McKinsey offers 5 steps to improve innovation in insurance industry
FOUR EXPERTS AT McKinsey, the global management consulting company, have outlined five steps insurers can take to improve innovation in the insurance industry.
They acknowledged that insurance executives are recognising the power of innovation to accelerate the pace of company change, but noted, however, that for innovation to deliver longterm value, it must become embedded in a carrier’s DNA.
Kweilin Ellingrud, Alex Kimura, Brian Quinn, and Jason Ralph who are senior partner and partners respectively at various McKinsey offices around the world, identified the five steps to include:
• Shift resources from core business tasks to breakthrough innovation initiatives;
• Develop distinct product-development pathways and processes;
• Design value propositions that incorporate new approaches to customer engagement and distribution;
• Ensure that innovation is a continuous, integrated process;
• Pursue more significant product innovations with an accelerator; Their suggestions appear to come against the backdrop of developments in the wake of the pandemic and how Covid-19 changed the whole notion of interaction with clients.
In a management strategy article, they declared that insurance is not typically considered a bastion of innovation, despite a long track record of creating new and exciting markets around emerging risks and consumer demands.
Using the example of cyber risk and citing market research by IndustryARC, they said the relatively nascent cyber insurance market is forecast to surpass $22.4 billion by 2026 at an annual growth rate of more than 25 percent in the next five years, adding that in reaction to the lockdowns of the COVID-19 pandemic, many insurers rapidly digitalized their customer and agent experience, permanently shifting away from a traditional face-toface service model.
“Other carriers are responding to consumer demand for more meaningful interactions with loyalty and gamification programmes that promote customer engagement,” they wrote
They also acknowledged that the C-suite is already taking note of the key role innovation will play in delivering long-term value, adding that “data from a 2020 survey show that while executive teams focused on short-term cash management and the welfare of their workforce at the peak of the pandemic, innovation now ranks as one of their top two priorities.”
However, they identified that industry-wide there are still shortcomings as while pockets of innovation have been delivered, “few carriers have pursued innovation in a systemic way.”
“Today, new customer expectations, low interest rates, and new sources of competition (such as leading tech companies, insurtechs, and third-party capital) are putting pressure on carriers to take a more systematic approach. For innovation to deliver sustainable growth, it must be embedded in the company’s growth model and fully integrated across the organisation, bringing together cross-functional teams to approach challenges in new ways,” they further stated.
They stressed that to make profitable success from innovation is “a complex, company-wide endeavour,” adding that most insurers are yet to crack this code, albeit not consistently.
Drawing from a 2017 survey of life and annuities executives, which found that only 12 percent believe they have a process that delivers strong product innovation, and that fewer than 30 percent of financial services executives say they have the expertise, resources, and commitment to successfully pursue new sources of growth.
Against this background the McKinsey partners stated that there are ways to establish and implement cross-cutting practices and processes to structure, organise, and encourage innovation for sustainable growth.
They therefore offered five steps for building innoyear vation into the way an organisation works, competes, and grows. Elaborating on these steps the stated as follows:
“Innovation is not just about creativity and generating unique ideas. It’s about identifying unmet needs and untapped markets and addressing them, sometimes with untested solutions and unproven business models. Yet too many leaders embrace these risks without shifting enough people, assets, and management attention to bring these ideas to life. Put simply, nothing comes from nothing; if a company wants to innovate, it must allocate resources to innovating,” they wrote.
They identified one of the industry’s biggest challenges holding insurers back from innovation to be capacity, both physical and human capital and executive mindshare, adding that business as usual has continued to be the priority for traditional incumbents, particularly as they have tried to provide stability to customers through the disruption and uncertainty of a global pandemic.
By reallocating the necessary resources from core business tasks to potentially disruptive initiatives, insurers can rebalance their product portfolios to move away from near-term product improvements and toward potential breakthroughs or new business models—forms of innovation that often hold greater potential to generate sustainable sources of growth and outsize returns, they further wrote.
The McKinsey partners also said different innovation initiatives call for different approaches, adding that, most organisations can predict with some certainty the likely gain in gross written premiums or combined ratio from an improvement to an existing coverage or tweak to a core process. This type of innovation is very different from developing a disruptive new product, such as a new life-insurance policy with unprecedented flexibility across living benefits. Disruptive products carry a host of risks—from understanding the market opportunity to communicating the value proposition effectively—and organisations have less clarity around them, said McKinsey partners.
On value propositions, they noted that “innovative value propositions aren’t just about products; they integrate insurance protection and prevention, customer engagement, and distribution and marketing. Historically, carriers have developed new products through actuarial innovation, often adding complexity that appeals more to agents than to customers. Separately, they invest in modernising and digitising their distribution platforms and strengthening new-business and underwriting capabilities, the partners noted.
They said value often arises from setting up an innovation lab or team without fully integrating it into the business-planning cycle. According to them, innovation teams that are not fully integrated often lack clearly defined, near-term metrics for success.
They proffered facilitating constant dialogue between innovation and business teams, noting that insurers can foster a common understanding of the market landscape, identify potential opportunities, and realise their aspirations.
According to the partners, building a diverse innovation portfolio and developing a differentiated value proposition require new, cross-functional ways of working, the partners wrote, adding that the right innovation operating model will hinge on an insurer’s innovation priorities—from developing capabilities that improve core operations to seeking more disruptive opportunities outside the core offering.