Regaining relevance

The insurance industry needs to regain relevance through product innovation and the coverage of new risks, according to a punchy new report from McKinsey.

The insurance industry struggles to create economic profit. But amid COVID-19’s enduring changes, opportunities await. A new report from McKinsey & Company, the Global Insurance Report 2022, provides an extensive view on the opportunities and challenges insurers face.

“Anticipating emerging trends and preparing for them is more important than ever”, says report co-author and McKinsey senior partner Stephan Binder.

These strategic questions include:

  • How can insurers create value for shareholders, improve customer experience, and attract and retain talent?
  • How can they, individually and collectively, reframe the role and purpose of insurance in society?

To address these challenges, McKinsey lists nine so-called ‘value levers’ which it suggests leadership teams need to capitalise on:

Make environmental, social, and governance (ESG) considerations a core feature of the business model. 

ESG issues increasingly affect how all companies do business. Consider climate risk, an area in which evidence is mounting that P&C insurers will soon need to revisit their business models. However, while many insurers have begun to incorporate climate-risk considerations in their investment processes, new-product launches and underwriting processes are mostly unchanged.

Regain relevance through product innovation and coverage of new risks.

While the insurance industry has built financial resilience recently, some substantial risks have been left uninsured. A fast-changing world is creating many new and evolving risks. In P&C commercial lines, for instance, data and cybersecurity risk and machine-learning liability are coming to the fore. New risks call for new products and a reallocation of priorities, and represent significant opportunities for P&C and life insurers that are willing to innovate.

Enhance and personalize customer engagement and experience.

New customer behaviours require a shift in distribution. Consumers are embracing digital channels and have become used to delightful experiences with leading tech companies. They expect the same when buying insurance both online and offline. A seamless, consistent “multi-access” experience in every channel is now the gold standard for insurers.

Engage with ecosystems and insurtechs.

The ongoing drive toward digitalization has also put the insurance industry on the verge of a paradigm shift: as traditional industry borders fall away, ecosystems will greatly influence the future of insurers, with insurtechs aiming to play a role in this recomposition of the value chain. Our research suggests that ecosystems could encompass $60 trillion in revenue by 2030. Many insurance executives are looking at ways to engage with emerging ecosystems in areas such as mobility, healthcare, and the connected home.

Develop new businesses for the digital age.

Private investors have spotted the potential for improvement and the not-too-distant prospect of attractive returns in insurance. They are investing heavily in insurtechs, whose attractive talent pools can rapidly create and scale new businesses. In this context, incumbent carriers must reinvent their business models to fulfil the imperative to grow and, ultimately, to deliver stakeholder value.

Scale impact from data and analytics.

Most insurance executives would agree that data and analytics capabilities are becoming table stakes in the P&C and life sectors in Europe, North America, and Asia. Leaders see enormous potential in best-in-class data and analytics capabilities across the value chain, even for the highest-performing companies. For example, even the leading P&C insurers can see loss ratios improve three to five points, new business premiums increase 10 to 15 percent, and retention in profitable segments jump 5 to 10 percent. However, after years of investing and experimenting, most insurers have not yet seen the return on their investments at the enterprise level.

Modernise core technology platforms.

From 2012 to 2020, technology’s average share of operating costs rose by 36 percent (for P&C) and 10 percent (for life). The key driver is increasing digitalization—at both the front end, where technology enhances the customer experience, and the back end, where digital drives productivity gains and operational performance. Digitalization is straining legacy systems, some of which are decades old, and many insurers are considering a replacement of core systems with tech platforms that support the requirements of the digital age.

Address the productivity imperative.

In the current conditions, addressing structural expenses has become an even more important source of value—especially given the limited progress to date. Insurers need more than mere piecemeal attempts at improvements. Only a transformative approach will allow an insurer to survive and thrive in a post-COVID-19 world. Each carrier is unique, but any company can begin the process to improve productivity by establishing the trajectory and full performance potential of the business across the value chain—including sales and distribution, product development, operations, technology, and corporate functions.

Reimagine culture, diversity, and ways of working to attract and retain talent.

Our colleagues summed it up recently: “Once in a generation (if that), we have the opportunity to reimagine how we work. In the 1800s, the Industrial Revolution moved many in Europe and the United States from fields to factories. In the 1940s, World War II brought women into the workforce (if not the C-suite) at unprecedented rates. In the 1990s, the explosion of PCs and email drove a rapid increase in productivity and the speed of decision making, ushering in the digital age as we know it today. And in 2020, the COVID-19 pandemic drove employees out of offices to work from home…. The return to the workplace is a chance to create a new, more effective operating model that works for companies and people navigating a world of increasing uncertainty.”

According to the report, addressing these nine imperatives will help carriers answer strategic questions about ‘how to play’:

“But the challenges and recent trends facing the industry will force some insurers to also think about ‘where to play’ and rebalance their portfolios of businesses and review their capital allocation accordingly. In this report, we zoom in on this pressing question: Where should insurers be active (in terms of geography, lines of business, and position in the value chain) to renew value creation and themselves? Our conclusion? Most carriers would benefit by focusing their portfolio more tightly on the businesses of which they are the best natural owners.”

To download the full report, click here.

Private investors have spotted the potential for improvement and the not-too-distant prospect of attractive returns in insurance. They are investing heavily in insurtechs, whose attractive talent pools can rapidly create and scale new businesses. In this context, incumbent carriers must reinvent their business models to fulfil the imperative to grow and, ultimately, to deliver stakeholder value.

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