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How insurers can get the most out of a digital transformation in 2018

by Tanguy Catlin, Johannes-Tobias Lorenz, and Shannon Varney

After initial enthusiasm for pursuing a digital transformation, many insurers met organizational resistance and struggled to maintain momentum. Despite these challenges, there was progress in the past year. What did we learn from 2017’s digital transformation front-runners? And what should insurance executives be asking in order to accelerate the transformation in 2018?

Lessons learned from 2017

We saw three key attributes among insurers who made significant progress on the path to digital transformation.

Focusing on the big picture

Successful companies focus not on a digital strategy but a strategy for the digital age. This business-wide transformation starts with a thorough diagnostic of competitive strengths and challenges that enables leaders to prioritize where they want to start. They set aspirational targets along a well-defined road map and commit to a budget to meet those targets. It is a complex, many-tiered undertaking that is made more challenging by continuously shortened development cycles. Leaders must stay focused on the big picture of the transformation and ensure sufficient staffing of all initiatives.

Understanding value drivers

Our research shows that 80 percent of the value of a digital transformation comes from transforming the existing core business of today, while 20 percent is generated from new revenue streams. Insurers, then, must not neglect the core, focusing on both value levers and customer experience. For example, claims departments in the digital era take care of customer needs— they provide transparency on the status of the claims process, use intuitive language, and offer assistance services. But they also seek to automate interactions in order to reduce expenses and increase efficiency.

Prioritizing technological literacy

Many new skills are required for a successful digital transformation, including an understanding of analytics and the perpetual evolution of IT architecture to modernize IT. Insurers are struggling to attract talent, because these and other necessary skills are new, not only in insurance but across industries. Demand for talent in areas like big data is expected to exceed available supply by a factor of four. The resulting talent shortage means that leaders are responsible for establishing an environment that attracts talent, promotes personal growth, and offers a desirable and interconnected work environment and flexibility. Few insurers will become leading tech companies, as they will struggle to attract tech talent at scale on a par with the likes of digital natives. But digital leaders in the insurance sector, having prioritized technological literacy and infused areas like engineering, design, and agile with more talent, better understand the investments and trade-offs required in the digital age. As a result, they have also redefined and upgraded the chief human resources officer role and encouraged the board to prioritize recruiting and retention.

Key questions for 2018

For insurers with a firm grasp of their big-picture strategy, value drivers, and technological literacy, the next step is to set bold aspirations for what they want to achieve in 2018. We believe every CEO should be asking key questions in a few areas of their business in order to capture additional opportunities.

Strategic investments: How should we approach investing and placing our bets in digital?

Although digitization is ubiquitous on management agendas across the industry, some insurers, faced with a whole portfolio of initiatives, are unclear on how to effectively deploy resources to achieve it. In fact, across the industry, about half of digital initiatives generate returns below the cost of capital, and many insurers have found that evenly spreading resources across diverse opportunities doesn’t work. With digital attackers at the gates—Amazon was rapidly investing in its nascent product-insurance business in the fourth quarter of 2017—insurers must take swift action to ensure their investments are generating value. They must also put funding mechanisms in place to nimbly allocate capital toward the transformation of the core, while applying additional time and resources for innovation, for example, through stand-alone organizations that incubate new business initiatives.

Ecosystems: What is our ecosystem strategy, and how will expanded partnerships create new opportunities?

Traditional industry lines are blurring, and the future of the business will likely be shaped by platforms and ecosystems. The winners in the digital era so far have all been designed on platform business models. To succeed in this new construct, insurers will need to evaluate new opportunities and radically rethink their relationships with players in other industries, including competitors. With ecosystems expected to account for 30 percent of global revenues by 2025, the value at stake is so high that defining a place in the broader ecosystem must become a top priority for 2018.

Data and analytics: Are we seeing enough value from data and analytics?

The proliferation of third-party data is greater than ever before, and we continue to see exponential increases in the volume of data produced by smartphones. This data reduces insurers’ dependence on internal data, which can lack conformity and exist on multiple legacy systems. Insurers need to aggressively tap new data sources, pursue innovations in analytics modeling, better underwrite emerging risks that are underinsured, and drive better outcomes for their in-force books. However, many CEOs are encountering organizational challenges to becoming data-driven. Others are waiting for de-risked business opportunities to present themselves before enhancing analytics capabilities. But CEOs should be prioritizing data and analytics and demanding more progress in digitization.

IT: How effectively is IT partnering with the business to achieve common goals?

In a digital environment, IT’s role can no longer be merely to support the company’s ability to analyze data and to select, price, and underwrite risk accurately. The IT functions of successful insurers of the future will play a more strategic role. Insurers will need to take a more strategic approach to IT development and adopt a more collaborative IT operating model that changes the way company leaders work with and think about IT. The teams, for their part, will benefit from agility coaches, scrum masters, and other roles that help them balance deep technological expertise with commitment to rapid, value-focused delivery on overall company goals. Without these changes, large investments could be wasted.

The value at stake from achieving a digital transformation is becoming increasingly clear—we know that property-casualty insurers in the top quartile for digital performance are growing twice as fast and are achieving higher profitability than their less digitally mature peers. The journey to transform, however, is fraught with challenges and complexity. By observing and replicating the common set of actions that industry leaders exhibited last year and using the questions raised above to push their own teams in 2018, insurance executives will see a clearer path to transformation.

Tanguy Catlin is a senior partner in McKinsey’s Boston office, where Shannon Varney is an associate partner. Johannes-Tobias Lorenz is a senior partner in the Düsseldorf office.