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Frontiers in Finance – KPMG Report

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Article Synopsis :

In the current edition of “Frontiers in Finance”, KPMG examines the ‘digital enterprise’ – specifically how new technology and digital labour can help financial institutions better cope with regulations, expand financial inclusion, and deliver cost-efficient products and services. This comprehensive report, organized in three segments, delivers viewpoints from several KPMG partners, aimed at helping expand your thinking in key strategic areas.

 The Digital Insurer reviews KPMG’s Report on Frontiers in Finance

This report from KPMG explores digital frontiers in finance, with an excellent section on M&A

Segment 1 – Technology and market trends

“Making automation work – Insurers adopt a digital labor force” explores why insurers, even with significant investments in automation, fail to achieve strategic, enterprise-wide success. This section identifies and explores several factors determinant of desired success. Of note, digital labour means the automation of labour by leveraging digital technologies to combine and automate standard tasks. This includes Robotic Process Automation (RPA), Enhanced Process Automation, and Cognitive Automation. These tools can unlock new levels of productivity, agility, confidence and competition.  Big questions for insurers include:

Development phase:

  1. Do you have clear executive sponsorship for the initiative?
  2. Have you considered the impact on your organisational structure and culture?
  3. Do you have a well-defined plan and strategy for labour automation across your enterprise?
  4. Have you developed a strong approach to governance?
  5. Do you have basic consensus on security and risk mitigation?

Commercialisation phase:

  1. Are your investments aligned to the organisation’s appetite and expectations?
  2. Do you understand the key drivers and characteristics of each class of digital labour you are using?
  3. Do you have a formalised approach for identifying and prioritising automation initiatives?
  4. Have you assessed opportunities for accelerating the path to value?
  5. Do you know when to declare success or failure and move on to the next initiative?

Rather than focus on cost reduction, leaders should focus on improved productivity and customer-centricity to deliver value. Bot pilots are useful, for example, to access historical databases to take decisions on specialty commercial policy renewals, or personal lines claim approvals. But even if the pilots succeed, absent an overall digital labour strategy, expanding this to the enterprise level will be very challenging.  Other challenges include the lack of skilled workforce, and an immature, fragmented external vendor environment. Unsurprisingly, per a KPMG survey, 91% of CEOs are concerned about the challenge of integrating automation with AI and cognitive computing

Best practices shared by industry leaders include:

  1. Understand the big picture by fully understanding the application of digital labour at the enterprise level, identifying interdependencies and synergies. Chart out a plan and make investments tied to the right financial metrics.
  2. Use a defined change management approach to educate and build the right awareness across the organization. Showcase the potential opportunities for development to your traditional workforce to ease transition to the new digital culture.
  3. Think global, but act local, by centralising capabilities and processes related to digital labour. In your local market, explore global ideas by setting up Center-of-Excellence hubs to foster innovation.
  4. Create the right governance to oversee the entire digital labour strategy execution, not just pockets of experimentation.
  5. Measure and monitor your digital labour strategies toward measuring outcomes and resolving problem areas. This should be continuous to ensure smooth implementation.

Segment 2 – Management and governance

“Insurers are on the road to strategy aligned decision-making” explores how insurers plan to build technological expertise, both organically and inorganically.

Per a KPMG survey, 84% of insurers feel that they will have to make at least three acquisitions in the next year, while 94% feel that they will make at least one divestiture. 33% of insurers will undertake M&A to redefine their business and operating models, and 40% intend to enter into partnerships and alliances.

M&A is no longer a reactive strategy, rather it’s becoming more planned. This requires firms to develop data- and analytics-enabled deal evaluation capabilities to ensure maximum value from prospective acquisitions.

To improve M&A deal outcomes over the long term, deal playbooks should cover due diligence, deal evaluation and post-deal integration/separation. While some focus more on partnerships or alliances to build up their capabilities, others have set up corporate VC models, which focus more on non-insurance technology investments. Of note, 90% of corporate VC investments are in the range of US$10m-US$50m.

KPMG outlines 7 steps for a strategy-aligned deal environment:

  1. Identify and prioritize the primary synergies of a deal, including the unique synergies that only your company can create.
  2. Identify targets with unique strategic fit and value creation potential.
  3. Conduct due diligence focused on the strategically relevant parts of the business.
  4. Value targets based on how they fit uniquely with your business, rather than just relying on average multiples.
  5. Select an appropriate deal type and structure to realize your competitive strategy.
  6. Plan for an integration approach focused on creating the unique synergies required to achieve maximal value capture.
  7. Set in place post-transaction performance assessments to track value creation on an ongoing basis.

Segment 3 – Business and operating models

“The innovation imperative continues” focuses on InsurTechs. Today’s changing industry dynamics and technology advancements are forcing insurers to accept and embrace technology as an imperative.

In 2015, Insurtech-related VC investments were US$590m. In 2016, the figure doubled, reaching US$1b. The more InsurTechs evolve the more they will put even more pressure on traditional insurers. The industry is slowly embracing the importance of technology adoption manifest by innovative InsurTech business models. Insurers not owning digital capabilities are collaborating with InsurTechs on primarily big data and analytics.

To leverage the InsurTech ecosystem, insurers can start by:

  1. Identifying current business problems and matching up with the right InsurTech opportunities. For companies unable to identify specific business problems, they can start by setting up innovation hubs with a focus on larger known problems.
  2. Addressing integration challenges (after identifying the right InsurTech technologies).
  3. Identifying the right technology partners and developing a symbiotic relationship with them.

Link to Full Article:: click here

Digital Insurer's Comments

We agree with KPMG’s view that insurers today need to do more than talk about the importance of internal innovation and the opportunities presented by external InsurTechs, they must leverage and integrate solutions toward sustainable growth.

Becoming a digital insurer is a lifestyle change, requiring new thinking and behaviour, toward a completely new digital state of mind. We particularly recommend the M&A section of this report, for insurers exploring M&A as a path to better long-term digital health.

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