Regulation, product complexity, and insurers’ large balance sheets have kept digital attackers from insurers’ gates. That is changing, but in ways incumbents should embrace. They can flourish in the digital age—if they move swiftly and decisively.
By Tanguy Catlin, Johannes-Tobias Lorenz, Christopher Morrison, and Holger Wilms (Read the whole report)
Chicago, IL (Mar. 31, 2017) – Digital technology destroys value. That might sound counterintuitive given the extent to which it can make business systems more efficient—and companies are urged to embrace its many possibilities. Yet new McKinsey research shows that although digital technology propels some companies to become clear market winners, for many more its impact depletes corporate earnings and the overall value of an industry. Consumers, not companies, are often the ultimate winners.
So it is likely to be in insurance. For a long time, the traditional insurance business model has proved to be remarkably resilient. But it too is beginning to feel the digital effect. It is changing how products and services are delivered, and increasingly it will change the nature of those products and services and even the business model itself. We firmly believe that opportunities abound for incumbent insurance companies in this new world. But they will not be evenly shared. Those companies that move swiftly and decisively are likely to be those that flourish. Those that do not will find it increasingly challenging to generate attractive returns.
A triple prize: Satisfied customers, lower costs, higher growth
The goal must be to meet customers’ expectations, which have been transformed by digital technology. Customers want simplicity—one-click shopping, for example. They want 24-hour access and quick delivery; clear, relevant information about a product’s features, particularly in relation to pricing; and innovative, tailored services designed for the digital age. They have the same expectations whatever the service provider, insurers included. And as Matthew Donaldson, CEO of UK-based BGL, the company behind the comparison site Comparethemarket, points out, although some insurers are holding back from the commitment needed to meet these expectations, demand must ultimately be satisfied.
In the shorter term, fulfilling this goal is a chance for insurers to improve profits in their core business. Higher customer satisfaction, driven by the improved service and faster processing times that digitization delivers, is itself a driver of profit through increased customer retention. At the same time, by digitizing their existing business, carriers can remove significant cost across the value chain, further increasing customer lifetime value. Automation can reduce the cost of a claims journey by as much as 30 percent, for example.
There are revenue improvement opportunities, too. The notion that insurance is a low-engagement, disintermediated category in which customer relationships can be delegated to agents and brokers is increasingly obsolete. Instead, digital technology and the data and analysis it makes available give insurers the chance to know their customers better. That means they can price and underwrite more accurately, and better identify fraudulent claims. They can also offer clients more tailored products—auto insurance that charges by the mile driven, for example. And they can offer them in a more timely manner. In an analog world, an insurer will be unaware when a customer holding a home insurance policy puts that home on the market. In a data-rich digital world, that need not be the case, and the knowledge that a home is up for sale becomes an opportunity to offer new home cover, new auto cover, and perhaps a life product to help cover a mortgage on the new house.
Longer-term growth opportunities reside in innovative insurance products and protection services. Concerns about cyber security will create demand from companies and even households for products that prevent and protect against the breach or loss of data, and damage that might ensue. And more products fit for a sharing economy will surely emerge—for homeowners who suddenly become hoteliers when they take a guest through Airbnb, for example.
This is all good news for insurers, particularly at a time when low interest rates and tighter regulation constrain performance. But while opportunities abound, there is no guarantee that today’s incumbents will be the ones to capture them. Digital is opening the gates to new attackers that will erode their advantages.
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