In this episode of the McKinsey on Insurance podcast series, we discuss the opportunities available to insurance carriers, vendors, and partners in light of the huge tremors the COVID-19 pandemic has sent through global supply chains. An edited transcript of the conversation follows. For more conversations from McKinsey on Insurance, our podcast series about the trends, disruptions, and strategies that are reshaping the insurance industry today, subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, or Stitcher.
Pradip Patiath: Welcome to McKinsey on Insurance. I’m Pradip Patiath, a senior partner in Chicago, and I’ll be hosting today’s conversation with my colleagues on how insurers can most strategically use external vendors—particularly as we emerge from the COVID-19 pandemic, which has significantly altered the insurance procurement and sourcing landscape.
I’m pleased to welcome two of my McKinsey expert colleagues to shed light on this topic. Indy Banerjee is a partner out of our Bengaluru office and has extensive experience working with service and IT providers globally. Ulrike Vogelgesang is a senior expert in our Hamburg office. She focuses on productivity transformation and technology modernization, and she also leads Insurance 360°, McKinsey’s global insurance benchmarking capability. Ulrike will offer an expert take on the insurance industry specifically, while Indy will offer insights into the broader evolution and state of external service provision across industries.
Let’s get started. Ulrike, as we’re coming out of this pandemic, every insurance carrier globally is reassessing their supply chain. As you reflect on your experience with clients, what are you seeing?
Ulrike Vogelgesang: Thanks, Pradip. Indeed, when we put ourselves back in the shoes of the industry in early 2020, all of a sudden insurers were realizing that some global supply chains and collaboration models didn’t work anymore. And we initially saw a very strong focus on risk, where many insurers decided to take back some of the things they had offshored previously—in particular, things very business critical. However, all of that started to turn at the end of last year when insurers became much more confident in managing things remotely. Everybody was starting to get used to working from home.
Insurers realized that if you can do things remotely, you might as well reconsider potential sourcing options.
And with that as the backdrop, insurers realized that if you can do things remotely, you might as well reconsider nearshoring and offshoring. So there we saw a very big shift. And on top of that, we saw increased cost consciousness. Because of the pandemic, because of uncertainty over how premiums were developing, we saw insurers refocusing on cost. Take that together—the opportunity to nearshore or offshore, plus a strong focus on cost—and it has made many insurers rethink their supply chains and the way they collaborate with service providers.
Pradip Patiath: And Ulrike, are you seeing that play out across small, medium, and large carriers and across P&C [property and casualty] and life? Or are there specific segments where you’re seeing more of this refocus?
Ulrike Vogelgesang: I’m seeing this happening both in P&C and life. The starting point is very different. Large insurance players typically have an extensive set of service providers, so they are considering a more distributed operating model and having multiple locations to reduce individual location risk, as well as thinking more strategically about where real partnerships are happening versus what we want to outsource tactically. Meanwhile, many of the smaller carriers are only starting on the journey, and for them it’s more often a cost and capability game.
Pradip Patiath: Indy, so that’s a bit on the demand side. What are we seeing on the supply side? What did you do when people couldn’t reach someone at a call center?
Indy Banerjee: Thanks, Pradip. That’s actually a very interesting question. Right in the beginning, driven by the pandemic, we initially saw a huge disruption of the supply chain. Especially in places such as the Philippines, we saw the voice network disrupted significantly and, as Ulrike said, it led to people bringing critical calls back onshore. We saw providers significantly, even heroically, adjust their footprints to enable tens of thousands of people to work from home, which you see stabilize quite significantly across a 12-month period.
On the client side, we started seeing two things. One, we saw folks have a lot more patience with servicing requests. The amount of time people were willing to wait to have their queries resolved, the amount of time they were willing to spend explaining things to people who were on the calls for the first time, spiked significantly. The second was the pivot to digital, which will be a lasting impact of the pandemic. We saw digital contact spike anywhere between two to five times higher than prepandemic rates, depending on which cohort you’re talking about, as people moved to chat, to self-serve, et cetera. And we see a very significant amount of it becoming the new normal.
Pradip Patiath: And Indy, these supply chains got, over the years, a bit disaggregated, right? So carriers sometimes have their own captive facilities in some of these places providing services. In other cases, they had outsourced relationships with redundancies. Are you seeing patterns emerge coming out of this lesson, where either people are reaggregating and bringing it back completely or going more toward captive or sourced relationships? Any lessons you’re seeing already?
Indy Banerjee: We’re seeing three clear themes emerge. First is people revisiting their footprint. In the past, footprints have emerged organically. It’s happened in bits and bursts, and there seems to be strategy in hindsight. Now, for the first time, people are really evaluating, for example, how resilient that footprint is. We used to think about resilience as business continuity for 25 percent of seats—that is, if a call center went down, you'd shift resources to another one that can keep it running at 25 percent capacity. However, under COVID-19 we saw city- and countrywide lockdowns that closed all centers, so the definition of resilience shifted to being able to operate at 100 percent capacity within 48 hours using work-from-home seats.
Second, the pandemic has allowed people to test what works and what doesn’t. One of the myths involves what people are willing to do around working from home. And there you have two ends of the spectrum. Some, like on Wall Street, are returning to work at the office. At the other end, you have folks like Nationwide, who’ve said their entire footprint can actually work remotely. And within that theme, folks have discovered that the more closely you work with your partners, the more recovery and service quality improve. That is the big reason why global capability centers recovered very quickly early on—because you didn’t have to walk through a five-step process to give people access. And so that’s something we’re going to see a lot more of, where people are going to integrate much more closely with their providers.
The third is the right choices: figuring out where you want to use partners or providers, where they have resilience, flexibility, et cetera, now that it has been tested. And for most of the clients I work with, on the in-house side people are moving into higher-end work, with more end-to-end ownership. And on the partner side, people are moving more toward managed services, toward things you can automate, and toward leveraging partner capabilities.
Pradip Patiath: Ulrike, it’s hard to ignore the geopolitics at play. Is it primarily a concern of North American and European carriers, or is it more global?
Ulrike Vogelgesang: We found in our survey on insurance sourcing last year that European insurers are a bit more conservative regarding making the full leap toward offshore, large-scale, very comprehensive sourcing. So in Europe we see a strong tendency to revisit the model and an increased openness to work together with partners in a broader sense. But at the same time, we see smaller steps, where insurers consider nearshoring, typically in Eastern or Central Europe, sometimes in North Africa, and continuing the full move toward offshoring in Asia as a second step. And in that sense, this continues the natural inclination for European insurers to take things more slowly. Apart from that, the geopolitical aspects haven’t really carried through to that large an extent. I would expect the situation is a bit different in the Americas.
Pradip Patiath: Indy, what’s your view from the supply side? Are you seeing patterns globally?
Indy Banerjee: In the early days, the expectation of destruction because of geopolitical issues was higher than what we actually saw play out. We didn’t see an extensive repatriation happen, and that’s one of the things a lot of people were concerned about in the first 90 days. If anything, we’re actually seeing a significant move toward a distributed, derisked network. And it’s reflected in the fact that most providers are now sitting on demand pipelines that are perhaps at a decade high, as folks realize that just pulling your footprint into a few concentrated sites onshore is not a derisking strategy. In fact, if anything, it increases the risk associated with delivery. So from the client side, we’re seeing a more distributed approach.
On the provider side, people are realizing that instead of very large offshore centers, they can build more distributed footprints that are both onshore and nearshore, especially if you’re servicing the European footprint. Providers are also focused on building in remote working as an intrinsic part of their capability. Right now, as we talk, most providers still have anywhere between 95 to 98 percent of their staff working remotely.
Pradip Patiath: Are there security-related concerns when you combine the remote work with in-person work and a globally distributed network? Is there any concern that the risk might get amplified instead of diminished?
Indy Banerjee: For sure. Keeping security in mind—information security, personal security, et cetera—is going to be critical. The way I would frame it is that this is not unique to global locations. The need to figure out the security implications of working remotely is true of any country that you allow people to work from. Folks are creating a new set of frameworks on how you capture the risk, how you test for it, and how you audit it. And we are beginning to see that in the contracts that people are writing with their service providers and their own locations.
As of right now, there haven’t been significant data breaches. In fact, the experience has been reasonably good. But it does create a risk.
As of right now, there haven’t been significant data breaches. In fact, the experience has been reasonably good. But it does create a risk. And therefore, as we see the future play out, we’re going to see a balanced hybrid footprint. Simply put, it means that there will be some roles that are seen as high risk. Over time, as the pandemic recedes and folks return to work, those roles will be either entirely office based or four of five days based out of the office. And at the other end of the spectrum, you are going to see roles that people realize, from a risk as well as productivity and experience perspective, can be done remotely. And you will see some of those roles having three, four, or five days working remotely. It’s going to be a balanced mix, and most clients that we worked with are actually now looking at individual job cohorts and figuring what sits where.
Pradip Patiath: Ulrike, in some ways when you look from an insurance carrier’s perspective, it’s been a bit of the perfect storm, right? You had the pandemic, you had supply chains that got disrupted, you’ve got work from home. You’ve now got, on top of that, the nationalism and the cybersecurity-related concerns, and the geopolitics. What’s your sense of how carriers are thinking about it? Are folks retreating and saying, “Boy, let’s just bring all this back and forget all this global sourcing?” Or are people saying, “It’s an opportunity to rethink and reinvent,” as Indy is saying?
Ulrike Vogelgesang: Absolutely. And as you say, in the end, this has been a bit of a shake-up, which also makes insurers much more aware of potential opportunities. Our benchmarking found that at an industry level, we don’t see evidence for sourcing leading to lower costs, and that I found extremely puzzling. For all of my insurance clients, when they do large sourcing or collaboration or new engagements, one of the core elements would always be reduced costs. And we didn’t really find evidence for that, so clearly something was amiss in the way insurers collaborate with service providers. And when we started looking into that, we found many great examples of substantial value captured, but we also found a lot of money still lying on the table.
So the pandemic has served as a wake-up call, or an opportunity creator, which opens up new discussions that might not have been possible before. And what we see really moving is a clear consolidation and a focus on strategic collaborations. Five years ago, sourcing was much more around rate card–based labor cost advantages. Where we see things moving currently is much more toward a closer collaboration, and in some cases even a full partnership or joint venture. And when we think about the role technology is playing for insurers, it’s a natural development because so many of the new-era business models are heavily dependent on technology, and that requires skills in short supply for many insurers. So it’s really the mixture of lower costs that can be provided by some of the global service partners, but also access to advanced skills—in particular around digital and artificial intelligence, which are very attractive for insurers and open up new avenues.
Pradip Patiath: Ulrike, that’s a very important and profound point: it’s not really the cost thing that’s played out, but it’s an opportunity to think more strategically and broadly about what you need—capabilities, skills, resilience, et cetera—versus just thinking of it as a way to get some efficiencies. Is that right?
Ulrike Vogelgesang: Exactly. So we asked the insurers, “What are your core motivations for collaborating with service providers and vendors?” And a dual objective always came out. On the one hand, it’s clearly cost related, like in infrastructure. And on the other, there are areas where capabilities are the one core factor insurers are missing. This could be in digital transformations or any new business model area, or in areas where you expect a resource need that is relatively short lived, for one or two years only. This combination is critical to make things work for insurers.
Pradip Patiath: If you were to pull back and offer one or two pieces of advice, what might they be? What would you advise a CEO, a COO, or a leader of an insurance company to focus on?
Ulrike Vogelgesang: The first thing would be to take this opportunity to step back and think through what you want to achieve in the collaboration with service providers. Review your sourcing strategy and look at this from a strategic angle—not just day-to-day, here-and-there improvement, but rather think about this holistically and be courageous enough to also think about a real shift in the operating model. The other piece of advice is related: think big, because many of the new business models out there require a completely different model of collaboration with service providers.
To prepare for this new era of collaboration on both sides, insurers and service providers need to invest in the capabilities to manage their collaborations.
What we realized in our conversations with both insurers and service providers is, to really get this going in a successful way, you need to have prerequisites in place. From an insurer’s perspective, you need a sourcing department that is able to develop these collaborations, to ensure an alignment of incentives, to define the right key performance indicators in the contract, and to operationally measure them. So you need to be able to find out throughout the course of the contract if some of the SLAs [service-level agreements] are not met, which means you need very strong steering and vendor-management capabilities. On the flip side, we heard from many service providers that, yes, we are seeing that insurers would like us to have more outcome-based contracts, but we are not prepared to do that because this requires a very different way of risk calculation, of price calculation, in which we don’t have that experience we need. So to prepare for this new era of collaboration on both sides, insurers and service providers need to invest in the capabilities to manage their collaborations.
Pradip Patiath: Excellent. And Indy, the same question to you. If you were to offer one or two pieces of headline advice to leaders of insurance companies on how to incorporate the lessons learned from these pandemic-related supply-chain issues, what would those be?
Indy Banerjee: I agree that one is to revisit the North Star of sourcing versus the old footprint, which has been in bits and bytes. This is the opportunity to step back and figure out what you’re solving for at scale: customer experience, costs, resilience, talent, next-generation delivery, or all five of them. What will your footprint look like? And make deliberate choices with regard to what’s global shore versus nearshore versus onshore, what is distributed versus not, and really create what we call the distributed hybrid-operating model.
The second point is that the postpandemic period will unlock partnerships, but this will require an end-to-end view both from the client and from the providers. Providers will need the ability to estimate risk and to step up the solutions—not just front-end digital but end-to-end capability. And clients will need to be willing to look at an end-to-end process and source for it and build your sourcing capabilities around it, as opposed to the old world of transaction-based pricing. Unlocked in that way, sourcing can be a huge opportunity, both because we actually see the clients under tremendous pressure to innovate in the marketplace and because providers are both thirsty for next-gen partnerships and sitting on the ability to innovate. Most of the large providers are sitting on $1 billion to $2 billion of cash, which they are willing to bring in to do transactions or transformational partnerships. Figuring the right mix for it is the real opportunity.
Pradip Patiath: What an exciting discussion and a couple of wonderful provocations for both leaders of insurance companies and for the suppliers to these industries from a sourcing perspective. Let me thank you both, Indy and Ulrike. The value at stake is clearly already large, but it’s probably getting bigger if done strategically. And for many insurers, I gather, you believe it’s still untapped. But it’s also clear that in the wake of this pandemic and the disruptions that have happened, the landscape has shifted significantly, and players and carriers and suppliers are all looking at their options through a new lens. You’ve given us a good framework to help them think about this.
To our listeners, I hope you found the discussion enjoyable and informative. I encourage you to subscribe to McKinsey on Insurance wherever you get your podcasts. You can find us on Apple Podcasts, Google Podcasts, Spotify, or Stitcher. On behalf of myself and my colleagues, Indy and Ulrike, thank you very much for listening.