement takes 2 hours detected within 10 days routed into target process partner network Self-service damage assessment via app in <5 min at any time and location

to: Increase in customer satisfaction Full transparency on claim to: Reduction in claims payment of up to ~4% status via push messages/app

1 Net score measures the loyalty between a company and its customers

42 Capturing value from the core Digital disruption in insurance: Cutting through the noise 43 experiences with customers as they are of tests with users. It is easy to imagine everything upfront to trying and testing. and the business work closely to splice developed—rather than waiting until the Swiss army knife being developed in Where we used to have everything ready business and customer. IT’s role thus they are complete—in order to obtain this way—first the simple blade, then a and done before we put it into action, now becomes strategic—it is no longer a immediate feedback and ensure the bottle opener, then scissors and file, and we can put it into action and learn on the support function. (See “IT moves center solution delivered is the one customers eventually an entire suite of tools. way. That’s a huge paradigm shift.” The stage” for more on this topic.) want. The aim is to bring a prototype, methodology also avoids costly mistakes, known in venture capital and start-up David Stachon, CEO of German direct as wrong moves can be quickly corrected The approach jargon as a “minimum viable product” insurer CosmosDirekt, explains how with early feedback. But insurers will need (MVP), to market in months rather than the test-and-learn approach speeds to embrace failures in order to learn from These fundamentals are all reflected in years. The MVP is then refined in a series progress. “We’ve changed from knowing them, and recognize that the journey the redesign of a customer journey. There is never really complete: it undergoes are three stages in the redesign: define, constant iteration. design, and deliver (Exhibit 2). The first stage, define, is about understanding Agile, cross-functional teams. In a what customers want and why, and how rapidly changing environment, insurers’ the business will benefit from meeting Digital distribution and claims in P&C various functions—risk, underwriting, their expectations. For simple claims, claims, marketing, and sales—offer deep for example, customers might seek expertise but are often too rigidly siloed to assurance that their case is being fast- Lemonade, a New York-based start-up that offers insurance for renters, uses a respond quickly. Moreover, in a functional tracked without their having to call the conversational chatbot powered by artificial intelligence to recreate the experience of set-up, no one owns the full customer adjustor to check progress; the adjustor texting or messaging with an agent to deliver tailored sales recommendations, followed by experience. It can take several weeks saves time as a result. These customer instantly issued policies. When a claim occurs, the same chatbot is used for first notice of and many working sessions to create a needs are uncovered by mapping current loss and damage assessment; in some cases it will issue payment in under three seconds. complete view of it, and still not everyone customer journeys and identifying Lemonade aims to use digital technology to improve the customer experience and keep its will be committed to its improvement opportunities and pain points, an exercise expense ratio down, passing savings on to customers. given the various performance metrics that can be achieved within three to five used. The solution is cross-functional weeks through ethnographic market teams whose common goal is to remove research and close customer contact. A customer pain points and capture the company might not choose to fix all the Digital distribution in individual life business opportunity. opportunities and pain points identified, but it does need to address the highest Haven Life, a direct-to-consumer life insurer started by MassMutual, uses digital Adopting an agile approach, these priorities. This stage forms the foundation technology to offer medically underwritten quickly and at low cost. By teams work in “sprints” to meet specific, of cross-functional collaboration that will tapping into other data sources such as prescription history and motor vehicle records, agreed development targets week by mark the new way of working. Haven can issue policies without asking customers to undergo unpleasant, lengthy, and week, incorporate regular user feedback, costly (for the carrier) medical tests. And by going directly to the consumer it eliminates the and hold daily meetings to ensure Next comes the design phase. For the distribution expenses associated with agents—often more than 100 percent of the first progress is transparent and deadlines time being, it ignores constraints such year’s premium. are met. Regular review meetings as immature technology or regulatory with other stakeholders from affected limitations and instead focuses exclusively business functions help identify areas on the customer need and the business for enhancement. In this arrangement, IT objective (“maximum aspirational

44 Capturing value from the core Digital disruption in insurance: Cutting through the noise 45 Exhibit 2 Exhibit 3

Capturing value from the core by redesigning customer journeys How current customer journeys could be redesigned Define, design, and deliver the minimum viable product within six months From To 1. DEFINE 2. DESIGN 3. DELIVER

1 month 1 month 4 months or less Subsequent releases build on MVP (e.g., Version 2.0, 3.0) to auto insurance claims Define digital business Design a clean-sheet Release the MVP deliver additional business model and customer needs customer journey. Test it and customer value Customer waits on hold to report claim Instant claims reporting through responsive mobile continuously via phone site or carrier app

Lengthy first notice of loss call to give Automatic data collection based on a simple Q&A, information on claim photo upload, and sensors

No transparency on status of claim Proactive updates sent via email, SMS, and online messengers (e.g., WhatsApp, Facebook)

Communication with human adjustor to check Communication with chatbot via digital channels for status and share additional information via Map existing customer journey Develop a customer journey Rapidly develop MVP features phone and email during normal business hours that customer and using agile methodology – Identify the key value levers business needs, using a constantly test with customers that will define a new, digital Payments triggered manually, and often paid Payments triggered automatically and deposited “maximum aspirational business model Release product and track via check directly into customer’s bank account proposition” customer and business impact Identify customer pain points Test and iterate the journey as well as opportunities to Prioritize next set of features with customers delight customers in a prioritized backlog Prioritize key features for (roadmap) beyond MVP MVP release life insurance purchasing

Initiated by a cold call from an agent Triggered direct-to-consumer based on customer’s life event

proposition”). To extend the claims updates, while the tech team works on Confusing set of complex policy variations Simple, tailored set of product options based on customer’s unique needs example, the team might decide that a the advanced analytics-driven chatbot for Blood- and urine-based underwriting Fluids-free underwriting, informed by public lightweight chatbot based on artificial subsequent releases. and private databases (accessed with intelligence is the best way to accelerate customer’s consent)

customer response times. It would test In the third phase, deliver, the cross- Lengthy underwriting duration Instant underwriting, quoting and policy issuance the concept with customers, refining it functional team embarks upon one- to several times, and then break it apart two-week development sprints with a into a set of discrete features. Each commitment to release the MVP to market is assessed for feasibility (business, within three to four months. This requires homeowners’ insurance renewal technical, and regulatory) in order to close coordination between business prioritize those features that can be and IT, often using an agile development Paper-based renewal notification at time Proactive communication well ahead of renewal developed immediately (the MVP). In this method that requires a strong product of renewal case, instead of a chatbot, adjustors might “owner” who is empowered to make No explanation for change in premium Simple explanation of changes to policy and additional cross-sell options first use a texting platform, augmented decisions about the scope and form of by automatically generated status the solution, a “scrum master” who leads Phone call required to learn more or request Interactive, web-based process to make changes complex changes to coverage (all pre-approved)

Manual renewal submission with a new Automatic and instant renewal underwriting process

46 Capturing value from the core Digital disruption in insurance: Cutting through the noise 47 the charge for a new way of working, a aggressive target would be to redesign while the home owner is away, offers to team of four to six full-stack developers, 25 to 35 journeys within three years, send out an inspector. The app could even experience and visual designers, and accelerating the pace of the roll-out during send alerts of pending storms, advise on representatives from relevant business that period as the redesign approach precautions that might be taken to protect functions. Once released, often to a improves with experience. the home, and offer a snow removal or limited set of end-users at first, customer repair service once the danger passes. feedback is gathered. This, along To support the roll-out, IT infrastructure with confirmation that the underlying often needs upgrading to include modern Redesigning customer journeys is not technology is stable, is used to develop technology stacks, cloud architecture, therefore simply a way of creating value version 2.0 almost immediately with the automated testing, reusable application from insurers’ core business today. It next set of prioritized features. program interfaces (APIs), and a flexible also prepares them for the future. The middle layer that links customer-facing cost savings the process delivers will Scaling up applications to underlying systems. New be essential if insurers are to compete hires and new partnerships will also be with low-cost digital attackers and invest Almost every customer- or agent-facing required to build the necessary skills, and in innovative products and services. touchpoint is part of a journey that could different organizational structures will Just as importantly, it equips today’s be digitized to some degree to make have to be considered. Some companies insurers with the means to adapt swiftly it more satisfying for customers, more choose to set up a separate division to and continuously to changing customer efficient, and more effective. Exhibit lead digital initiatives, believing they need needs—whatever the shape of tomorrow’s 3 describes a handful of journeys ripe the distance, space, and a degree of insurance industry. for redesign, with examples of how autonomy from the old business in order the customer experience could be to flourish. Johannes-Tobias Lorenz is a senior transformed. partner in McKinsey’s Düsseldorf office,    Pradip Patiath is a senior partner in The question thus becomes, which the office, and Christopher customer journeys should be tackled As technology evolves, so will the extent to Morrison is an associate partner in the first? The choice will differ by organization, which customer journeys are transformed Boston office, where Ido Segev is a but it is important to prioritize journeys to include an array of products and partner. that will demonstrate early impact and so services. Home insurers, for example, gather enthusiasm and support for more might become part of an ecosystem investment. centered on a mobile app that not only helps home buyers take out insurance, Generally, the choice and sequencing are but also values the property, predicts guided by the value likely to be captured variable costs such as annual energy and the feasibility: is the IT architecture charges, helps the homeowner catalog in place, and are there enough people possessions against any future claim, with the right capabilities? This will shape offers smart-home devices to monitor fire the roadmap for the coming months. An or flood risks, and, if a problem is detected

48 Capturing value from the core Digital disruption in insurance: Cutting through the noise 49 Insurers have always offered “virtual” In the , for example, the products and based their success on a IoT is being applied to the maintenance of data-driven business model. Information wind turbines to improve their repair speed technology has thus been essential to and reliability. In , sensors that their operations. Yet the industry has been monitor soil humidity and trigger irrigation slow to adopt digital technology and, in are raising productivity. For insurers too, particular, to grasp the benefits arising the IoT presents an array of opportunities, from the Internet of Things (IoT). If it is to particularly in relation to the way they do so, it needs to put its foot firmly on the interact with customers—but it also poses accelerator. a threat to existing business models. A winning IoT strategy will depend upon the The soaring number of internet-connected partnerships and scale insurers can build, devices that constitutes the IoT signals and the speed at which they do so. their influence. In 2010, there were 12.4 billion. By 2025, it is estimated there will The emergence of ecosystems be more than 50 billion. These devices, equipped with sensors and activators At present, there are four primary areas and attached to all manner of objects or for insurers considering an IoT strategy: worn by people, can convey vast amounts connected cars,1 connected health, of data back to companies in real time connected homes, and IoT in commercial and enable virtually immediate analysis lines. The IoT can enhance existing and response, often without the need for business models in each and allow for human intervention. The way companies more accurate . For in many industries operate is changing example, auto insurers used to price because of them. 1 For more detail, see “Shifting gears: Insurers adjust for connected-car ecosystems,” McKinsey.com. Partnerships, scale, and speed: The hallmarks of a successful IoT strategy 1 The Internet of Things both promises to enhance and threatens to undermine insurers’ business models. A three- pronged strategy is needed to secure its benefits.

1 Source: Statistisches Bundesamt, Deutsche Bundesbank, Prognos, Digital Sociey Study, Thomas Nipperdey, McKinsey.

50 Partnerships, scale, and speed: The hallmarks of a successful IoT strategy Digital disruption in insurance: Cutting through the noise 51 policies on the basis of proxy variables point. Cars are increasingly equipped new, service-based revenues, however. find the right partner? Can I build enough such as the age, residence, and credit with sensors that, besides monitoring Insurers could offer risk-prevention scale? And can I move quickly enough? score of a driver. Today, they can price a driver’s behavior and vehicle usage, services, alerting drivers that their car on the basis of real usage and driving can collect other vehicle data such as needs a service, for example, or finding The question of finding the right partner is behavior, such as how fast a vehicle oil temperature, brake wear, and tire smart parking solutions. They could closely related to the question of building is being driven and whether it is being pressure. A host of new applications even offer proprietary data and analytics sufficient scale. Any partner will be need driven at night. In a commercial setting, are thus enabled that meet customer solutions to third parties, such as media to be sizeable. That is because very large insurers can now know whether a demands for convenience, safety, agencies that focus on location-based amounts of sensor data will be required, business owner is following required and security. And as their number advertisements. on top of the proprietary data insurers safety and maintenance procedures. grows, an ecosystem forms around the already have, if meaningful insights are connected car, involving automakers, Yet, notwithstanding assets such as to be extracted from it, especially to telecom companies, sensor and chip proprietary data, long-established get to sufficiently long claims histories While offering manufacturers, digital platform giants customer relationships, and analytical in order to assess risks. At present, in such as Uber, academic institutions capabilities, insurers might not be in the respect of connected cars, for example, plenty of potential and standards-making bodies, and, of best position to tap the IoT. To access many sensor systems are of limited value course, insurers. the valuable data from sensors upon because they have neither sufficient to enhance the which new, hybrid insurance models geographic coverage nor a link to data on The emergence of this connected-car depend, they will probably have to enter actual claims frequency or severity. business model, ecosystem changes the competitive partnerships with the companies that own connected devices landscape for all participants, but the data, such as auto manufacturers and particularly for insurers. Connected cars health equipment producers—and these Insurers need to make also challenge it. have fewer accidents and breakdowns— companies might have better contacts the new technology increasingly with their customers than insurers do. themselves attractive prevents them. Hence, premiums In that case, auto manufacturers that On top of the core business of offering fall. This downtick is potentially fit monitoring devices to every car as potential partners. insurance policies, connected devices aggravated by significant changes in standard, or telecom companies that also give insurers the opportunity to risk distribution. Connected devices can upgrade with smart home interact more often with their customers separate out the high-risk customers sensors, could become gatekeepers Insurers can enhance their chances of and to offer new services on the basis from the lower-risk ones, so the insurer’s to insurance customers. At the same finding the right partner by considering of data collected—a step change in an focus moves to predicting and managing time, companies outside the insurance carefully how they position themselves industry where customer relationships individual risks rather than communities industry are building risk-related data and within an IoT ecosystem. For example, are often delegated to an agent or of risk and to developing new actuarial analytics, alongside service capabilities. consumers are increasingly suspicious , and customer touchpoints tend models. Moreover, careful drivers might In other words, the IoT could undermine of companies collecting their data; thus to be limited to annual renewals and expect significant discounts on their insurers’ two hitherto critical competitive insurers can present themselves as occasional claims. insurance premiums that will be difficult advantages—their underwriting skills and trusted and reliable collaborators. They to balance with price increases for their customer access. can also highlight their capabilities in risk While offering plenty of potential to higher-risk drivers. These developments assessment. Yet ultimately, the most enhance the business model, however, are expected to put pressure on hitherto Becoming an attractive partner attractive insurers in the ecosystem will connected devices also challenge it. stable revenue streams. be those keen to build risk mitigation The auto industry—the most mature What will it take for insurers to succeed in a capabilities too, and to help provide sector in terms of its adoption of The loss of these risk-based revenues connected world? Carriers should start by services such as roadside assistance and connected devices—illustrates the could well be offset by the emergence of asking themselves three questions. Can I medical assistance.

52 Partnerships, scale, and speed: The hallmarks of a successful IoT strategy Digital disruption in insurance: Cutting through the noise 53 This leads to the third question: can I move partner in the Munich office, and Anand quickly enough? Before long, the IoT will Rao is a digital in the reach a tipping point where insurers not Chicago office. yet in the game could find themselves locked out. Unless they move fast, they The authors would like to thank Simon might find it hard to secure a partner with Behm and Thomas Schumacher for their the necessary mass of data and customer contributions to this article. access. An auto manufacturer might need only one insurance partner, after all. Similarly, in the connected home market, those with the data are likely to be picky. In the end, this could be a winner-takes- all situation in which first movers shape the market and sustain a competitive advantage.

Insurers therefore need to make themselves attractive potential partners. That means defining a compelling value proposition and building the critical capabilities: next-generation IT that can interact with multiple external systems, advanced analytics that connect an insurer’s data with insights from partners in the various ecosystems, the ability to integrate coverage and service solutions, and digitally native talent experienced in agile and test-and-learn modes of working. Modernizing IT for a strategic role The inevitable uncertainty that still surrounds the development of the IoT should not prevent insurers from taking bold, urgent action. The fast lane is the place to be. IT has long been seen as a cost of doing business by insurance companies. In a digital era, it must be Markus Löffler is a senior partner in McKinsey’s Stuttgart office, Christopher modernized and recast as a strategic one. Mokwa is an associate partner in the office, Björn Münstermann is a

54 Partnerships, scale, and speed: The hallmarks of a successful IoT strategy Digital disruption in insurance: Cutting through the noise 55 Insurers’ success has always depended The reason is that technology is defining Exhibit 1 upon their ability to analyze data, and the winning business model in insurance, thus to price and underwrite policies as in other industries. It has set a high accurately. The purpose of IT has been bar for service—with customers now to support these capabilities and as such expecting simplicity, speed, transparency, Comparison of costs incurred by modern and legacy IT systems it has been regarded as a cost of doing and customization—while reducing the business. In a digital environment, this cost of that service. At the same time, with relationship and attitude have to change. so much real-time data being generated 1 1 While the successful insurers of the future in a connected world, digital technology IT costs per GWP Operating costs per GWP will still excel at the analysis of large data is pushing insurers toward new types of pools, their IT functions will move toward business that help consumers mitigate Legacy IT 1.8 1.4 playing a strategic role. In the words of risk rather than simply protect against it. Danny Dagher, group chief information officer of regional universal banking group If IT is to sit at the center of a new business Modernized IT 0.8 0.8 , “There are many insurance model, insurers will need to make two companies that run IT as a support commitments. First, they will have to -58% -43% function. [In today’s environment,] that will invest heavily to build IT capabilities and kill them.” modernize core platforms. For some incumbents, that might mean as much as 10 percent of a single year’s premiums 1 Gross written premium spread over a five-year period, depending Source: McKinsey’s insurance cost benchmark Q1 2016 Life insurance sample, expert interviews

With so much real- on the starting point and the extent of time data being the modernization needed. That level of spending might be hard for some to generated in a contemplate, not least because premiums but also how they think about IT. Without The products and services that digital are destined to fall as a result of digital this change, large investments could be technology enables constantly evolve. A connected world, technology (see “Facing digital reality”). wasted. leading-edge portfolio already includes But they should bear in mind that wise features such as dynamic pricing, digital technology investments to upgrade IT can ultimately An understanding of what IT needs to whereby prices are instantly adjusted is pushing insurers lower their IT and operating costs relative deliver in a digital age reveals why these based on relating to claims or to those of their peers and bring efficiency commitments are so important. churn, for example, and real-time toward new types in IT to the level required in today’s market customization of products from a set of (Exhibit 1). The deliverables both mandatory and optional product of business that modules, again allowing for dynamic help consumers Second, insurers will need to commit There are four elements of a high- pricing. to new ways of working. That means performing digital insurance business mitigate risk rather a differentiated approach to IT (Exhibit 2). New types of product will emerge as development, and a more collaborative digital technology alters the nature of the than simply protect IT operating model that changes not only A digital portfolio of products and industry. Access to ever more real-time against it. the way business leaders work with IT, services within an ecosystem of partners data, particularly via the Internet of Things,

56 Modernizing IT for a strategic role Digital disruption in insurance: Cutting through the noise 57 arguably have more insight into a driver’s required to implement them either in the risk than insurers do once sensors product system or other core systems. A large European insurer has modularized its auto insurance to enable customers to become fitted to vehicles as standard. policies to their needs—either by choosing one of three pre-defined packages or Insurers will therefore no longer be able IT will also need to manage quite by assembling a policy from a range of modules including roadside assistance, rental car to rely solely on their underwriting skills, different relationships. Under the guarantee, and compensation for loss in value. Because the dozen or so modules are but will need to partner with companies traditional insurance model there was standardized and individually priced, the straight-through processing (STP) rate for the from other industries, such as auto clear differentiation between a carrier’s issuance of policies is close to 100 percent, delivering considerable cost savings, while the manufacturers and telecoms operators, customers and suppliers. But that line average new-business premium per has risen by 6 percent. to become part of the ecosystem forming is blurring as insurers increasingly offer around the data stream, offering products value-added services that are provided by and services of which insurance is but one external partners, in addition to traditional component (see “Partnerships, scale, and insurance products, and an ecosystem of speed: The hallmarks of a successful IoT partners takes shape. means more accurate assessment of check-up, or an automatically triggered strategy”). risk, but also less risk. Sensors in the appointment for repairs when a fault is home can warn of the danger of fire, detected on a car. sensors in the car can help prevent accidents, and sensors worn on the Importantly, in a connected world, A Dutch insurer has partnered with a leading technology company to develop an internet body can alert physicians to health insurers will need to complement platform for the remote monitoring of chronically ill patients, aimed at containing costs and problems. In addition, the data gives rise their proprietary data with data from increasing customer satisfaction by encouraging healthier lifestyles. In a similar effort, South to new services that can be combined other industries and external sources. African insurer Discovery has developed the Vitality platform, now available globally through with insurance products—a medical For example, car manufacturers will partnerships—with John Hancock in the United States and AIA in Singapore and Australia, for example. It encourages its more than 5.5 million members to lead healthier lifestyles, and in return offers discounts on a range of products and services. Exhibit 2

IT capabilities clearly contribute to the An omnichannel customer experience value of such digital portfolios. Technically, Digital portfolio of Advanced analytics An omnichannel Automated operations product systems need to be flexible Whatever products and services an products & services with customer experience an ecosystem of partners in order to map modularized product insurer offers, customers want to structures, for example, and must lend access them across a range of channels themselves to being integrated, alongside where they enjoy the same high-quality other systems in the IT landscape, with experience that they are used to from those of external partners to enable other industries, such as retail. And joint development, testing, and release. they want to be able to switch from one Products are fully digital, with Customized offerings identified to Full spectrum of digital channels in Process landscape automated and dynamic pricing meet customer needs place beyond simple website integrated across the organization Organizationally, IT needs to support the to another without the disruption of

Modular product structure enables Advanced analytics used across the Advantages of all channels leveraged Response time to customers business to bring new products to the having to repeat themselves or re-enter real-time customization value chain to prevent high-cost cases, in a targeted manner to increase sales quickened and waste and costs in identify market micro-segments, and and retention operations reduced market within weeks rather than months, data. Companies that fail to provide Value-added services offered beyond enable interactive and customized and with little or no additional IT effort this omnichannel experience will lose pure insurance, such as predictive underwriting Increased sales and retention through maintenance with auto policies an optimized channel mix customers to competitors that do.

58 Modernizing IT for a strategic role Digital disruption in insurance: Cutting through the noise 59 Advanced analytics value-creating insights via predictive models or machine learning. A US insurer has launched a mobile app that enables customers to get an instant quotation Insurers increasingly employ advanced for auto insurance by taking a snapshot of their driver’s license, to report vehicle damage by analytics to help them make better A strategy for building next- sending photos, and to find a service center for repairs. Claims processing time has fallen decisions. Some auto insurers, for generation IT by up to 20 percent as a result. A European insurer has launched a similar app for mobile example, use credit scores to assess quotations and underwriting; cycle times for policy issuance have fallen from three weeks risk more accurately, as analytics have Delivering on all this is replete with to three minutes. revealed that people who pay their bills on challenges. There is the technical time tend to be safer drivers. And some challenge of overcoming the drag of life insurers are using social network and legacy systems and the practical one of geographical data to reduce fraud by up to hiring new talent—both of which may be The implications for insurers are clear. in the value chain regardless of the line 25 percent. Ultimately, advanced analytics familiar to some insurers. Yet if the full They need round-the-clock platforms for of business or channel. The generation will become a capability that sits at the strategic value of IT is to be realized, new, all channels, with functionalities available of sales leads and the processing of core of the way business is conducted often unfamiliar ways of working and to customers, sales partners, and high-frequency, low-cost claims are across the value chain, further driving the thinking will be required too. external partners on multiple devices just two candidates ripe for automation. level of automation. and user front-ends. They need to equip Increasingly, however, insurers will need the salaried salesforce and tied agents not only to automate basic processes with mobile devices and applications further, but also to deploy robotics with that ease the sales process with existing artificial intelligence and advanced A large European insurance group has developed a statistical model to predict and reduce and potential customers. And they analytics to make better decisions, customer churn. By analyzing variables such as the price paid for a policy, the percentage need to provide those customers with faster. price increase year on year, and how long the policy has been held, it can identify those self-service tools that enable them to customers most likely to leave. It then reverse-engineers competitors’ prices and optimizes acquire real-time quotations, make Achieving a high degree of automation its own prices accordingly. In addition, having identified those clients most at risk of leaving, administrative alterations to policies requires profound changes to IT it is able to concentrate agents’ efforts on retaining them. As a result, renewal rates have (such as changing an address or direct architecture because every layer increased by up to 7 percentage points and bottom-line profits by as much as 5 percent. debit information), or notify a claim. is affected. For example, policy administration and claims systems will Automated operations need to be overhauled, be it in response to a higher overall level of IT intensity, the The automation of processes increases introduction of novel robotics and script Capturing the technology’s potential We see four key components of a strategy customer satisfaction while reducing systems, or upgraded workflow engines. hinges on the ability to administer and to modernize IT for the digital age. operating costs, and touches every step analyze data (whether from internal or external sources) in a consistent Systematic building of new capabilities manner across all channels. Both will require significant changes to existing IT With most incumbent insurers, there is a A Scandinavian insurer has rigorously automated the claims handling process. For first architectures. These include establishing gap between the capabilities they have notice of loss, it deploys “smart” scripts to capture the fields relevant for STP; in claims a master data-management system that and the capabilities they need. A clear plan handling it checks coverages through a rules engine and calculates costs upfront through gives a consolidated view of all data, in is required to the gap, based on a a data-based inspection system. In these ways, the insurer has been able to achieve STP particular customer and product data, and grasp of the present state and the target rates in claims of up to 30 percent in auto insurance and 60 percent in health. the deployment of big data and advanced state over the next three to five years. analytics systems that integrate data Areas must be prioritized and initiatives sources and provide platforms to generate agreed.

60 Modernizing IT for a strategic role Digital disruption in insurance: Cutting through the noise 61 Beyond exceptional general capabilities might have to be augmented by searches management of foundational IT—the such as fast decision-making, the ability among developer communities, via parts that support business capabilities “Moving toward an to learn and react, and strong central participation in technology conferences requiring less agility and speed—can agile methodology ... steering, the essential qualities needed to and other events, or by establishing be approached in a traditional, more keep pace with digital leaders are rigorous partnerships with software providers. In structured manner to ensure the stability means development discipline in IT execution, world-class turn, developers will expect prospective and reliability of systems, and cost agile IT , a scalable cloud employers to check their contributions efficiency. Our experience is that the times are shorter. infrastructure, and a single, open, and to open code communities, not rely on division of digital IT and foundational flexible application architecture. interviews. IT should be made according to And it includes—this business capabilities and where speed is the important A differentiated approach to IT will differentiate a company. Hence “Think of all the development customer portals, social management, part—getting the and customer relationship management business people informational assets Digital attackers can build their IT typically belong to digital IT, while risk capabilities from scratch, aiming precisely management, fraud management, and involved in the you have as an at specific emerging opportunities. belong to foundational IT with Incumbents have the advantage of large longer release cycles. development of any insurer ... if that’s all policyholder books of business, but are burdened by system environments which Some believe the bimodal approach new solution.” hard coded, and if it were designed for traditional operating has drawbacks, arguing that agile ways takes massive capital models and are challenging to adapt of working should be introduced as —Tom King, senior director to contemporary digital preferences. broadly as possible. Our view is that expense and effort in Marcus Ryu, the CEO of Guidewire, a insurers should indeed switch to an agile at US software company US software provider for P&C insurers, development approach wherever they Pegasystems order to make even describes the situation as “strategic can, but the fact remains that releases in superficial changes lock-in.” foundational IT domains do not need to be as frequent as those in digital IT domains. Modernized core platforms to that environment, That said, these legacy assets still have A bimodal approach is therefore an considerable value, which needs to effective way to ensure that investments to For many incumbent insurers, there then you are, in a be maximized. Often, the solution is a accelerate IT delivery are directed where is no getting away from the need to bimodal approach comprising “digital IT” they will be most valuable. overhaul their core platforms. Written sense, suffering from and “foundational IT.” In respect of the using decades-old, common business- strategic lock in.” first, the innovative features and products That said, establishing a bimodal oriented language (COBOL) or PL/I, demanded by customers are released approach requires time, careful these monolithic, batch-processing quickly by replacing the waterfall method consideration, and commitment because systems usually cannot deliver the speed, —Marcus Ryu, CEO of of software development—whereby it involves radically evolving IT, an agile agility, and flexibility required by a digital Guidewire software is developed, tested, and collaboration culture (see below), business. They can present difficulties in deployed in a strict sequence—with agile modern engineering methods such as terms of operations and scalability, and methods whereby teams work in sprints DevOps, increased use of services and are too costly. Fresh talent will be required to strengthen to meet weekly development targets. microservices, improvements to the existing capabilities and build new ones. Features are tested with customers and organizational set-up, and the honing These insurers are left with three choices: Traditional methods of recruiting via refined and refreshed in rapid iterations. of talent. build a new core insurance platform agencies, job listings, or internal referrals Meanwhile, the development and themselves, refactor the existing one

62 Modernizing IT for a strategic role Digital disruption in insurance: Cutting through the noise 63 (by modernizing code or streamlining functions have deep expertise, they are might be needed too. If agile models and culture. While near-term benefits can the system architecture, for example), too rigid to respond to rapid change. are to succeed, vendors might need to be captured within six to 12 months, a or replace it with standard software. Moreover, in a functional set-up, no one work differently, in closer cooperation wholesale upgrade to the next generation The choice will depend on a range of really understands the entire customer with insurers. Insurers are therefore likely of IT capabilities can take as long as five considerations, including the state of the experience. to have to consolidate the number of years and will require a company’s full legacy systems, the level of ambition, and vendors with which they work. In addition, commitment and significant investment. the level of resources. Those wanting contracts that fix prices, scope, and The effort will bring a reward beyond lower to lead in processes and product budget might need to be replaced with overall unit costs: an IT function equipped innovation, and able to invest accordingly, For many incumbent contracts that reward success. to play the strategic role crucial to an might choose a proprietary platform. insurer’s success in a digital world. This was the choice made by a global insurers, there is no This type of operating model requires insurance group seeking a platform getting away from cultural change within IT and the Krish Krishnakanthan is a partner with a common core and country- and businesses. Leaders in both need to in McKinsey’s New York office, Jens entity-specific customizations in order the need to overhaul help build an understanding across Lansing is an associate partner in the to promote common practices globally the organization of how IT can define a Düsseldorf office, Markus Löffler is a while maintaining local flexibility. Insurers their core platforms. product’s value to customers, and how senior partner in the Stuttgart office, and with relatively stable and modern systems agile ways of working can deliver that Björn Münstermann is a partner in the that need to be able to support digital value. This is particularly true for intangible Munich office. technology might choose to refactor. Cross-functional teams organized insurance products. And those aiming for lean, standardized around products solve this problem. processes and products might find Their combined expertise means they are Working in cross-functional teams will standard software to be the right solution. able to deliver the products and services help alter thinking. But for business A Benelux insurer that found itself with a customers want and at the pace required leaders to contribute to the collaborative very expensive legacy system unsuited in a digital world, particularly if team environment, and understand the to digital modification, and wishing to members are located in the same place constraints and potential of IT, some institute lean processes, chose standard (often digital “garages” or “factories”), formal training is often required. One software as its best option. they are empowered to make their own large European insurance group has set decisions, and the entire team (not just up an IT literacy program to educate and A collaborative IT operating model the IT people) adopts an agile approach to update business line managers, while all its work. Flexible funding—replacing the newly appointed top business managers The digital operating model is defined conventional one-off, annual budgeting must take a three-day training module to by agile ways of working and by process—ensures that investment is help them understand and capture IT’s collaboration—internally across the directed incrementally at projects that strategic value. business and externally with partners and show most promise. vendors.    Externally, IT must facilitate collaboration Internally, a digital-ready operating model with new partners—auto manufacturers, Building next-generation IT capabilities is one in which IT works closely with all telecom companies, sensor and chip is no small undertaking. The process other parts of the business. Yet most manufacturers, or digital platform giants touches all dimensions of a company’s insurers still organize themselves around such as Uber—by enabling the integration IT—architecture, application landscape, functions such as risk, underwriting, of systems and processes. Yet some infrastructure, supporting processes, claims, marketing, and sales. While these re-evaluation of existing relationships and operating model—as well as skills

64 Modernizing IT for a strategic role Digital disruption in insurance: Cutting through the noise 65 Many have likened the revolutionary up, because as well as demonstrating possibilities of blockchain technology to potential to enhance insurers’ current those of the internet, such is its perceived business model, blockchain is being used capacity to transform the ways in which by digital start-ups to attack it. people and businesses cooperate. Blockchain is a shared, public ledger of records or transactions that is open to Investors put inspection by every participant but not subject to any form of central control. The more than Economist newspaper has described it as a machine for building trust.2 In the case of the virtual currency Bitcoin, arguably its most famous application, it tracks transactions and facilitates money transfer, while preventing double- $800M spending, without the need for a bank. But blockchain lends itself to many other into blockchain- systems for keeping static records (of land titles, for example), for registering related start-ups dynamically the exchange of assets, between 2014 and and for making payments such as ticket purchases. It is also a platform for “smart 2015. contracts”—computer programs that automatically initiate certain actions when Sensing this, investors put more than predefined conditions are met. $800 million into blockchain-related start- ups between 2014 and 2015. Perhaps How it works even more indicative of its disruptive potential, in late 2016 four European While blockchain technology can be used The promise of blockchain insurance giants, Aegon, Allianz, Munich in different ways, a blockchain solution Re, and Swiss Re, set up a combined generally builds on four features. pilot project known as B3i to explore the nascent technology.1 Decentralized validation. When a Blockchain has huge potential to enhance insurers’ transaction such as a ticket sale occurs, The insurance industry in general, new data blocks describing it are added business model, but is also being used by digital start-ups however, lags behind other industries, to a chain only after consensus is reached to attack it. Hence the imperative for incumbents to start such as banking, in terms of the interest it among the relevant participants on the exploring this nascent technology. has so far expressed. It will have to catch validity of the action—for example, when

1 See also http://www.mckinsey.com/industries/financial- 2 http://www.economist.com/news/leaders/21677198- services/our-insights/beyond-the-hype--in- technology-behind-bitcoin-could-transform-how- capital-markets. economy-works-trust-machine.

66 The promise of blockchain Digital disruption in insurance: Cutting through the noise 67 the seller is validated as the owner of a smart contract, or registered data in the required by regulators to prevent money process of verifying the delay can be a lot ticket that is sold. blockchain. laundering—a process that is otherwise of effort for relatively little reward.) expensive and time-consuming for Redundancy. The blockchain is Opportunities for insurers institutions and annoying for clients if they Similarly, smart contracts could trigger continuously replicated on all or at least have to offer up the same information the claims and payments processes for a group of nodes in a network. As a With these characteristics, blockchain about their identity and source of wealth damage caused in the home or to a car result, no single point of failure exists. can help address some of the key to different institutions. Once KYC data is and detected and verified by sensors challenges that many incumbent verified, the customer can use a private linked to the Internet of Things, doing Immutable storage. Blockchain insurers face in a digital age, including key to grant companies in the network away with quibbling about the causes confounds hackers because to tamper the need to understand and meet access to the encrypted data whenever it of damage and phone calls to chase the customer needs more fully and to cut is needed. progress of a claim. costs by making operations more In a digital world, efficient. There follow some examples of In addition, blockchain provides greater Fraud prevention the way blockchain might be applied. transparency and hence perceived winning companies fairness in respect of tariffs and claims An estimated 5 to 10 percent of all Meeting customer needs handling. Another UK start-up, InsurETH, insurance claims are fraudulent, costing meet exacting is working on a peer-to-peer flight US non-health insurers more than $40 consumer needs—for In a digital world, winning companies billion a year according to the FBI. By meet exacting consumer needs—for serving as a cross-industry, distributed tailored products, tailored products, simplicity, and An estimated registry of external and customer data, transparency, for example. Insurers blockchain can be used to identify fraud. simplicity, and traditionally have had little opportunity transparency, for to understand such needs, interaction It can, for example, expose falsified with customers being limited to buying damage or theft reports by validating the example. a policy or making a claim, processes 5-10% authenticity, ownership, and provenance that might anyway be delegated to of goods, authenticating documents such brokers and agents. This explains both as medical reports, checking police theft with data they would have to alter not the threat and often the success of of all insurance reports and claims histories, and verifying just one block in a chain but also all digital attackers that make customer identities. successive blocks and the majority of satisfaction their priority. claims are their replications. In addition, data is fraudulent. It is clear that extensive cooperation registered in the blockchain with a digital Blockchain can help insurers in this between insurers, manufacturers, fingerprint that includes a date and time both by sparing clients the frustration customers, and other parties will be stamp; any attempt to change data of repeatedly having to provide data built on blockchain with needed to unlock Blockchain’s full would be apparent because the new for verification purposes—a copy of a smart contracts. The contracts initiate potential. Blockverify, a UK start-up, is digital fingerprint would not match the passport, for example—and by reducing payouts to the holders of insured tickets building a system that will enable users old one. privacy concerns. No longer will it be when cancellations or delays are reported to check for fraudulent transactions, possible to pass that data on to a third from verified flight data sources, making counterfeiting, or theft relating to Encryption. Digital signatures based on party without the client’s permission. the claims and payments process quick goods such as personal electronics, pairs of cryptographic private and public and easy. (Although many travelers could pharmaceuticals, and luxury items. It keys enable network participants to For instance, UK start-up Tradle is claim compensation for flight delays under works by labeling products and then authenticate which participant owns an working on a blockchain solution that will their usual insurance, few do so as the storing their history and supply chain , initiated a transaction, signed a enable financial institutions to conduct the know-your-customer (KYC) checks

68 The promise of blockchain Digital disruption in insurance: Cutting through the noise 69 activity in a blockchain. Everledger, validation mechanism, its continuous inefficient solutions, and investment involved in a transaction then insurers’ also based in the , has replication, and the ever-growing amount decisions will need to be taken carefully. current transaction models are likely devised a similar application, used to verify of stored data means that the larger the to suffice. Moreover, it is unlikely to be diamonds and transactions relating to blockchain grows, the greater become the But the obstacles should not deter beneficial if no intermediary is needed, them, and targeted at helping insurers, law requirements for storage, , and insurers given that new companies are or a trusted one already exists. But in enforcers, and those in the diamond computational power. That leads to a risk rapidly embracing the technology and its transactions involving multiple parties, to detect fraud. of centralization if the blockchain becomes cost advantages. At their core, insurance perhaps with competing incentives, where so large that only a few nodes are able to companies collect premiums, pool the an iron-clad record of data is needed, and Efficiency process a block. money, and reassign it to those with a no central trusted authority is available valid claim. Blockchain means all this can or needed—then blockchain technology Underlying many of these use cases is now be automated and today’s insurers holds out huge promise, which insurers another clear opportunity for insurers—to potentially disintermediated—by the likes would be wise to explore. reduce operational and administrative The lower handling of InsurETH, for example, or Dynamis, costs. Automated verification of a start-up that is using smart contracts policyholders’ identity and contract costs of a smart to offer peer-to-peer supplementary Matt Higginson is a partner in validity, the auditable registration of contract could feasibly unemployment insurance. In the latter McKinsey’s New York office, Johannes- claims and data from third parties such case, it is other policyholders on the Tobias Lorenz is a senior partner in the as doctors, the underwriting of smart help open up new network who validate both the application Düsseldorf office, Peter Braad Olesen is contracts, and the automation of claims for insurance and the claim, using social an associate partner in the procedures all reduce costs while growth markets. media. office, and Björn Münstermann is a speeding up processes. partner in the Munich office. These examples pose no immediate great The lower handling costs of a smart Second, recent incidents have shown threat to incumbents’ business. But they contract could feasibly help open up new that for all blockchain’s security attributes, should alert incumbents to blockchain’s growth markets. In emerging markets, it is not impregnable. For example, disruptive potential, and to the need blockchain and smart contracts could be hackers stole $65 million from Bitfinex, for them to help shape the blockchain used to offer micro-insurance to farmers, a cryptocurrency exchange. Such insurance ecosystem. The starting point for example, triggering payments to them threats are not as well understood as is to develop a thorough understanding when drought conditions are verified by those related to conventional database of how the technology can address a reliable meteorological source. And architectures. customers’ needs as well as their own, insurers could potentially save the many and to identify potential applications. millions currently spent chasing down Standardization is a third challenge. To That will mean working with consortia, fraud. realize sustainable benefits from an open technology experts and start-ups, or partially shared and distributed system, regulators, and other market participants The way ahead some standardization will be necessary. to address the challenges. Incumbents The current absence of industry can learn from the start-ups and might Blockchain clearly facilitates innovative standards—which the B3i project is consider partnering with or acquiring business models and promises cost seeking to address—reflects the newness companies that are entering the insurance advantages to insurance companies and of the technology. A distributed system market with blockchain-based products their customers. Various barriers impede that sometimes depends on collaboration and processes. its widespread adoption, however. between competitors, suppliers, and others will take time to evolve. So will For the time being, it is important to bear Scalability is the first challenge. The the resolution of legal and regulatory in mind what blockchain can and cannot technology’s consensus-based issues. Thus there is a high risk of initiating facilitate. If a limited number of parties are

70 The promise of blockchain Digital disruption in insurance: Cutting through the noise 71 The use of data and analytics to have seen little effect to date from their underwrite risk is nothing new for investments in analytics.1 insurance carriers. Yet in a digital world, it is revolutionizing their business. An industry in which 80 percent of all auto insurance claims are adjudicated We only have to automatically, and 80 percent of all life glance at other insurance policies are issued straight through without requiring any of the industries to usual health checks, is no distant pipe dream. Neither is one in which the cost understand how of acquiring a customer falls by as much powerful new as 70 percent because of precision marketing and personalization. Such is the competitors with power of analytics. large customer bases The convergence of several technology trends is behind this . The can rapidly invade volume of data continues to double other sectors. every three years as information pours in from digital platforms, wireless sensors, virtual reality applications, and It is important that this changes quickly, billions of mobile phones. Data storage as those slow to adopt the technology at capacity has increased, while its cost scale will surely struggle to compete. They has plummeted. And data scientists now will struggle against other insurers that use have unprecedented computing power analytics to improve their core business at their disposal, giving birth to ever more by streamlining internal processes, raising sophisticated algorithms. As a result revenue and cutting costs in the process. machine and deep learning are on the And they will struggle in the longer term The advance of analytics horizon (see box, “Analyzing analytics”). as data and its analysis begin to break “We’re moving from computer science, down business models and industry where computer coders write very explicit, boundaries. In personal auto insurance, line-by-line instructions, toward starting to we can already see how data from sensors Harnessing the potential of burgeoning data and train machines to look for information that fitted to vehicles will put premiums under could be valuable,” says Scott Simony, pressure as driving becomes safer. And computer power to add value must become ingrained in head of industry at Google. we only have to glance at other industries insurers’ every activity. to understand how, in a world in which Yet data and technology alone do not data and analytics are king, powerful new deliver value, as too many companies competitors with large customer bases for have discovered to their cost. While some are seeing good results, others admit they 1 See “The age of analytics: Competing in a data-driven world,” McKinsey.com.

72 The advance of analytics Digital disruption in insurance: Cutting through the noise 73 Exhibit their core businesses can rapidly invade other sectors. Chinese e-commerce Some life insurers giant Alibaba also owns one of the world’s are using social Analytics at work in claims management largest technology finance companies, which include among its services network and insurance. geographical data to 1 Case evaluation Here then, is how companies can move quickly to build their analytics muscle reduce fraud by up overview analytics use cases main impact across the organization, avoiding to 25 percent. common problems and ensuring their Advanced analytics enables carriers to use historical Fraud Claims costs investments translate into business value. data to create robust data sets There are four phases. But their use can significantly improve

The data sets identify patterns in case characteristics Total loss prediction Handling costs predictive capabilities, unearthing insights (accident details, vehicle type, presence of bodily Phase one: Building insights upon which carriers can act. Some auto injury) that oer predictive markers that can be used to Litigation prediction Claims costs insurers now use credit scores to assess identify similar cases The starting point is to be clear about how risk more accurately, analytics having analytics can deliver insights and add revealed that people who pay their bills Once these markers have been defined, carriers can Severity prediction for BI cases Claims costs apply them to incoming cases to guide handling value, and choose the use cases that will on time tend to be safer drivers. Some demonstrate this. Too often, companies life insurers are using social network and give scant thought to the business geographical data to reduce fraud by up problem they are trying to solve, instead to 25 percent. And some companies are 2 Case segmentation getting carried away with refining data, using data on insurance agents—their gleaning perfect insights, or investing behavior, previous sales, regional location, overview analytics use cases main impact heavily in technology infrastructure. The and training undertaken—to predict how exhibit shows how analytics can be put to likely each one is to sell multiple products, Using the insights from case evaluation, carriers can Identification of straight- Handling costs work in claims management. and which specific products they would determine a subset of cases ideal for straight-through through processing cases be most successful at selling, leading to processing vs. those that require specialized processing. It is also important to understand what a 20 to 25 percent increase in sales. As Those requiring specialized attention are assigned to Assignment of cases to claims handlers (for example, by complexity) handler units Handling costs analytics can and cannot do. It cannot, for machine learning technology develops, example, predict outcomes with pinpoint it will be applied not only to predicting accuracy, particularly in low-frequency, events and forecasting outcomes, but high-severity, or shock-prone lines of also to classification (including identifying 3 Case management business. For instance, the market for images or making associations between directors and officers data) and generation (from interpolating overview analytics use cases main impact endured waves of litigation over the past missing data to generating the next frame decade—and subsequent spikes in in a video sequence, for example). The outputs of case evaluation also enable Prediction of success in Claims costs claims—resulting from events such as automation of case steering, so that carriers can case steering direct customers to preferred garage networks to the financial crisis and new regulations internal and external data repair their vehicle, for example, or use an app to Medical treatment Claims costs governing options backdating. It would make self-service claims have been difficult to predict any of these In some cases, organizations struggle to Reserve prediction Claims costs events with analytics. develop convincing use cases because data quality is poor. Many cannot yet

74 The advance of analytics Digital disruption in insurance: Cutting through the noise 75 master their internal data, which remains changes to IT architectures are likely to disaggregated, unstructured, and be required. These include establishing generally underused, requiring substantial a master data-management system that Analyzing analytics effort to be brought into working condition. gives a consolidated view of all data, in particular customer and product data, and the deployment of big data and analytics Analytics has emerged from four trends. First is the exponential growth in data that a digital systems that integrate data sources and world enables, including structured data that is machine readable and easily loaded into Leading provide platforms to generate value- databases and queried, and unstructured data such as video, text, social media, and organizations find creating insights via predictive models or employee emails that is harder to collect, analyze, and process. In the past 18 months machine learning. alone, more data has been generated globally than in the entire previous history of mankind. ways to make sure In the next five years, the amount generated will be three times more than has been the businesses Phase 2: Capturing value cumulatively generated to date. Here the focus shifts from proof of The second trend relates to revolutionary advances in computer technology and to work alongside the concept to adoption, the goal being for the analytics techniques, such as machine learning, that rely on automated, computer analytics function, businesses to lead demand for analytics. program-driven pattern recognition. These techniques are far more predictive than That is unlikely to happen unless the generalized linear modeling. With machine learning, algorithms “learn” from data and adapt and involve top front line is involved from the outset and to new circumstances without being explicitly reprogrammed. The concept is to give the performance measurements are chosen algorithm “experiences” (training data) and a generalized strategy for learning, then let the management. carefully. algorithm identify patterns, associations, and insights from the data—in short, to train the system rather than program it. Involving the front line Accomplishing this should perhaps be a Deep learning, a frontier area of research within machine learning, uses neural networks priority before a company begins mining When companies falter in their use of with many layers (hence the label “deep”) to push the boundaries of machine capabilities. external data. An additional challenge analytics it is often because the old way of Data scientists working in this field have recently made breakthroughs that enable is to collect, integrate, and analyze working still prevails: that is, build a model machines to recognize objects and faces, to beat humans in challenging games such unstructured data such as web content, (often based on unclear assumptions as chess and Go, and even to generate natural language. Digital giants such as Google, network data, images, text, and audio and about the variables that have most Facebook, Intel, and Baidu, as well as companies such as GE, are leading the video recordings. predictive impact on the outcome) and way in these innovations, seeing machine learning as fundamental to their core business roll it out, regardless of whether people on and strategy. Many incumbents struggle with switching the front line understand precisely how to from legacy data systems to a nimbler apply it. They might not know, for example, The third trend is the shift from batch processing to real-time processing, monitoring, and and more flexible architecture to store and whether the model’s recommendation is of data feeds. This trend will continue to change the behavior of the insured harness big data (whether from internal binding or if there is flexibility to deviate and affect the operations of many core insurance functions such as underwriting and or external sources). But capturing the from it. Not surprisingly, efforts at adoption pricing, claims, billing, and customer relationship management. potential of analytics hinges on it. At the can meet resistance. outset, companies should bear in mind Finally, flowing from all this, is a complex ecosystem of new analytics vendors and solutions the business case they are making, Instead, front-line employees need to be that enable carriers to combine data sources, external insights, and advanced modeling and that the very latest technology and involved at each stage of the development techniques in order to glean insights that were not possible before. significant upfront investment are not process, from establishing the business always needed. Before long, though, case to deciding what data to draw upon,

76 The advance of analytics Digital disruption in insurance: Cutting through the noise 77 prioritize efforts. They also find ways to companies need a CoE with teeth to come how to integrate the into working projects—and trying to do so can become make sure the businesses work alongside up with ideas and recommendations, patterns, and what new skills might be an exercise in false precision. Diligently the analytics function, and involve top as well as businesses and domains that needed. One large insurance carrier saw tracking the impact of use cases in terms management. shape and approve the CoE’s agenda and a 30 percent increase in adoption rates of their adoption and satisfaction might the costs allocated to it. when front-line employees joined a cross- prove a better measure of early progress, Prioritization functional team engaged in defining use as well as an indication of when version 2.0 Direct involvement of top management cases. They participated in workshops or 3.0 is needed. Comparing outcomes for The heat map should be drawn up on to define hypotheses on the variables those who use the new models and those the basis of three dimensions: the value As the CoE scales up, with most predictive power, worked on who do not is also a helpful gauge. that analytics can deliver, their feasibility needs to make clear that analytics understanding and refining modeling (drawing on a large number of different is a corporate priority, paying close output, and finally integrated the output systems to collect data will make it attention to the portfolio of initiatives and with the . The end-state is one harder to capture value from a use case, understanding how it will achieve impact. for example), and strategic relevance. To promote take-up, executives can The integration element is particularly in which analytics Importantly, the map needs to be updated encourage line leaders to contribute to important and often particularly at least once a year to align with changing the pipeline of analytics ideas as part of challenging, given that it involves a shifts from being strategic priorities and feasibility based on the annual planning process. And, while significant shift of mind-set away from the technology and data lessons learned understanding that returns on investment the old method of working. How will data regarded as a business in the previous year. might not be obvious within the first that reveals insights be presented? It is no aid to being seen as few quarters, executives can highlight point sending quantities of it to the person Balancing business engagement with a required to use it. Carriers will need to be a capability that sits strong analytics function creative so that data is in a form that is An industry in which self-explanatory and prescriptive. It is also at the core of the way As carriers master the execution of important that analytics becomes part business is conducted. use cases, so a permanent center of 80% of all auto of the work process, rather than being excellence (CoE) needs to take shape an additional, separate task that busy to support the businesses. Carriers can insurance claims people are unlikely to complete. Better wrestle with how best to position the CoE. are adjudicated that it be integrated directly into core tools Phase 3: Achieving scale Should it be autonomous with its own being used for, say, customer relationship reporting and profit-and-loss statements? automatically, and management and pricing. The application of analytics often begins Or should it function as an on-demand within the pricing and underwriting resource? The advantage of the former is 80% of all life functions. Employees here are relatively that the CoE is likely to be more proactive accustomed to modeling and data- in developing analytics initiatives across insurance policies Early on, organizations are driven analyses, and the potential to the organization and more accountable are issued straight understandably keen to see a return on improve previous practices should be for their success. The latter has the their investments. But too much focus on clear—be it by finding new variables, advantage of more closely aligning the through without certain metrics can impede progress. It is exploring new modeling techniques, or CoE with the businesses’ agenda. hard, for example, to isolate the financial further automating processes. Eventually, requiring any of the impact of an analytics initiative from however, it needs to be deployed in all The best approach probably lies usual health checks, that of other business initiatives such as businesses and functions. To reach that somewhere between the two, making efforts to improve customer retention point efficiently, leading organizations sure there is strong business and analytics is no distant pipe based on digital marketing or strategic use heat maps that indicate where to leadership. Whatever structure chosen, dream.

78 The advance of analytics Digital disruption in insurance: Cutting through the noise 79 quick wins and celebrate successes and the use cases emerging dictate that will prove the concept and maintain that gradual improvement is no longer momentum. an option. Analytics will soon become a core corporate capability, and those Phase 4: The analytics-driven carriers that leap ahead and bring it to organization insurance are likely to capture an unrivaled competitive advantage. The end-state is one in which analytics shifts from being regarded as a business aid to being seen as a capability that sits at Ramnath Balasubramanian is a partner the core of the way business is conducted. in McKinsey’s New York office, where Indeed, it will become so ingrained in Khushpreet Kaur is an associate partner daily work practices that the CoE is made and Ari Libarikian is a senior partner. redundant. Various functions—claims, Paolo Moretti is a senior partner in the distribution, underwriting—might still Milan office. exist, since the practical activities and the skills required for them differ. But the core decision-making and the analytics engine that supports decisions are likely to converge at a single point. When that point is reached, all business and strategy decisions are made with data and analytics at their center.

At this stage it will make no sense to measure success by returns on investment. The business metrics themselves become the markers of success, be it price adequacy or loss, expense and combined ratios, or the The value of robotic process quality of new-business growth. In addition, analytics will firmly shape the automation: An interview with organization’s talent strategy, becoming an integral part of multiple roles. Professor Leslie Willcocks

  

While most carriers have taken up The professor of technology, work, and globalization at the analytics, they have barely begun to tap its potential. Yet the intensity of competition London School of Economics’ Department of Management talks about robotic process automation—its impact on work, the strategic and financial benefits, and how to capture them.

80 The advance of analytics Digital disruption in insurance: Cutting through the noise 81 McKinsey: Can you start by defining quickly how to configure and apply the I’ve not seen a wave of powerful cognitive just to relieve the stress that creates robotic process automation (RPA)? robots. It’s lightweight also in that it automation tools appear in the market and in organizations. One online retailer only addresses the presentation layer not many companies are using them yet. measures the success of RPA in terms Leslie Willcocks: RPA takes the of information systems. It doesn’t have of the number of hours given back to the robot out of the human. The average to address the business logic of the McKinsey: What are the business business. So it’s not just the shareholders, knowledge worker employed on a back underlying system or the data access benefits of RPA? the senior managers, and the customers office process has a lot of repetitive, layer. who benefit but also employees. routine tasks that are dreary and Leslie Willcocks: The major benefit we uninteresting. RPA is a type of software found in the 16 case studies we undertook McKinsey: Can you describe a process that mimics the activity of a human being One major benefit of is a return on investment that varies where you have seen RPA in action? in carrying out a task within a process. between 30 and as much as 200 percent It can do repetitive stuff more quickly, RPA is “a return on in the first year. But it’s wrong to look just at accurately, and tirelessly than humans, the short-term financial gains—particularly To get started with freeing them to do other tasks requiring investment that varies if those are simply a result of labor savings. human strengths such as emotional between 30 and as That approach does not do justice to the RPA, “you have to intelligence, reasoning, judgement, and power of the software because there are pick the right process. interaction with the customer. much as 200 percent multiple business benefits. It has to be stable, There are four streams of RPA. The first in the first year.” For example, companies in highly is a highly customized software that will regulated industries such as insurance mature, optimized, work only with certain types of process and banking are finding that automation is in, say, accounting and finance. The McKinsey: How is RPA different from a cheap and fast way of applying superior rules-based, more general streams I describe in terms cognitive intelligence? capability to the problem of compliance. repetitive, and usually of a three-lane motorway. The slow lane You also get better is what we call screen scraping or web Leslie Willcocks: RPA deals with because you’ve got more power in the high-volume.” scraping. A user might be collecting data, simpler types of task. It takes away mainly process. A company that receives lots synthesizing it, and putting it into some physical tasks that don’t need knowledge, of customer enquiries, for example, can sort of document on a desktop. You understanding, or insight—the tasks free staff to deal with the more complex Leslie Willcocks: In an insurer we automate as much of that as possible. that can be done by codifying rules and questions. studied, there was a particular process The second lane in terms of power is a instructing the computer or the software where it used to take two days to handle self-development kit where a template to act. With cognitive automation, you There are benefits for employees, too. 500 premium advice notes. It now takes is provided and specialist programmers impinge upon the knowledge base that In every case we looked at, people 30 minutes. It worked like this: a range of design the robot. That’s usually a human being has and other human welcomed the technology because brokers would write business for clients, customized for a specific organization. attributes beyond the physical ability to they hated the tasks that the machines and there was a central repository into The fast lane is enterprise/enterprise- do something. Cognitive automation can now do and it relieved them of the rising which the business written had to go, and safe software that can be scaled and is deal with natural language, reasoning, pressure of work. Every organization we a process that someone had to manage reusable. judgement, with establishing context, have studied reports that it is dealing with to get the premium advice note from the possibly with establishing the meaning of bigger workloads. I think there will be an broker into the repository. A number of You can multi-skill each piece of things and providing insights. So there is a exponential amount of work to match operations had to occur for that advice software. It’s lightweight in the sense that big difference between the two. the exponential increase in data—50 note to be fully populated by all the data, you don’t need a lot of IT involvement percent more each year. There is also and the process operator might find that to get it up and running. Business In addition, whereas RPA is pretty ripe as a massive increase in regulation the data had not been completely filled operations people can learn quite a technology, cognitive automation isn’t. and bureaucracy. We need automation out, perhaps because the advice note

82 The value of robotic process automation: An interview with Professor Leslie Willcocks Digital disruption in insurance: Cutting through the noise 83 wasn’t structured very well. So the data gradually you educate and configure security. Organizations signing up to RPA tool is usable, cheap, and doesn’t require had to be structured to standardize it so the RPA to do more and more work. now should probably think about building much IT skill to implement it’s a no-brainer that it could be a common document Eventually it can do 90 or 95 percent of a center of excellence immediately. for the average operator in a business unit. like all the other advice notes. And if any the work and very few exceptions have The reason IT gets worried is that they data was missing, that person might to be dealt with by a human. McKinsey: How do companies choose know the disruptive, potentially disastrous have had to go back to the broker, or add whether to implement an IT solution or effects of people playing around with IT in things from the systems of record in the McKinsey: What are the most RPA? And how do the two departments the organization and not understanding back office. Then, once the note was important considerations for those work together? how it’s going to upset infrastructure, complete and signed off by the process wishing to adopt RPA? governance, security, and all the important operator, it went into the repository. Leslie Willcocks: When organizations touchpoints that IT is held responsible for. Leslie Willcocks: The most important consider proof of concept for RPA, they So it’s not surprising to find IT functions consideration is strategy. You can use look at the business case and compare in denial about RPA and what it can do. “In an insurer we automation tactically for cost savings. it to an IT solution. Often that’s pretty It’s crucial therefore that IT is brought on But if you use RPA as a broader strategic unflattering for IT. In one organization we board early. studied, there was tool, you get a lot more out of it. That’s looked at, the return on investment for number one. Number two concerns RPA was about 200 percent in the first McKinsey: What do you think will be a particular process the launch. You need to get the C-suite year and they could implement it within the long-term impact of robotic process where it used to take involved and appoint a really good three months. The IT solution did the same automation? project champion, and you have to thing but with a three-year period two days to handle pick the right process. It has to be and it was going to take nine months to Leslie Willcocks: In the longer term, RPA stable, mature, optimized, rules-based, implement. means people will have more interesting 500 premium advice repetitive, and usually high-volume. Start work. For 130 years we’ve been making notes. It now takes with a controlled experiment on a visible jobs uninteresting and deskilled. The bottleneck or pain point. “In the longer term, evidence is that it’s not whole jobs that 30 minutes.” will be lost but parts of jobs, and you can The third consideration is change RPA means people reassemble work into different types of management—persuading the job. It will be disruptive but organizations Now a lot of that sort of work can be organization to change and adopt will have more should be able to absorb that level of automated. But some of it requires automation. It is a key issue from the interesting work. change. The relationship between human intervention, human reasoning, outset. And the fourth is building a technology and people has to change in judgement. So an RPA engineer would mature enterprise capability for RPA. For 130 years we’ve the future for the better and I think RPA look at that type of process and say, Long-term users have built centers of is one of the great tools to enable that “Which bit can we automate?” The excellence over time, usually within been making jobs change. answer is not everything—it can’t , and developed structure the data. There may at skills and capabilities within that center. uninteresting and some stage be cognitive automation They have people who assess the deskilled.” Professor Leslie Willcocks was technology that could structure the data feasibility of a proposal from a business speaking to Xavier Lhuer, an associate but RPA can’t, so the human being has unit. They have people who configure partner in McKinsey’s London office. to structure the data at the front end a robot, install it, and develop it, and In addition, many business operations find and create a pro forma ideal advice controllers who switch it on and off, going through IT frustrating because it’s so note. Clearly, the RPA can’t deal with and plan its work and how it fits with busy. Often the business wants something exceptions either. The engineer has to human work. They have some sort of relatively small, but the IT function has intervene and look at the exceptions and continuous improvement capability and bigger fish to fry and the business has to create a rule to deal with them, so that relationships with IT, governance, and go to the back of the queue. So if an RPA

84 The value of robotic process automation: An interview with Professor Leslie Willcocks Digital disruption in insurance: Cutting through the noise 85 Introduction

Few CEOs need convincing that a digitally them well, there are more specific reasons enabled transformation of their companies why cultural change can be particularly is the path to lower costs, growth, and hard for insurers to contemplate. To begin perhaps even survival as technology with, the industry is highly regulated, and changing customer expectations making insurers extremely cautious about usher in new competitors, new value changing the way they work. There are drivers, and new business models. Nor also certain aspects of a digital culture do they need telling that at the heart of a that seem designed to undermine the digital transformation lies a cultural one, very things that have made insurance equipping them to support new ways of companies so successful in the past. thinking and working. Rare is the CEO who does not have cultural change high on his or her agenda. But making that change can seem a daunting task. Indeed, “The companies that McKinsey research has shown that 46 will stand out are the percent of financial services executives feel cultural or behavioral change is the ones that are going to biggest challenge they face in pursuing their digital strategies. find ways to move a

Perhaps not surprisingly then, insurers bit faster, at the pace scored poorly when we measured their of the people they’re cultural preparedness for a digital world (see “Measuring your digital maturity”). insuring.” Cultural change is of course hard for any — Scott Simony, head of long-established organization. And so it Building momentum for cultural is with insurers, the largest of which often industry, Google have a century-old record of creating change value for policyholders and shareholders.1 Unlike digital newcomers to the industry For example, a digital culture demands that are building up a new business, an unswerving focus on customer needs. incumbents suspect change might And while there are exceptions, most undermine the health of their existing one. insurers have built their success on the Being told to abandon old ways of thinking and working products they offer and their underwriting and embrace without delay a new, and seemingly riskier, But beyond a general reluctance to skills, and by focusing on agent and tamper with approaches that have served broker relationships—not customers. A digital culture can be unnerving for insurance companies. change of focus will therefore be hard But there are certain actions insurers can take to kick-start not only culturally, but also operationally: 1 Average age of the top ten P&C and top ten life insurance administrative systems that are built change while minimizing the risks—and they do not have to companies in the United States based on 2015 premiums, SNL Financial. alter everything at the same pace.

86 Building momentum for cultural change Digital disruption in insurance: Cutting through the noise 87 around policies rather than customers experimentation put their value and The business by earned premiums) and enjoy some will need to be reconfigured, for instance. brands at risk? of the highest growth in direct written And disturbing the long-established Personal lines insurance has felt the premiums (Exhibit 1). Arguably, their intermediated distribution system carries Of course, fear of change is no reason for greatest impact from digital technology. success stems from their digital culture: risks when 84 percent of sales in US maintaining the status quo; history is full About 25 percent of people who they have moved swiftly to embrace P&C and 90 percent of US life policies go of the corpses of companies that failed shop for auto insurance in the United technological innovation and focus on through agents or brokers.2, 3 to keep ahead of industry disruption. States, for example, buy online directly changing customer needs. The outcome Moreover, building a digital culture does from the carrier,4 with several direct is a high level of automation that enables not mean destroying the skills and values underwriters enjoying high growth and them to cut costs and price keenly, and a that have sustained the company. Rather, profitability as a result. In the United determination to make buying insurance it is about renewing that heritage with new States, carriers that mostly sell directly easy for customers. Personal lines ways of thinking and working. have the lowest combined ratios (losses insurers that fail to act similarly will surely ~ and loss-adjustment expenses divided struggle to compete. 25% In addition, not everything has to alter at the same pace. It is important to 4 J D Power US Insurance Shopping Study, 2016. of people who shop for distinguish between those segments of auto insurance in the US the industry that are being transformed quickly due to digital technology, where Exhibit 1 buy online directly from cultural adjustment is thus urgent, and those where change is slower. With these the carrier. parameters drawn, cultural shifts become Direct sales can enhance growth for personal lines insurers¹ a less unnerving prospect. We do not pretend there is an obstacle-free method ² Another digital mantra is experimentation to instilling new ways of working and Carriers with smaller Carriers with a large with new products and services— thinking, and a digital culture will need to combined ratio proportion of direct sales proportion of direct sales %, 2005-2015 requiring an ability to test and learn quickly take hold across the entire organization and a willingness to fail sometimes in order before long. Nevertheless, certain actions 90 to keep pace with market change. But the can kick-start change, and build support idea of experimenting can make insurers and momentum for more. 95 feel distinctly uncomfortable. They spend a great deal of time meticulously Where to start?

planning to ensure nothing they do 100 falls foul of regulatory or compliance Wholesale, rapid change is neither top quartile High Growth/Low Combined Ratio requirements, while the job of necessary nor possible. Culture, by is to be absolutely certain about the definition, takes time to root. To know 105 carrier’s predicted losses. Will a new where to concentrate their efforts, insurers culture that demands more speed and should first consider how quickly digital technology will affect different business 110 -0.5 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 8.5 9.0 lines, then different functions within those dwp growth %, CAGR 2005-2015 2 Market Share Report, Independent Insurance Agents and businesses. With this clear, they need to Brokers of America, 2016. improve those elements of a digital culture ¹ 3 Fritz Nauck, Kia Javanmardian, Brad Mendelson, Jonathan Figures refer only to the direct written premium (DWP) growth and combined ratio of the personal lines of each insurer where they are weakest. ² Godsall, “Rethinking U.S. Life Insurance Distribution,” Size of the bubble represents size of 2015 personal lines DWP McKinsey & Company, May 2016. Source: AM Best, McKinsey analysis

88 Building momentum for cultural change Digital disruption in insurance: Cutting through the noise 89 Small commercial and simple term customers’ expectations only if they Strengths and weaknesses companies expand the framework life policies will be next to go the are strongly digitally enabled. Because for decision making, putting the direct route, both as customers grow these areas lend themselves to digital Our research, as described in the box customer’s point of view among their top increasingly comfortable using virtual experimentation, bringing about below, suggests there are certain cultural considerations. A question on the table channels and as the combination of change should not be overly difficult. attributes that underpin a mature digital should always be, “How does this create more data and technology enables In marketing, for example, testing environment and help drive superior value for the customer?” insurers to underwrite a large share of messages and channels in order to performance: an appetite for risk, a test- these risks automatically, limiting the find out what is most effective presents and-learn mind-set, organizational agility, need for intermediaries. Movement little risk for an insurer and can produce and a desire to collaborate internally “You’ll be penalized is already apparent in the life answers quickly if A/B tests are used and externally. Often, of course, these segment. Jennifer Fitzgerald, CEO of (whereby two versions of a web page or cultural attributes are nurtured by certain if you fail over a long PolicyGenius, a US-based aggregator of app are tried out to decide which one management or organizational practices. term life quotes that aims to make buying performs better). Is the leadership team a good role model, period of time, so fail a life policy simple for consumers, for example, or are functions set up in a fast.” says people cannot understand why, way that makes collaboration possible? if they can do something as seemingly In the US, carriers — Eric Gewirtzman, CEO of complicated as their tax returns on their Various tools exist to help a company US online insurance agency own, they cannot figure out how to buy that mostly sell ascertain its cultural starting position and a life insurance policy unaided. Haven to indicate what needs to change and Bolt Life, a direct term life carrier in the United directly have the what does not. These include McKinsey’s States, offers an online application Digital Quotient® and the Organizational process that takes less than 20 minutes lowest combined Health Index. At Amazon, for example, internal and makes an immediate decision on ratios and enjoy some presentations addressing business term coverage up to $1 million. How to start problems are known as “working of the highest growth backwards documents.” They start by Direct insurance for small commercial There are myriad ways to achieve a digital identifying how a proposed solution would is still rare, but a McKinsey survey of in direct written culture, and the path each company help improve the customer experience, be more than 1,500 customers with small premiums. chooses will be unique. In general, there it a better price, improvement in service, commercial policies showed 60 percent are a number of actions companies can or increased selection. Only then does the would be interested in buying directly. take to kick-start change and speed them presenter work backwards to present the Large commercial and specialty policies Before long, however, companies will on their way. Here we describe some that business case. It is a mind-set that some will be the last to feel digital’s pull given need to be prepared to broaden their reinforce three particular traits of high- insurance incumbents are endeavoring to their complexity, the fact that brokers change efforts to wherever the adoption performing digital companies—customer- enforce. Sandeep Bakshi, the CEO and fully control distribution, and the lesser of digital technologies will enhance centricity, collaboration, and comfort with managing director of Indian life insurer price elasticity of buyers compared to competitiveness. In underwriting auto (calculated) risk-taking. ICICI Prudential, insists decisions made other segments. insurance, for instance, real-time data by employees, whatever their rank, must from the Internet of Things is leading to Customer-centricity have one of three outcomes: improved The function more accurate pricing and risk selection customer experience, more business, or based on factors such as how fast a Most businesses make decisions by less risk. It is already the case that consumer- person is driving or how hard they are considering the business case and what facing functions such as marketing, braking. competitors are up to. Customer-centric customer service, and claims can fulfill

90 Building momentum for cultural change Digital disruption in insurance: Cutting through the noise 91 Many other businesses are engaging really saying to us or hear a few calls. The improving the customer experience, can developer and said, ‘Build me a working customers in the product development idea is just to get our people connected do that rapidly. prototype of the new insurance website.’ process, as there is no point asking what with our customers.” It took four weeks. I then took it to the they think of a new product or service The team, located together and working innovation committee, and it was relatively once it has been launched. If they are A sure way to quicken a shift toward a in sprints to meet specific weekly simple from there. It’s really hard to stop dissatisfied, the development has been customer-centric culture, of course, is to development targets, introduces early a prototype because it’s touchable, a waste of time and money. Customer link employee compensation to metrics prototypes or minimum viable products feasible.” needs should be understood at the outset that promote it—for example, metrics that (MVPs) that satisfy some—not all— and feedback sought continually as the measure customer satisfaction directly, customer needs and can be improved Risk taking product is developed. or relate to other attributes of high- with customer feedback. If the team is also performing digital companies that affect empowered to make decisions without On the subject of experimentation, the customers indirectly, such as speed to seeking higher authority, it can cut delivery inventor Thomas Edison is reputed to Aviva has an internal market. time to as little as three to four months. have said, “I haven’t failed, I’ve just found 10,000 ways that won’t work.” app that connects Collaboration employees to the In a digital age, insurers need the same Collaboration is key not only because “It’s really hard to mind-set. Concern over the costs of digital insight the it improves customer understanding stop a prototype failure can be minimized by the use of the and decision making, but also because test-and-learn approach encapsulated company has about it does so quickly. Our research shows because it’s touchable, in MVPs—the frequent gathering of that more than 70 percent of insurers feedback means a company will not its consumers, take from six months to more than a year feasible.” travel far in the wrong direction before including live feeds to move a digital initiative from idea to correcting course. United Services implementation. That is too slow. Scott — John Straw, Investor, Automobile Association, a US-based from social media or Simony, head of industry at Google, insurer, now tests some 8,000 ideas each explains why. “Insurance is a highly Bought by Many year, generating roughly 250 patents. curated calls from its regulated industry and it is not easy to Yet a culture that understands the value contact centers. move quickly—but the fact is consumers of calculated risk-taking is one that also are moving at exceptional rates. So I’d accepts failure, and learns from set-backs. say that the companies that will stand out Pure digital companies such as Spotify Some organizations openly celebrate the The more people reached by that are the ones that are going to find ways to were among the first to adopt this agile lessons learned in order to encourage feedback, the better. To this end, Aviva has move a bit faster, at the pace of the people approach, and insurance companies are their employees to take risks. an internal app that connects employees they’re insuring.” increasingly following their lead. John to the digital insight the company has Straw, an entrepreneur with investments Organizational changes and the role about its consumers, including live feeds The way to achieve this pace and cut in the insurance industry, and formerly of the CEO from social media or curated calls from development time dramatically is to set the chairman of the digital advisory its contact centers. “The purpose is to up small, cross-functional teams that board at UK travel agent Thomas Cook, The way a company chooses to organize give our people the ability to nibble on take an agile approach to their work. In recalls his experience building a new itself can significantly affect the pace of real consumer feedback in an entirely a functional set-up, no one owns the full insurance website for the company. cultural change. There are many options. without making a huge event of it,” customer experience and it can take “It was the prototyping part that made For example, some companies tackle the says chief digital officer Andrew Brem. “So many work sessions to cobble together a the big difference. Rather than put the cultural challenge from within, in the belief if you’ve got two minutes, you could read a complete view of it. But a cross-functional plans through a committee, I took some that this is the only way it will take hold, few tweets about what our customers are team, focused on the single goal of of my budget and went to a WordPress while others set up a separate division

92 Building momentum for cultural change Digital disruption in insurance: Cutting through the noise 93 for digital initiatives on the basis that they Aside from these considerations, or need distance and a degree of autonomy other actions a company might take, from the old business to flourish. That the element that underpins all efforts division will look more like a start-up, with to embark upon cultural change, and its own goals, new digital talent, agile sustain it, is the commitment of the processes, and the autonomy to act CEO and the leadership team. It falls to toward these goals. them to explain to the organization why cultural change is so important and to model the required behaviors. Some United Services gain inspiration and conviction for this by visiting other companies around the world; Automobile Dean Connor, CEO of Sunlife, takes his management team to Silicon Valley once Association, a US- a year, for example. Others spend time based insurer, now with customers, then share what they have learned, perhaps in a live-streaming tests some 8,000 interview, or underscore the importance of a changed culture in every meeting. ideas each year, Whatever the specific tactics, it is the generating roughly demonstration of senior commitment that is the surest way to bring about change. 250 patents. Everything emanates from there.

Youse Seguros, the online insurance sales Tanguy Catlin is a senior partner in platform of Brazilian insurance company McKinsey’s Boston office. Somesh Caixa Seguradora, was set up in this way. Khanna is a senior partner, and Julie According to CEO Eldes Mattiuso, “It Goran is a partner, both in the New was an essential move. You have to start York office. from scratch. You have to forget about the A roadmap for a digital rules of the old company and think like a start-up. If I’d had to follow the traditional transformation product development procedures it would have proved impossible to move quickly, or to use the cloud, for example. It would have taken us a year and a half to launch a single product.” Eventually, once the No insurance company has yet completed a digital new culture takes hold, the division can be transformation—one that fully harnesses the power reintegrated. of digital technology to rethink every aspect of the organization. But a number of carriers are making remarkable progress, indicating the direction others should take.

94 Building momentum for cultural change Digital disruption in insurance: Cutting through the noise 95 The future of insurance will be digital. have an advantage. And they are keenly in which they can be overcome. And from 1. Secure senior management That much is certain. The industry might aware that digital can give birth to entirely these early efforts and successes a set of commitment have been slow to feel digital technology’s new business models that shake up ten guiding principles is starting to emerge impact, protected by regulation, the size sectors, leaving companies that fail to (Exhibit 1). Any transformation will be dead in the of companies’ in-force portfolios, and adapt struggling to survive (newspapers water if it does not have the commitment customers’ tendency to stay put with their are a case in point). They have therefore Defining value of the CEO and the leadership team. insurers. But the pressure is mounting. In taken steps toward transforming their That statement seems almost glib, auto insurance, a handful of direct carriers businesses. To set a digital transformation on the right given how often CEO commitment is already enjoy the lion’s share of profits. course a company must place it at the positioned as the solution to any major Disruption of other lines of business core of its agenda, and understand the challenge. But the CEO cannot simply will surely follow. Distribution channels, magnitude of that undertaking. It is not for sanction a digital transformation; he products, underwriting technology, The CEO cannot the fainthearted, but CEOs are heading or she must communicate a vision of competitors, and even business models simply sanction a in the right direction if they grasp the what needs to be achieved, and why, will shift as technology attacks market fundamental importance of heavyweight in order to demonstrate that digital is inefficiencies and customer expectations digital transformation; management commitment, are willing an unquestionable priority, make other evolve. to make significant investments, and set leaders accountable, and make it harder he or she must clear, ambitious targets. to back-track. Hence, in 2015, Allianz Most insurers are responding to some announced that a key strategic growth degree, albeit often cautiously. Some communicate a vision see how digital technology will transform of what needs to be pieces of the business, but find it harder to envisage how the entire value chain achieved, and why. Exhibit 1 and business model might change. They therefore content themselves with investing in a new sales channel, launching a service app, or automating They are far enough advanced to know guiding principles of a digital transformation a few processes. At other carriers, that each stage of the transformation will stage 3. scaling up executives believe a transformation will not present challenges. The first will occur at be completed on their watch, because the the outset, when the CEO must set the 10 8 Sequence initiatives for quick returns magnitude of change required will leave company on the right course for success. stage 2. launch & acceleration Build capabilities no part of the organization untouched and More will present themselves during Adopt a new operating model could take up to a decade. So why bet on the first six to 18 months—the launch 4 Start with lighthouse projects an uncertain future and risk cannibalizing and acceleration phase—when initial stage 1. defining value 5 Appoint a high-caliber launch existing profits or alienating distributors changes have to start taking root, and yet team when they face more pressing issues, others will arise during the long haul of 1 Secure senior management 6 commitment Organize to promote new, agile such as regulatory compliance? subsequent years, when digital initiatives ways of working need to be scaled across the enterprise 2 Set clear, ambitious targets 7 Nurture a digital culture A growing number of executives, though, and digital capabilities and new ways 3 Secure investment are facing up to digital reality. They know of working become the lifeblood of the that digital technology can significantly company. Already, the industry’s digital improve the performance of their current pioneers are meeting these challenges business. They know that first-movers and demonstrating to fellow CEOs ways

96 A roadmap for a digital transformation Digital disruption in insurance: Cutting through the noise 97 initiative was to become “digital by provocative, disruptive, ambitious, and be automated, the percentage of build new businesses as the insurance ”—indicating the extent of the often uncomfortable sponsorship to be transactions that will be migrated from model evolves. To acquire expertise in changes ahead. Similarly, ING branded successful.” one channel to another, the fraction of new fields and keep abreast of innovation, its transformation “Fast Forward.” new code that will be tested automatically, for instance, insurers will need to invest 2. Set clear, ambitious targets the level of personalization that will be in partnerships or a venture capital arm, achieved, and the number of campaigns perhaps both, as well as in their own To set the organization’s sights at the that will be run each month. innovation labs. It’s not enough right level, investments need to be linked to clear, ambitious targets. This Launch and acceleration just to have CEO helps on three fronts. First, it signals the magnitude of what digital technology An insurer with It is easy to launch change initiatives. It is sponsorship. It needs can deliver. Without targets, people who hard to keep them afloat and spawn more. to be provocative, find it hard to accept that the old ways of premiums worth Often companies decide to fund several, doing things were massively inefficient more than $5 billion assign people, even set up separate disruptive, might be content to sign up for a 10 units. But then the initiatives fail to take percent improvement in cycle time, for should expect to off and the old ways of doing business ambitious, and example, when 100 percent is possible. continue much the same—at which point often uncomfortable External benchmarking can help in this hire between 20 and executives wrongly conclude there is no respect by reinforcing the conviction that 100 new specialists urgency as the market is not ready for sponsorship to be cutting the time it takes to, say, process change. a claims submission from 90 minutes to during the first successful.” 20 is not good enough if someone else To ensure early efforts thrive and build has reduced it to four. A company can 18 months of a momentum, companies should consider – Andrew Brem, chief digital be certain that if it does not match that carefully which projects to start with benchmark soon, others will. transformation. and support them with the necessary officer, Aviva resources. Prerequisites include a high- Second, setting clear targets at the caliber launch team often led by a chief outset prevents back-sliding when the 3. Secure investment digital officer (CDO), consideration of With the vision set, results are then going gets tough. And third, it imposes , and the nurturing achieved through relentless daily discipline on the process of deciding Digital transformation is likely to require of a digital culture. engagement. Andrew Brem, chief digital which initiatives to pursue for maximum significant investment. European insurer officer of Aviva, says CEOs need to be impact. Axa, for example, invested €950 million 4. Start with lighthouse projects “single-minded and aggressive” about over just two years. Our experience driving the transformation. “There’s no Targets are needed for each source suggests that in IT alone, companies with To win early support, companies should way you can do digital transformation of value creation—cost savings, outdated systems might need to double start with projects that offer potential for by halves,” he comments. “Our CEO revenues, improved performance of their current spending over a five-year significant rewards with manageable risk. is chirping in my ear the whole time. agents, and satisfaction of employees period. That investment is likely to result Such projects include customer services He is very activist. He bases himself and customers—and for new ways in lower profits for a while—but without activities and the redesign of the claims in our garage frequently. He drops of working and the new capabilities it there is a serious risk to profits in the process, from the moment a customer into meetings. He just starts talking required. They can be set, for example, longer term. Importantly, companies needs to file a claim to the moment to people. It’s not enough just to have for the frequency of releases, the will need to allocate investment both of reimbursement. Customers will be CEO sponsorship. It needs to be percentage of processes that will to improve the current business and to delighted, cost savings can be as high as

98 A roadmap for a digital transformation Digital disruption in insurance: Cutting through the noise 99 40 percent, and effectiveness, measured highest caliber a considerable challenge. kind that promises empowerment in their development, test-and-learn methods that in return on investment, can rise by as The scarcity of elite data scientists, for work on high-impact digital initiatives. speed progress while keeping the focus much as five percentage points. example, has been a factor in some “The talent piece is essential,” says on customers, and cross-functional teams insurers’ acquisitions of cutting-edge Andrew Brem. “I’ve hired an entirely that pool specific types of expertise. 5. Appoint a high-caliber launch team artificial intelligence start-ups; $5 million new digital team. I’ve brought in people to $10 million per employee can be from the world of gaming, from travel, The importance of securing a high- commanded in these so-called “acqui- from retail, from pure digital. And they’ve “The reason caliber launch team, often under a hire” deals. bought in a lot of people too. There are CDO, cannot be overstated. A CDO some particular skills I’d call out. One there hasn’t been can prove invaluable in co-ordinating a would be digital production design. transformation—avoiding duplication by “We have an Another would be digital marketing on the more innovation devising a methodology for the redesign of social side. And another would be data within traditional customer journeys that can be replicated advantage when it analytics, particularly on the customer across the organization as digitization side rather than risk.” distribution ... has efforts are extended, for example. He comes to culture. We or she can also ensure the appropriate People leadership skills are essential too. been that it’s very technology and skills are in place, decide are a tech company Transformation is not just about tipping the sequence of the transformation, in the insurance everything upside down, reinventing hard to find someone monitor progress against targets, and products, and disrupting value chains. It with a digital ensure that tactical day-to-day priorities space, not an is partly about balancing old and new and get the attention they need. But the integrating fresh talent with old, valued skill set who also role of CDO is a temporary one. At the insurance company hands. As Clara Shih, founder and CEO end of the nineteenth century, many that plays with of “advisor marketing cloud” company understands field companies employed a chief electricity Hearsay has observed, digital-savvy sales and vice versa.” officer to ensure supplies of what was a technology.” hires from outside the industry might ace new industrial . A few years building a digital-direct, e-commerce later, none did. Key recruits to the launch – Adam Lyons, founder and business, but are often ill-equipped to – Clara Shih, co-founder and team include designers to contemplate modernize insurers’ existing channels, CEO of Hearsay Social customers’ unmet needs and inform the CEO, TheZebra.com where huge, value-creating opportunities creation of experiences, products, and await. “The reason traditional agency services; data scientists; scrum masters distribution hasn’t innovated is because A digital unit can also help attract and to facilitate agile development; and One way to meet the challenge is to start it’s very hard to find someone steeped in retain those specialists, while offering developers who can work in the modern by hiring a renowned expert to serve as digital who also understands field sales, them freedom from incumbents’ IT environment. Roughly, an insurer with an anchor hire, who will help to attract and vice-versa,” she says. organizational constraints and the support premiums worth more than $5 billion others, on the basis that they will be drawn of like-minded colleagues. If such people should expect to hire between 20 and 100 to him or her more than they would be to 6. Organize to promote new, agile ways are simply parachuted into the existing new specialists during the first 18 months an insurer per se. Some companies go of working structures of incumbents they can of a transformation. further than hiring individuals and acquire become bored and frustrated at the pace agencies that specialize in design thinking. The way a company organizes itself is key of change. They need to be empowered to That is not a huge number, but the To help satisfy the expectations of their to a successful launch. Setting up a digital make a swift impact, which often means competition for digital talent and the ambitious recruits, companies might have unit independently of the organization will giving them authority to make their own advantage technology companies have to adapt their traditional value proposition, promote new ways of working essential decisions. in attracting it makes finding people of the based on span of control, with a different for digital success, such as agile product

100 A roadmap for a digital transformation Digital disruption in insurance: Cutting through the noise 101 Separating a digital component from empowered—will be the default mode paid to building more capabilities. And to the rest of the organization is not entirely of new recruits with digital skills. These “Agile principles reap the full rewards of a transformation, the answer, however. To begin with, methods also need to take hold across the are now standard eventually an entirely new operating model newcomers can (unintentionally) run organization, and now is the time to start will be required. roughshod over what is valuable in an nurturing them. operating procedure incumbent: the reason many insurance 8. Sequence initiatives for quick returns companies have been around for more So much needs to change. A focus on for software design, than a century is that they excel at what customer needs rather than process Sequencing with a view to quick returns is they do. They can also start to create and procedure, continuous customer but they’re also key to building scale fast. The more value a channel conflict, particularly if innovations feedback, comfort with testing and applicable any transformation captures as it progresses, threaten to cannibalize revenue streams. learning and hence with occasional the more it becomes self-funding and the The digital unit therefore needs to be failure, and collaboration—all are vital. time you need to greater the support it garners. Often a reintegrated at some stage, and that But insurers can be made to feel they are company’s approach is to let a thousand becomes more difficult as time passes. being asked to jettison the things that orchestrate a large flowers bloom. But this spreads scarce Whatever the choice, the ultimate goal has have made them successful and adopt an number of people resources thinly. Moreover, transformation to be to enmesh the old and the new. untested culture. No wonder McKinsey incurs costs at a time when competition research has shown that 46 percent of to get something is probably putting pressure on margins. financial services executives feel cultural complex and multi- Hence the imperative to thoughtfully McKinsey research or behavioral change is the biggest pursue a manageable number of digital challenge they face in pursuing their digital faceted done over an initiatives to tend the performance of the has shown that 46 strategies. core business while cultivating future extended time frame.” sources of growth (see “Capturing value percent of financial They are not, of course, being asked to from the core”). abandon the traits that have made them services executives successful, but to renew their heritage — Marcus Ryu, co-founder Initiatives that are strategically important, feel cultural or with innovative ways of thinking and and CEO at Guidewire pay back quickly, and reduce complexity working (see “Building momentum for Software are the ones to prioritize. This almost behavioral change cultural change”). Brad Auerbach, US always means looking for ways to cut industry manager at Facebook, describes costs—a counterintuitive notion for many is the biggest it as recalling what initially made them executives who tend to focus on digital challenge they face in successful. And there are relatively easy Scaling up technology’s growth potential. But context ways to kick-start change and gain matters. A company’s financial pressures pursuing their digital support. For example, rather than making At the 18-month point, companies will shape the sequencing to some decisions by considering the business should be making good progress. They degree. So will its IT, if legacy systems strategies. case or what competitors are doing, insist should have a handful of initiatives up and restrict initial choices. And companies that the starting point is “How does this running and be starting to capture value. need to be flexible. It could prove hard to create value for the customer?” Moreover, But just when everything seems under recruit the particular people needed, while 7. Nurture a digital culture change can begin in areas where there are control is also the time to supercharge the technology and customer behavior will fewer risks—in marketing, for example, by transformation and do everything on a continue to evolve. We have touched upon how digital ways of testing messages and channels to find out grander scale. The thoughtful sequencing working and thinking—fast, collaborative, what is most effective. of subsequent initiatives is key to this. In Tracking returns is essential to ensure addition, close attention will need to be all available value is captured. Often,

102 A roadmap for a digital transformation Digital disruption in insurance: Cutting through the noise 103 targets can be raised during the course of reason one large European insurance That is why companies will have to lean afford insight into decisions relating to the transformation as prototypes reveal group has set up an IT literacy program away from a traditional matrix structure technology architecture, data architecture, greater productivity improvements than to educate and update business line with rigid functional boundaries if the and platforms. Customer satisfaction is have been assessed on paper. And when managers, while all newly appointed top transformation is to succeed. They will likely to jump. Cycle times will be shorter initiatives are successful and deliver the business managers must take a three-day need a network structure, organizing and costs will fall. New ways to accelerate intended financial benefits, the board and training module to help them understand around sources of value, with product revenue growth will reveal themselves. This top team should be emboldened to push and capture IT’s strategic value (see managers empowered to make decisions is the time to double down on efforts. to achieve more. But while concentrating “Modernizing IT for a strategic role”). with implications that cut across functions. effort and attention on what works well Teams will not be permanent. They will be A closing thought, and perhaps one that matters, so does letting go of what does Ultimately, however, it will be important dissolved when they capture the value at reframes the challenge: the term digital not. to help all employees rethink the way stake, then regroup around new sources of transformation puts the emphasis on they work, as the end result of a digital revenue growth or cost reductions. Some technological change. But it becomes 9. Build capabilities transformation is the establishment of a companies call them scrum teams, others clear to anyone who understands digital company-wide agile operating model. tiger teams, portfolios, or tribes. Whatever technology’s potential that what is afoot is By now it will be apparent that insurers the label, the ossified matrix is giving way less of a digital transformation and more will have to invest in more than just digital 10. Adopt a new operating model to a more agile one. In other words, the of a fundamental rethink of the corporate technologies themselves to scale up entire organization, not just IT, will adopt an model, for which digital technology is the digital initiatives. Marcus Ryu, co-founder Whatever structures a company chooses agile approach to working. “Agile principles catalyst. Sources of revenue, efficiency, and and CEO at Guidewire Software, contends initially, it will reach the stage when only are now standard operating procedure for the organization’s structure are all up for that it is only by modernizing core a fundamental organizational redesign software design,” says Marcus Ryu, “but scrutiny, as are talent models, which need operating platforms — most importantly will do. Silos drawn along functional lines they’re also applicable any time you need to to offer more flexible, more empowering, policy administration, billing, and claims have always been a drag on collaboration orchestrate a large number of people to get and more rewarding career paths. Some systems — that insurers can externalize and performance in large organizations. something complex and multi-faceted done executives might feel the reframing makes the data and business logic necessary to In the digital age, when companies need over an extended time frame.” the challenges more daunting still, others deliver a satisfying digital experience for to reinvent the way they work on the fly, that it makes the opportunities more the policyholder or distribution partner. an inability to connect all parts of the    exciting. We are in the second camp. organization to share data, expertise, and Skills as well as systems will need to be talent can be crippling. Insurers that pursue digital transformation boosted. But if a company struggles to will meet challenges. IT projects fall behind Tanguy Catlin is a senior partner in hire 20 to 100 new people for the launch schedule, channel conflicts arise, and McKinsey’s Boston office, Johannes- team, how should it go about hiring several unexpected regulatory concerns emerge. Tobias Lorenz is a senior partner in the hundred? Searches are likely to extend to The only way forward Typically, companies also struggle with Düssesldorf office, Bob Sternfels is a developer communities and to technology cultural issues and challenges in recruiting senior partner in the San Francisco office, conferences and similar events. The quest for a company is to new types of talent. and Paul Willmott is a senior partner in the for talent might even lead companies learn as it goes and London office. to establish partnerships with software No rule book will solve all of this. A providers. figure out how to transformation is not a science. The only way forward for a company is to learn as it A huge internal training job will be apply lessons as scale goes and figure out how to apply lessons needed too. Business leaders will need as scale is built. Along the way there will be to understand IT’s strategic value—the is built. important markers of success. IT strategy will become clearer as early prototypes

104 A roadmap for a digital transformation Digital disruption in insurance: Cutting through the noise 105 Its application reveals that, relative to collaborate internally, and willingness sectors such as telecoms, travel, and to collaborate externally—US P&C retail, the insurance industry remains in insurers struggle most with the first the early stages of digital transformation. three (Exhibit 2). Indeed, among the nine industries measured, insurance ranked seventh, The stark performance differential scoring an average of 31 points out of 100 matters. Top P&C insurers, those that (Exhibit 1). score 50 and higher, are increasing revenue 1.5 times as fast as the rest of McKinsey research shows that this lag is the field and operating with a combined due largely to a weak digital culture. ratio that is eight percentage points lower. Of the five attributes important to a digital Our research examined what insurers are culture—an appetite for risk, a test-and- doing differently in the four management learn approach to product and service practice areas to outperform their peers development, agility, willingness to (Exhibit 3).

Exhibit 1

49

42 37 36 35 32 Digital Quotient: Where does 31 28 your company stand? 25

pharma/medical Insurance1 banking and media/ telecom retail travel/ To assess the digital maturity of businesses, and hence their ability to thrive in a digital products logistics hospitality world, McKinsey has devised a simple metric, the Digital Quotient®. The DQ evaluates 18

management practices connected to four areas—digital strategy, capabilities, culture, and ¹ Includes P&C and Life organization—that correlate most strongly with growth and total returns to shareholders. Source: USDEC

106 Digital Quotient: Where does your company stand? Digital disruption in insurance: Cutting through the noise 107 Exhibit 2 Exhibit 3

P&C insurers’ performance scores in the five attributes important to a digital culture Insurers’ digital maturity as measured by the Digital Quotient®

P&C average Top quartile P&C 1=Poor performace 5=

Risk appetite 2.4 2.8 strategy culture organization capabilities Test-and-learn 2.7 2.9 73 26 38 43 ¹ Speed/agility 2.3 3.1 28 19 22 24 CULTURE Internal collaboration 3.2 4.0 40 35 37 29 External ² collaboration 2.7 3.2

1 2 2.5 3 3.5 4 5 ¹ Sample of some 30 insurance companies worldwide. ² Sample of 200+ companies drawn from range of US-based, non-insurance industries.

Strategy. Top-performing P&C insurers average cross-industry score of 29. They Organization. High-quality governance scored on average 73 for the effectiveness generate 47 percent of all sales over digital and employee practices, and the effective of their digital strategy, compared to an channels, compared to 11 percent for the alignment of roles and responsibilities, are average of 40 across all companies. This average insurer. They also make it easy for especially correlated with market success. strong performance was driven by three customers to file first notice of loss claims But even top-quartile companies that enablers: a bold long-term vision based online, receiving 15 percent more such institute dynamic measurement and on a clear and shared articulation of notifications over digital channels than the talent development practices can customer priorities, strong support from average insurer. struggle to adapt the way they work. senior leaders, and a firm set of targets Insurers on average record poor to for growth, market share, customer Culture. A handful of cultural attributes middling performance in fostering a digital satisfaction, and return on equity. separate outperformers from the rest of organization, with an average score of the pack. They have a greater risk appetite 22 compared to an average of 37 for all Capabilities. The best performers for digital initiatives, embrace a test-and- industries. were particularly strong on connectivity learn mind-set, enforce cross-disciplinary between channels and digital content collaboration, and look outward for For further details of the survey, see see creation, earning an average score of 43 inspiration. Tanguy Catlin, Ido Segev and Holger Wilms, “The Hallmarks of Digital Leadership in P&C for their digital capabilities compared to an Insurance,” McKinsey & Company, August 2016.

108 Digital Quotient: Where does your company stand? Digital disruption in insurance: Cutting through the noise 109 The following McKinsey consultants and experts contributed to this compendium:

Elizabeth Abraham Pradip Patiath Mila Adamova Anand Rao Ramnath Balasubramanian Jay Scanlan Simon Behm Thomas Schumacher Rohit Bhapkhar Ido Segev Henk Broeders Parker Shi Joao Bueno Kate Smaje Jacques Bughin Rohit Sood Rae Chen Bob Sternfels Michael Chui Kurt Strovink Peeyush Dalmia Ashley Thomas Julie Goran Shanon Varney Matt Higginson Amy Vickers Khushpreet Kaur Paul Willmott Alex Kazaks Holger Wilms Somesh Khanna Shuang Wu Chandresh Kothari Olga Yurchenko Krish Krishnakanthan Laura LaBerge Jens Lansing Xavier Lhuer Ari Libarikian Markus Löffler Christopher Mokwa Christopher Morrison Björn Münstermann Peter Braad Olesen

For more information, contact:

Tanguy Catlin Johannes-Tobias Lorenz Senior Partner, Boston Senior Partner, Düsseldorf [email protected] [email protected] March 2017 Copyright © McKinsey & Company mckinsey.com @digitalmckinsey