Article Synopsis :
The digital future is knocking, but most insurers are still not opening the door to opportunity due mainly to the enormity of transformation challenges. The main protections for incumbents are regulation, product complexity and large balance sheets—and these protections are eroding.
In “Time for insurance companies to face digital reality”, McKinsey shares the researched opinion that ‘Digital technology destroys value.’ Although digital technology propels some companies to become clear market winners, for many more it depletes corporate earnings and the overall value of an industry. And so it is likely to be in insurance. As power is transferred from carriers to customers, market value will be destroyed, with digital laggards paying the price.
Amid this reality, it makes sense for incumbent insurers to fast-track digitization in pursuit of:
- More satisfied customers
- Lower operating costs
- Higher revenue opportunities
- Innovative insurance products and protection services
As it stands, these benefits are being pursued almost exclusively by InsurTechs and FinTechs who see real money in these ‘niche’ benefits. Globally, VC’s invested $4.3 billion in InsurTechs over the last two years alone, with a main focus on distribution in the P&C and Health sectors.
Beyond InsurTechs, the article explores three other emerging tends facing incumbent insurers:
- A shift toward preventing risk rather than insuring against it. Sensors and telematics remove risks from tasks such as driving and McKinsey’s research suggests premiums for personal auto insurance may decrease as much as 40% over the next fifteen years.
- The increasing power of companies owning and analysing data.
- The investment of huge amounts of capital in insurance-related capital market instruments by institutional investors seeking high returns.
Despite all the doom and gloom, digital is not all downside for insurers. Higher customer satisfaction levels, driven by the improved service and faster processing times enabled by digitization, is itself a driver of profit through increased customer retention. At the same time, by digitizing existing books of business, carriers can remove significant cost across the value chain, further increasing customer lifetime value. Automation, for example, can reduce the cost of a claims journey by as much as 30%. An essential point: first/fast movers typically benefit from digital initiatives at the expense of laggards.
The report concludes with a discussion on the five drivers of successful digital transformation:
- Technological leadership and innovation
- Customer ownership
- Efficiency by cost savings and effectiveness through higher returns
- Scale and network effects
- Speed and agility
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Digital Insurer's CommentsOf all the articles we’ve covered touting the upside of digital—which is indeed massive—this is the first to state flatly, based on sound research, that ‘Digital is a long-term destroyer of value’ across industries, including, ultimately, insurance. Carriers catering to digital customers will win share from those that don’t. It’s a less-than-zero-sum game.
Judging the velocity of this value destruction is a key decision-point for every insurance CxO. Moving too quickly (or haphazardly) on digital transformation can squander capital; moving too slowly can imperil the long-term viability of the business. Yes, digital transformation is daunting. And its expensive. If you think doing nothing and riding the status quo is a ‘safe’ option, we recommend spending ten serious minutes with this report.
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