Insurance companies struggle to take full advantage of digital tools, technology: McKinsey report

Despite insurers worldwide increasingly creating value through the innovative use of digital tools and technology, much of the potential value and the most significant opportunities for making digital a competitive advantage remain untapped, argues a new report from McKinsey & Company.

Insurers are already demonstrating the value that a digital approach can deliver through improved connectivity with clients and intermediaries, better decision-making, cost savings and business model innovation.

The Making of a Digital Insurer: The Path to Enhanced Profitability, Lower Costs and Stronger Customer Loyalty is based on McKinsey & Company’s work with carriers and research on the qualities that distinguish digital leaders across all industries, notes a statement last week from the global firm, which has more than 9,000 consultants and almost 2,000 research and information professionals.

The report acknowledges that insurers are already demonstrating the value that a digital approach can deliver through improved connectivity with clients and intermediaries, better decision-making, cost savings and business model innovation. That said, insurers today continue to face a choice: whether to invest in digital capabilities or become digital insurers.

“To reap the full benefits of the digital era, insurers should aspire to become digital firms,” the report recommends. “Digital firms leverage technologies such as mobile, social and cloud to make better decisions, automate processes, deepen their connection with customers, employees and intermediaries, and pursue profitable innovation, all at a rapid development pace,” it notes.

“Insurers should follow the example of leaders in digitally advanced industries, which take an enterprise-wide approach to digital and understand that digital is more than the sum of individual initiatives,” advises the report.

“The digital bar for insurers is high and rising,” McKinsey & Company notes in the report, pointing out that insurance customer expectations have been shaped by their digital experiences with companies outside the insurance space, including Amazon and Facebook. “Those companies that can meet this challenge will build greater customer loyalty, cut costs and improve profitability.” [click image below to enlarge]

The report recommends insurers focus on the following six key areas where digital can have the greatest impact:

• Strategy – Insurers seeking digital excellence must develop a strategic approach that is nimble and flexible enough to adapt to rapid industry change, with the digital strategy being closely tied to or integrated into the overall business strategy. McKinsey & Company’s research, however, shows that only one in six insurers is doing this integration.

• Customer-centricity – An effective approach to customer-centricity begins with the systematic examination of how digital can improve the customer experience at every step of the decision journey. However, the company research indicates only one in 10 insurers has aligned its digital strategy to maximize effectiveness across the full decision journey. Insurers can use digital tools to develop a clear view of which customer interactions can be re-imagined through digital.

• Business processes – Digitizing processes can deliver significant near-term gains in the form of reduced costs, lower error rates and increased customer satisfaction. But, thus far, most carriers have not fully embraced the opportunity, with McKinsey & Company estimating p&c and life insurance carriers have as much as 30% to 40% of their expenses locked up in their top 20 to 30 core end-to-end processes. Overall, it is estimated carriers can drive a minimum one-to-four-point improvement in their overall expense ratios through rapid digitization.

• Organization – Successful digital firms are distinguished by more than technical expertise. Their corporate cultures (cultural values that drive digital excellence include a higher risk tolerance, an acceptance of failure as a part of innovation, and a test-and-learn approach), approaches to talent (among other things, carriers must overcome their traditional reluctance to hire from outside the industry) and organizational models (an insurer must choose a model that best fits its current level of digital maturity and that can change as the company evolves) create the conditions for digital excellence.

• Technology – Nine out of 10 carriers report that they are struggling to develop the technology structure they need to support digitization, notes research by McKinsey & Company. With dated legacy platforms sometimes being a barrier to the rapid development that characterizes digital, the report suggests the best approach is to develop IT capabilities that run at two speeds: a foundational IT architecture centered on transactions systems, and a high-speed, agile IT model that focuses on customer engagement systems.

• Analytics and decision-making – Data analysis has long been a core competency for insurers, but they need to build on these capabilities. The exponential growth of data, combined with new analytics tools, is expanding the number of processes that can be digitized, and processes that once relied on the judgment of trained employees can now be automated. [click image below to enlarge]

A heat map can help prioritize digital opportunities across geographies, product lines and steps in the value chain

• “While the pace and magnitude of change depend on a carrier’s present position and on their product focus, all insurers can derive significant near-term value from digital,” the report notes.

But challenges remain. McKinsey & Company’s research shows that only 16% of U.S. insurers have an appetite for risk-taking and creativity that matches that of digital leaders across all industries. “Meeting these expectations is both the challenge and the promise for insurance carriers in the digital era

For example, claims and servicing in particular are fruitful areas for the digitization of processes, notes the report. As well, while some carriers see their antiquated legacy IT systems as being insurmountable obstacles, this is not the
case. “The reality is that insurers can revamp many discrete processes without making changes to their underlying technology infrastructure,” it states.

While digital transformation touches all areas of the business, “it would be a mistake, however, to insist on the perfect strategy and full organizational alignment before taking concrete short-term steps to drive value. The optimal approach combines quick wins with more measured, longer-term projects,” the reports explains.

“Importantly, the characteristics that have differentiated high-performing insurance carriers in the past – underwriting discipline, claims execution, investment management savvy – will continue to be fundamental to success,” states the report. “However, carriers that can combine these strengths while also leveraging the full power of digital tools and approaches will be in a position to lead the industry.”

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