Three trends—digitalization, health, and mobility—that have gripped the world over the past few years have not spared insurers. These trends have revealed opportunities and also changed the way insurers think about meeting customer needs. For a close look at the changing realities in the industry, we spoke with Brad Mendelson, leader of McKinsey’s insurance work in Asia, and Kurt Strovink, North America and global practice leader, about their perspectives on regional trends, customer expectations, and where insurers have opportunities to innovate and lift ambitions in the coming years.
The pandemic has accelerated many trends for insurance companies globally. What changes has this prompted among insurers in your region?
Kurt Strovink: In North America, carriers are responding to COVID-19 in myriad ways, but there are a few identifiable and integral trends. For one, while some carriers are returning to their previous ways—albeit while maintaining certain health and safety protocols and accommodating new work habits—many are completely reimagining business models for employees and consumers. They’re leaning into a hybrid model of development and work: recasting their real-estate footprints, devising new ways of working, and collaborating in the spaces they retain. They’re investing in technology, in rebuilding consumer value propositions, and in bringing their expertise to clients remotely. And they are looking more expansively at employee value propositions, including connectivity, continuous professional development, and performance management, in addition to wellness and mental health.
A second burgeoning trend is digital innovation for advisers and consumers. We’re seeing much greater distribution, with carriers rethinking their agent channel and digital distribution. They’re working to optimize the use of wholesalers digitally. E-signatures are on the rise, and much of underwriting and innovation is happening virtually.
Third and finally, in the slightly longer term, carriers have their eyes on the future of work. We estimate that by 2030, roughly 40 percent of financial services and insurance activities will be automated, making it necessary for carriers to proactively manage substantial challenges and opportunities in workforce development.
Brad Mendelson: In Asia and around the world, low interest rates have squeezed the spread between investment returns and expenses, which, in turn, has spurred an ongoing shift toward more protection products and away from guaranteed-savings products.
Specifically in Asia, perhaps the most important accelerating trend is the modernization or digitalization of distribution. This has taken several forms. On the agency side, when the pandemic compelled agents to operate in a virtual world, insurers took urgent action. At the start of the pandemic, many countries in Asia didn’t allow companies to sell insurance without a face-to-face meeting with customers. The response was an initial wave in which basic necessities—including e-signatures, recording, permissions and authorizations, and the collection and processing of data to manage a sale—were implemented.
As the pandemic has continued, carriers are increasingly investing in a digital, hybrid agency model, taking those makeshift solutions and turning them into something that is much more professional and scalable. This includes digital or virtual education and illustration, digital sales, and ongoing customer engagement.
Something similar is happening in bancassurance, a huge channel in Asia. As the rise of digital banking leads to more branch closures, branch relationship managers can no longer talk to customers, and the traditional retail banking model is being disrupted. In response, many banks have moved toward using digital and analytics to target a mass-market customer segment and generate bancassurance leads through the bank’s app and website. Telesales and digitally completed, small-ticket bancassurance sales are also becoming more common.
How is the insurance customer in Asia and North America different today compared with before the pandemic?
Brad Mendelson: There are two major differences. One that we’ve seen in Asia and around the world is that customers are much more comfortable interacting digitally—whether they’re learning about products, having telephone or videoconference discussions with an adviser, or actually making a purchase. Customers now expect digital interaction; it is no longer optional.
The other change is that customers are more focused on health insurance products. Health insurance penetration is remarkably low in many Asian countries, particularly in developing markets. Most customers have some basic government-provided health insurance but face a wide out-of-pocket gap. COVID-19 has spurred a heightened awareness of the importance of health and wellness and the need for the protection that health insurance provides to customers and their families.
Kurt Strovink: Customer digital adoption has, indeed, increased in North America. We’re seeing record online consumer activity, particularly seeking information on life insurance. In 2020, search volumes in some categories were 20 to 50 percent higher than the previous year, and conversion rates were considerable. We saw similar trends in term insurance. In P&C [property and casualty], demand for disability insurance has increased, and demand for homeowners’ insurance is likewise surging. Similar to [what’s happened with] Asian consumers, the pandemic has encouraged consumers in North America to focus more on health—not only in wearing masks but also regarding mental health and well-being.
The pandemic has encouraged consumers in North America to focus more on health—not only in wearing masks but also regarding mental health and well-being.
How have insurers in your region been able to address these changing customer needs?
Kurt Strovink: Many carriers are working on digital adoption in various forms. Digital-adviser tools are on the rise, and many carriers are investing in self-service capabilities and claims automation. Numerous senior-management teams are compressing four-year tech initiatives into 18 months. They’re also discussing how to economically migrate to the cloud.
In terms of mobility, insurers are offering more pay-as-you-go products and forming new partnerships. For example, Ford and Lincoln have partnered with Verisk, a data analytics provider, to offer owners of certain vehicles usage-based insurance programs founded on driving data. And OEMs and data analytics providers are aligning to provide usage-based insurance programs, sometimes backed by multiple US insurers. This kind of partnering will likely continue.
Brad Mendelson: In Asia, there has been some early product innovation in health insurance, such as COVID-19 coverage by which insurers provide cash payments to cover missed wages if someone is diagnosed with COVID-19 or forced to quarantine. We’re also seeing innovation around critical-illness and personal-accident insurance, making it more modular and affordable. For example, critical-illness policies offer a fixed benefit if someone is diagnosed with a specific illness. They’re popular and affordable policies, and they’re gaining more and more traction.
Furthermore, insurers—particularly in China—are vertically integrating into healthcare services. Insurers are focusing on areas where the health services ecosystems are less well-developed and are providing these services. For instance, they are delivering telemedicine services, providing pharmaceutical or drug delivery services, and offering Al-driven diagnostics. Some are even building physical sites, such as physical-wellness clinics and retirement homes, and linking them with their insurance products.
From which innovations in your region might others learn?
Brad Mendelson: Aside from vertical integration, others might learn from the important platforms and partnerships that many insurers in Asia have created. These insurers are not just partnering with platform providers but are also trying to build their own platforms to own the customer relationship and drive customer engagement.
Prudential Pulse in Asia, for example, is a health and wellness platform that rolled out across the region starting in 2019. It has now been downloaded 30 million times, presumably by consumers who aren’t traditionally insurance customers. It is engaging them in health and wellness topics, providing some free services, and familiarizing them with insurance and other health services. Other players are introducing similar offerings: many multinational carriers have platforms that allow customers and noncustomers to engage in wellness programs where users track their activities and earn points and discounts based on their wellness trajectory.
Kurt Strovink: Beyond insurance, there’s a noticeable change happening in how North American companies are thinking about transforming themselves to become at-scale executors and innovators. The metabolic rate of companies is increasing substantially. They can make more decisions of a higher quality faster, especially for the firms that have thought about systematic ways to transform their core activities. In the past couple of decades, companies in telecommunications, banking, and asset management have become much more efficient and have passed on some of those benefits to consumers.
There are three critical parts to this type of transformation and resulting innovation. First, there’s raising aspirations and going after the full potential in companies. Second, there’s creating line-led or operator-owned bankable plans—developing a real system for bottom-up planning and problem solving and then locking in operator-led plans. Last, there’s utilizing new technology or cloud-enabled performance infrastructure to help companies manage and create what we call “radical transparency,” a way to gauge progress on various aspects of the transformation and to keep initiatives moving.
Adopting these practices and ensuring that large companies can execute at scale and with quality is an innovation coming out of North America that has global implications and, of course, significant implications for the insurance industry.
Looking ahead, which topics and trends will be top of mind for insurers in your region in the short and medium term?
Kurt Strovink: In North America, there will be a lot of innovation around new product design for a low–interest rate world, especially in regard to life insurance. Rethinking product design around business interruptions and cyber on the commercial side will also be crucial.
We also expect to see more M&A, but it’s going to be thematic M&A, focused on certain capabilities that carriers are looking to acquire. More companies will be making smaller deals. We analyzed 250 transactions in North America totaling $200 billion in life and P&C since 2007, and we found that programmatic M&A of this kind created more value than large, blockbuster M&A. And I think we’re going to continue to see more programmatic M&A, such as with Lincoln and Liberty or MetLife and Cigna in group benefits. Over the next five years, such thematic plays for certain parts of the product ecosystem will continue.
Brad Mendelson: In Asia, distribution is going to continue to be the real area of focus. Almost all carriers in developing Asian markets are focused on growth. The insurance markets are so underpenetrated in this part of the world and customers have such a considerable protection gap that there is a significant opportunity through distribution to try to reach more customers more effectively. Most customers don’t know what their insurance needs are. They don’t understand the protection gap they’re facing, and they don’t have access to insurance products. So continuing to modernize and build out agency, bancassurance, and digital-partnership distribution is likely going to be the key trend in the region over the short and medium term.
When lifting their ambitions, where should insurers focus their efforts?
Brad Mendelson: Insurance carriers should focus on consistently increasing their relevance to customers. Companies shouldn’t narrow their scope only to insurance products. By instead aspiring to meet customer needs across health, wellness protection, and wealth accumulation, they can open up significant possibilities. Some of these possibilities might place insurers in competition with various other types of companies in the marketplace, including banks, healthcare providers, and asset managers. Indeed, there is a real opportunity for insurance carriers to focus on those customer needs and move outside the traditional boundaries of insurance.
Companies shouldn’t narrow their scope only to insurance products. By instead aspiring to meet customer needs across health, wellness protection, and wealth accumulation, they can open up significant possibilities.
In China and some other parts of the world, carriers are increasingly skilled at making this move. Importantly, super apps and the internet players in Asia, some Chinese insurance carriers, and some of the leading multinational insurance carriers are pushing these industry boundaries so as not to be overcrowded or left behind.
Kurt Strovink: Insurance has a major opportunity to advance in terms of climate change and sustainability considerations. Indeed, the climate and sustainability space has immense innovation potential. But insurers can’t wait for regulators to tell the industry what is necessary. They will need to lean in and find the right way to preserve their social good and value to society. At the same time, they need to be pragmatic about forming new government partnerships and increasing risk management so that they can become risk engineers—not just underwriters. It’s a unique moment, and insurers have an opportunity to be leaders in forging the path forward for all industries.