What would happen to the insurance industry if a critical mass of autonomous vehicles eliminated many road accidents and injuries? Or if a digital giant with strong customer relationships — say, Amazon — began selling insurance?
These scenarios are among a handful of threats identified by management consultancy McKinsey & Company which could potentially alter the products, pricing and service models offered by property and casualty (P&C) insurers.
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Another uncomfortable thought for the industry incumbents is the possibility of a data aggregator, backed by a third-party investor, launching a new insurer which draws on new sources of data to develop much more accurate underwriting and pricing models.
McKinsey’s article, Making Digital Strategy A Reality In Insurance, published this month, notes that the traditional insurance business model has proved remarkably resilient so far — thanks to regulation, product complexity and large capital requirements. However sources of disruption are emerging.
Autonomous or semi-autonomous cars, connected home devices and sharing economy businesses such as Uber, AirBnB, are reshaping the products offered by insurers. Usage- and behaviour-based pricing are made possible by rich customer data, telematics, and enhanced computing power, while the claims process is being altered by automation, analytics, and consumer preferences — enabling insurers to improve fraud detection, cut loss-adjustment costs, and eliminate many human interactions.
The authors note, “No single competitor or innovation poses a threat across the entire value chain, but taken together, they could lead to the proverbial death by a thousand cuts: many small disruptions combining to fell a giant.”
According to McKinsey, P&C insurers in the top quartile for digital performance are achieving twice the growth rate of their less digitally advanced peers and delivering better profitability at the same time.
The P&C industry lags in digital sophistication, McKinsey said. However, insurers are experimenting with many different approaches to digital. Early areas of focus are connected cars or connected homes. The challenge insurers face is deciding where and how to focus in order to establish or maintain a competitive edge.
“To succeed in this new landscape, insurers need to take a structured approach to digital strategy, capabilities, culture, talent, organisation, and their transformation roadmap,” the report states.
“Digital strategies most frequently fall short when they lack a clear vision of the sources of value in digitisation and digital innovation.” Insufficient investment or a failure to adjust organisation structures to reflect digital’s importance leads to a lack of talent.
“What all successful digital transformations share is a sustained commitment from senior management, a shared long-term vision, a willingness to transform the culture and operating model, and the tenacity to persist through the difficulties that accompany any organisational effort of this magnitude,” the report says.