Article Synopsis :
The continued low-interest environment has hit insurance in mature markets hard, particularly life insurance carriers. As a result, most are failing to make their cost of capital, says this McKinsey report.
Even though the picture is rosier for some, for the industry as a whole is in the red by average economic profit, with huge disparities in performance among the profitable carriers and those that follow.
Boosting performance is a key objective, but insurers have been slow to leverage the benefits of digital technologies and increase their overall productivity in the past.
The answer has been to roll out standard cost-cutting exercises but to little effect. And complexity is a major obstacle.
Performance may be enhanced through achieving scale through a merger or takeover or founding an ecosystem to capture value in adjacent markets. But only a few have made this work as it is a complicated undertaking.
Digital entrants are commoditising the landscape, driving down prices through increased transparency. Other risks have also emerged, including cyber and the increasing frequency and severity of natural catastrophes.
Investment in innovation and new products for future growth needs a more productive core, so insurers need to get moving. More ambitious, root and branch is required, as the ‘softly, softly’ approach is too conservative and will not bring about transformation in time – if ever.
The report identifies four categories of lever to increase productivity and boost growth:
1) Deepened functional excellence
This covers actions that will enable the optimisation of specific parts of the organisation, such as focusing on underwriting or claims. These actions should increase productivity by improving or enhancing a specific capability already present in current operations.
2) Comprehensive simplification
This deals with a greater scope for change, such as operating model transformation. These actions make significant structural changes in order to enhance productivity.
3) End-to-end business model transformation
Insurers must behold and be prepared to make a drastic change, such as introducing a digital attacker, selling closed books, or overhauling the operating model along with next-generation operating model principles.
This will transform the way business has been done to date and may be influenced by shifts in the product portfolio, the sale or acquisition of whole business units, or the at-scale introduction of technologies such as advanced analytics, artificial intelligence (AI), and robotic process automation (RPA).
4) Enterprise-level enablers
This covers a number of levers from the ability to scale innovation, through recruiting new blood and managing changed efficient implementation of capabilities that align spending with business priorities to effective communication with stakeholders.
It requires experienced staff at the implementation level on the front line as well as in leadership and middle management to guide the organisation and dismantle any obstacles.
It calls for new agile business models, which will require both alignment and synchronisation at the enterprise level.
Carriers have dipped their toe into the transformation pool by pulling on one lever at a time.
But in order to generate a sustainable edge, executives must bite the bullet and pull all of these levers at once.
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Digital Insurer's CommentsThere is increased focus on the claims process as a route to digital transformation and this paper leans on this heavily.
It cannot be done in isolation, but the suggestion that come what may, this new model for claims will be essential has some weight.
Some insurers have already succeeded in automating elements of their claims processes for parts of their business, such as auto, baggage and flight delays.
If we can do some of this now, there will be no excuse for developing this capability when technology – probably blockchain – influences areas such as healthcare claims.
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