Four action items for insurers to succeed in digital transformation

COVID-19 has accelerated some trends that look certain to reshape the insurance industry. At the same time, some of the problems that have challenged the industry over the past decade have not gone away.

In our new report, Creating value, finding focus: McKinsey Global Insurance Report 2022, we examine actions insurers can take to address the challenges of this period of intense flux. Here are four imperatives focused on improving insurers’ digital transformation.

1. Enhance and personalize customer engagement and experience
New customer behaviors require a shift in distribution. Consumers are embracing digital channels and have become used to delightful experiences with leading tech companies. They expect the same when buying insurance both online and offline. A seamless, consistent “multi-access” experience in every channel is now the gold standard for insurers. At the same time, most customers still expect some form of advice on most products. Addressing customer needs and improving customer experience thus does not necessarily mean going direct. It might mean supporting distributors with seamless, digital customer journeys that let customers decide which topics they can access digitally themselves, and on which topics they value personal advice (for example, before buying a complex and low-frequency product, or in the case of a severe claim).

Major European and U.S. carriers have not moved as quickly as some players in Asia that have seamlessly linked their digital platforms and tied agent channels, and invested in customer personalization and engagement. Carriers willing to launch this journey could follow different approaches based on their strengths and organizational capabilities. Many insurers that traditionally rely on agents start by providing digital tools to agents. Insurers that depend on direct distribution are typically far down the road of digitalization; they can augment direct channels with tools to connect customers with people. Carriers that rely on both an agent network and direct channels can build a true multi-access model that fully integrates both agent and direct channels.

2. Engage with ecosystems and insurtechs
The ongoing drive toward digitalization has also put the insurance industry on the verge of a paradigm shift: as traditional industry borders fall away, ecosystems will greatly influence the future of insurers, with insurtechs aiming to play a role in this recomposition of the value chain. Our research suggests that ecosystems could encompass $60 trillion in revenue by 2030.

While only the very largest insurers will be able to create or orchestrate their own ecosystems, the ability to connect with ecosystems will be a prerequisite for growth for all carriers as these systems gain in scale and customers come to expect insurance products as part of the offering.

Carriers will also need to take a close look at their relationships with end customers in the context of purchasing journeys—such as buying a car, going on vacation, and buying a home—and decide how to embed solutions and services alongside insurance coverage. To succeed, insurers need to build the technological and organizational foundations as well as the necessary partnerships to generate value from their ecosystem approaches. Our conversations with insurance executives around the world suggest that leading carriers take a three-stage approach to participate in or form an ecosystem: strategize, enable and generate value. These stages can help insurers implement ecosystems in manageable, focused phases.

3. Develop new businesses for the digital age
New-business building is emerging as a crucial strategic priority to drive reinvention and innovation for the industry. Part of the reason is speed: what used to take years must now be done in months or weeks to meet changing demands of the market. Insurance executives must shift how they lead their institutions—from a methodical pace of change to the decisive reinvention of their businesses. Many established companies have tried and failed to build new businesses from scratch. The ones that successfully combine the speed of a startup with the scale and resources of the core business.

Organizations that repeatedly build successful new businesses exhibit six characteristics: strong commitment from senior management, obsession with value over ideas, a test-and-learn culture, “open architecture” capabilities, balance between organizational freedom and corporate support, and dynamic performance management and measurement. To get started on new-business building, insurers can look for opportunities that simultaneously meet customer demands, square with the organization’s strengths, and are sizable enough to create real value.

4. Scale impact from data and analytics
Insurance leaders see enormous potential in best-in-class data and analytics capabilities across the value chain, even for the highest-performing companies. For example, even the leading P&C insurers can see loss ratios improve three to five points, new business premiums increase 10 to 15%, and retention in profitable segments jump 5 to 10%. However, after years of investing and experimenting, most insurers have not yet seen the return on their investments at the enterprise level. While individual pilots are successful, they realize the real challenge is in scaling the impact to the whole organization. We call this the pilot trap; to escape it, insurers need to move analytics from experiments to the mainstream.

This move requires a combination of distinctive analytics, tools, frontline and management routines, and investments in talent and capability building. The ideal mix of these elements will vary by line of business. Based on our experience with similar efforts, getting a few things right often determines whether companies achieve their full potential. One principle is to start small to learn and build conviction—for example, by picking two lines of business, one with strong performance and another that is performing less well, to prove impact. ‘Big bang’ efforts made without examples of the potential outcome often fail to drive change.