Many insurers have failed to benefit fully from the decade-long global economic expansion. In recent McKinsey research, insurers in the second, third, and fourth quintiles of economic performance may be on slippery ground, generating only about $26 million in economic profit from 2013 to 2017. Meanwhile, a typical carrier in the bottom quintile destroyed nearly a billion dollars in value every year. But some insurers are highly profitable—a carrier in the top quintile created an average of $764 million in economic profit each year during this period.
While step-change productivity improvement is a foundational element of creating economic profit, the insurance industry faces a paradox. Productivity has become an imperative to remain competitive in the future—especially in the event of a downturn, when the gap between winners and the rest of the pack typically widens. However, the industry as a whole has made almost no progress in this area over the past decade. Traditional approaches to productivity that apply individual levers, such as outsourcing or automation to certain businesses or functions, no longer suffice, as they do not fully address the changes needed to simplify the business model and reduce product complexity.
The carriers that managed to improve economic performance have made transformative productivity improvements—that is, they implement changes that go far beyond typical cost-cutting, use many levers to unlock value, and require cross-functional teams to work better together. These insurers embed new mind-sets, behaviors, and tools across the organization to offer strategic clarity, spur growth, and promote health.
Three mind-set shifts to transform productivity
If productivity transformations were simple, many more insurers could be highly profitable. In our experience, successful carriers have turned over every stone, revisiting decades-old assumptions and policies, streamlining processes from underwriting to claims, and reinvesting the savings to improve customer experiences, product offerings, and margins. Productivity is the prerequisite for great customer experience and delivering on a carrier’s value proposition.
A productivity transformation requires the CEO to make important mind-set shifts in three main areas.
1. Make productivity a board priority
Productivity transformation should be among the company’s (and board’s) top three priorities and a core part of positioning carriers to be winners. In our experience, the most effective CEOs pursue productivity improvements with extraordinary pace and cadence. They treat pace as a strategy, engaging in productivity discussions weekly and even daily; have the full support of the board; and inspire teams and individuals. The CFO can support and play an integral role in being the orchestrator and, when required, neutral arbiter.
One top team tried for over a year to align and galvanize the organization. After recalibrating with a shift in incentives, a directive from the CEO, and early wins, employee engagement and organizational health measures reached unprecedented levels.
While you must role-model new mind-sets and behaviors, colleagues at every level of the organization need to own and anchor the effort so that productivity becomes part of everyday business. The top team, starting with you, must communicate a compelling aspiration that integrates performance and health and set clear direction and targets for each. Building health measures into productivity efforts are often the difference between short-term gains and sustained performance improvement.
2. Raise the organization’s aspiration to capture the full potential
Many CEOs are confident they are improving productivity, but their incremental efforts lack the materiality needed to change their earnings trajectory and one-off efforts seldom yield a step-change improvement in efficiency. Since many organizations fail to pursue their full potential, let alone achieve it, the best leaders ask to be challenged and raise their aspirations dramatically.
Lasting productivity gains that tap the organization’s full potential (both in costs and revenues) require a transformative vision developed through an objective diligence rooted in clear-eyed analysis and fueled by courage, imagination, and a willingness to make tough decisions. The best companies aim to become top-quartile performers across all functions (with no exclusions, not even commissions to brokers). They use benchmarks, take a “capital markets” lens to full potential, and apply examples and practices from outside of the insurance space.
Once you and your top team have clearly articulated an elevated aspiration, the most effective senior executives champion a bold ambition and look across the value chain and business units to identify additional opportunities. For example, the CEO of one life insurer initially saw limited value in exploring external contracting spending (including reinsurers). After a cross-functional team identified this area as a significant source of value, the CEO’s willingness to pursue every opportunity—and abandon strong prior beliefs—helped the carrier add millions of dollars to its bottom line.
Many carriers find multipliers at the complex intersection of businesses and functions, such as between the sales force and underwriting. Only by having a lofty aspiration that cuts across organizational silos can you activate these multipliers and maximize productivity. Insurers can learn from the automotive industry’s pursuit of continuous productivity improvements, for instance. Many automakers require cost reductions of two to three percentage points annually after the launch of a new product.
3. Use radical transparency to achieve change at a granular level
The most successful CEOs and top teams take a holistic approach to value creation, with a full suite of initiatives and an emphasis on radical transparency to track progress toward full potential. Successful organizations encourage cross-functional transparency from the C-suite to the front line. Detailed, continuous benchmarking informs organizational targets. Teams are jointly accountable for granular targets, quickly identify challenges, and adjust accordingly to capture value at pace. Executives and the front line alike use a value assurance platform to enable this transparency and prompt each other to accomplish more together.
Any gap in transparency, including for the CEO, can lead to shortfalls. For example, one CEO thought his team was working well and achieving a few quick wins. However, when the impact didn’t immediately flow to the bottom line, he engaged in specific details on signature initiatives. Pursuing in-depth explanations and shortening the cycle time to make improvements, the CEO quickly brought the radical transparency needed to cut through the noise and have an impact on the bottom line.
To achieve progress at the granular level, the entire organization must commit to making wide-ranging and coordinated advances in four areas detailed in “The productivity imperative in insurance”:
- Functional excellence to improve enterprise support functions, product, underwriting, and claims while optimizing channel mix and distribution.
- Structural simplification of the organization and its products, which may require optimizing locations and consolidating IT platforms.
- Business transformation with an emphasis on integrated digital advances, such as next-generation operations and agile, as well as new partnerships and alliances.
- Enterprise enablers to sustain momentum and make changes stick. These often include frontline engagement, execution discipline, organizational health, and financial and talent management.
In our experience, insurers that go after the full potential through all four levers often find, and recognize, a value that is three times their initial aspiration.
Make it material
As the pressure rises for productivity improvements, leading insurers that pursue a bold aspiration will leave the average performers behind. In the process, they will deliver far more for customers, employees, and shareholders—and create a virtuous cycle that attracts more customers, talent, and capital to enable additional investments to win in the future. Breaking through the paradox for you, your company, and the industry requires board-level commitment, ambitious full potential aspirations, and radical transparency to execute with pace and purpose. Are you up for the challenge?
The authors would like to acknowledge the contributions of Pradip Patiath and Ulrike Vogelgesang to the development of this post.