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Few insurers have defined a comprehensive digital strategy fit to withstand attackers at the gate. The starting point, asserts this report from McKinsey, is to understand the sources of disruption.

Venture boldly where your competitors seem unwilling or unable to go . . .

According to McKinsey research, insurance companies with the most advanced management practices related to digital strategy, capabilities, culture, and organization outperform their peers. Yet relatively few incumbents have so far defined a comprehensive digital strategy. Their digital approach is ad hoc, piecemeal.

Why? Part of the answer lies in regulatory protection and the strength of in-force books. Also, CEOs with limited tenures might be wary of upsetting what has served them relatively well—‘if it isn’t broke, don’t fix it.’

Digital strategy is no different from that of any other strategy; it is a set of integrated, hard-to-reverse choices, made for the future, in the face of uncertainty, with the purpose of creating and capturing economic surplus. Discerning the sources of opportunity and disruption in digital technology is core to strategy development.

The building blocks of a digital strategy likewise resemble those of any other strategy: a diagnosis of where and why a company makes money in the present, a forecast of how that might alter in the future, an understanding of the potential pathways to success, a portfolio of initiatives, and then a commitment to driving change.

What is different in a digital age is the speed and potential magnitude of that change, upending old business models and rapidly building entirely new ones. Circumventing the need to build traditional fixed assets, the likes of Amazon, Netflix, Uber, and Airbnb, have disrupted incumbents in the space of a few years creating value without owning, respectively, physical shops, cable connections to viewers’ homes, car fleets, hotels, or bank branches.

A McKinsey survey of more than 2,000 executives in industries affected by digital technology shows that the companies with the highest revenue and earnings growth exhibited four characteristics:

• Boldness: Leaders looked for digital opportunities across all elements of their business model, not just one or two, and either led the disruption or were fast followers. They made bets on digital processes across the value chain, on innovative products, and on new business models.
• Vigilance: Leaders review strategies frequently as technology, consumer behavior, and competitors evolve ever more rapidly. The five year strategic review—once a staple of board-level strategies—is increasingly outdated.
• Open-mindedness: Leaders build a wider range of strategic options realizing conditions can change so quickly.
• Swiftness: When conditions do change, leaders exhibit discipline and agility reallocating management time and resources swiftly. As Klaus Schwab, chairman of the World Economic Forum, memorably said, “In the new world, it is not the big fish which eats the small fish, it’s the fast fish which eats the slow fish.”

Digital technology can disrupt in four, non-mutually exclusive, ways. It can 1) transform the cost structure of a business system, 2) disrupt supply and demand, 3) create new value propositions and markets, and 4) create hyperscale digital platforms. There are thus four questions companies should ask to start building strategy.

To what extent will digital technology transform the cost structure of the business system? In a digital world, all businesses are likely to be disrupted if they rely on a physical distribution network and involve manual processes that can be automated. It’s easy to see how traditional insurance models, often reliant on commissioned agents, could be displaced by companies able to automate advisory processes and apply advanced analytics to improve pricing and underwriting.

To what extent will digital technology disrupt supply and demand? Digital technology caters to demand more precisely so customers are no longer obliged to buy elements of a package they don’t want. Digital technology also has the power to unleash supply. In insurance, complex regulation and capital requirements have restricted supply in primary markets as start-ups seldom want to take insurance risk on to their balance sheets. But startups are targeting accessible slivers of the industry, primarily marketing and distribution. And institutional investors are hovering.

To what extent will digital technology give birth to new value propositions and markets? There are myriad ways of using digital technology to improve value and offer new propositions, such as making purchases simpler and faster, adding fresh elements to a product or service, using data and analytics to make products more relevant, or removing costs incurred by intermediaries. Examples are emerging of carriers using it to reward consumers with benefits for behaving in a way that aligns with their own interests—such as US insurer John Hancock offering customers discounts on products and services, as well as lower premiums, in return for leading healthy lifestyles. Value propositions are emerging that threaten to undermine the existing insurance model. The more real-time data becomes available, from sensors in cars or on drones, devices installed in homes, or monitors worn on our bodies, the more companies can learn from the analysis of that data and the more it will be possible to mitigate risk, reducing the need to insure against it. That hits the volume of demand, but risk mitigation becomes a new value proposition in the process.

Will digital technology give birth to hyperscale platforms? Digital technology gives rise to companies building platforms on a massive scale. Their size, the huge amounts of data they amass, and the depth of analytical talent they deploy—along with the network effects they generate—are hard for others to match and thus create barriers to entry. Insurers need to consider what their role might be in the ecosystems developing around these data platforms, and where value lies in owning and analyzing data.

Worth noting, In insurance, as in other industries, it takes a while for customers and companies to embrace digital technology, but as the pace of change accelerates incumbents’ scope to adapt diminishes. There comes a tipping point where those that have not adapted their strategies fade away—as in traditional print media, for example. The insurance industry might have been relatively slow to feel the digital effect, but personal lines in P&C cover look set on a steep trajectory toward the tipping point, with small commercial lines just behind. Life insurance and large commercial insurance, with longer-term, often more complex contracts, have further to go.

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