As insurance carriers adapt to geopolitical, technological, and economic influences, building a growth mindset and being flexible could be key to outlasting uncertainty. McKinsey spoke to partners Konstanze Reinecke-Schneider and Yolanda Zonno about the factors most affecting insurers today and how companies can rethink their strategies to incorporate growth and longevity into every aspect of their business.
McKinsey: What have been the biggest influences on the insurance industry recently?
Konstanze Reinecke-Schneider: Insurers are facing a more disruptive and volatile world, considering macroeconomic developments, the emphasis on energy efficiency and decarbonization, geopolitics and globalization, technology, and the labor market. Each factor has clear implications for the insurance industry.
To name a few implications: Inflation is causing claims costs to rise and has increased the complexity of pricing decisions and made capital scarce. Geopolitical issues have changed risk profiles and limited access to key markets. New technology has introduced a shift in operating models. And the labor shortage, as well as changing employee preferences, have changed business models and hiring practices.
These challenges and disruptions have presented a need for leaders to create sustainable and persistent ways to engage with their organizations and secure long-term performance. Insurers can set initiatives that have a holistic impact along the insurance value chain to remain stable in a volatile environment.
McKinsey: What areas should insurers focus on to make a holistic impact?
Konstanze Reinecke-Schneider: We see holistic impact consisting of five main elements: ESG [environmental, social, and governance], claims, productivity and costs, sales, and “new models”, such as broader platforms, strategic partnerships or ecosystems. Advancements in each of these will be driven by data and analytics, technology, and a supporting transformation approach. Insurers should consider their starting position and prioritize the areas that will help the most based on their current performance. Insurers can start to make holistic changes by taking three steps.
First, they can navigate current challenges and identify relevant acute vulnerabilities and gaps in their business models—such as inflation risks, market access risks, and foreign exchange risks—based on these five elements. Then they can address them by implementing strategic short- and midterm fixes, such as changing underwriting and pricing approaches or updating budget and cost plans to account for inflation.
Second, they can anticipate and be prepared for future storms by defining scenarios and stress testing the institution for these disruptions. This step will help develop early-warning systems and make the business aware of key indicators of issues.
Last, they can improve resilience internally by upskilling employees and departments in agility, pursuing business innovation, and strengthening leadership.
McKinsey: What approach should insurers take to survive in the current context?
Yolanda Zonno: In insurance, there is a large gap between companies that are doing well and those that are not. Successful companies are closer to the customer in the value chain, which helps them satisfy unmet client needs. They also focus on high-growth lines of business, and their markets are ambitious.
Success requires a “permanent transformation” approach. Consider this: five of the ten largest companies did not exist 25 years ago. The life expectancy of companies in the S&P 500 is only 15 years, compared to 60 years in 1955. And 75 percent of Fortune 500 companies are projected to no longer exist by 2030. Transformation is difficult. Only one-third of transformations reach their goals over time, and only 5 percent deliver disproportionate value.Among the few outperformers, one of the most important distinguishing factors is business reinvention. This entails going beyond optimizing the core business to fundamentally reinventing the business, untapping new revenue sources by using analytics, and pursuing big moves, such as new business models like ecosystems and partnerships.
Insurers should strive to deliver and sustain growth by piloting short- and midterm technical and operational performance initiatives and continuously rebalancing the initiative portfolio and investments over time. They should also transform the operating model to embed this growth culture and enable fast-paced value creation, rigorous value capture, and new capability building.
McKinsey: How can insurers make their transformations a reality?
Yolanda Zonno: Review your competitive position and understand where the current environment provides strategic opportunities. Then make decisive moves based on this assessment; for example, reallocate resources, move into adjacent industries, expand into high-growth regions, pursue M&A deals, and develop new—or enhance existing—capabilities.
It’s about setting a clear aspiration for growth. Leadership should aim to launch growth initiatives from day one and establish teams that push the ambition. In fact, three types of teams can help achieve these goals: delivery teams that help execute short-term goals; a capabilities hub that drives the growth culture and ensures that relevant skills are rightly allocated; and a growth think tank that continuously brings and prioritizes new ideas in the context of longer and more uncertain circumstances.
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Konstanze Reinecke-Schneider is a partner in McKinsey’s Cologne office, and Yolanda Zonno is a partner in the Madrid office.