Digitalization is not a new effort, but today’s complex economy and consumer market has made it more urgent than ever. As insurers work to incorporate automation and other advanced technologies into their offerings and workstreams, they are finding that successfully implementing these tools requires a more holistic focus. McKinsey recently spoke to Khushpreet Kaur, a partner in the New York office, about the common pitfalls insurance companies experience during implementation and how to overcome them by using a well-rounded strategy.
McKinsey: Why is it important for insurers to transform their digital operations?
Khushpreet Kaur: Many insurers have been working to digitalize operations for years and have seen pockets of success. Now, however, there is a greater emphasis on accelerating digital transformations to work through the volatility of the market. Several recent trends are resulting in increased pressure on insurers to be more agile and nimble.
For example, market downturns are creating pressure on companies to create more value for shareholders; high inflation has made claims more expensive while raising operating expenses; customer preference have shifted from physical channels to more digital, self-service models; and COVID-19 introduced hybrid ways of working, enabling many employees to work from home and limiting paper-based processes and manual handoffs.
McKinsey: What are some of the most common points of failure for insurers making these transformations?
Khushpreet Kaur: There are four common traps that insurers can fall into when embarking on their digital transformations. First is implementing trendy automation programs that focus solely on the technology aspect, such as ChatGPT or robotic process automation. Doing this provides only superficial tools and does not solve core operating model challenges within the business.
Second is making progress in areas not critical to business enablement. Many of these initiatives tend to slowly disappear in the pilot phase of implementation.
Third is not balancing tech-led initiatives with business-led initiatives. The balance is difficult to achieve, and it’s important to show how certain actions are meeting business priorities. And fourth is missing the capabilities and skills in the organization to scale early experiments and analyze the results from the deployment of technology.
McKinsey: What steps can insurers take to approach their technology transformations holistically?
Khushpreet Kaur: There are four key steps. First, insurance companies can ensure automation is as much a business priority as it is an operations priority. This step requires leaders to align the business on key areas of focus and tie goals closely to business strategy, markers of success, micrometrics, and KPIs to track progress along the way. Leaders should start with the most critical business processes first. For example, one company found success using automation to help enhance human productivity rather than attempting to use it to replace manual labor.
Second, insurers should focus on people as much as technology. Companies can assess where talent gaps exist and look to reskill employees on technical skills or acquire new talent with these capabilities. Having these people at the heart of solution design is the key to successfully deploying and scaling tech initiatives. It also helps adds a human element to technology enablement, ensures that solutions are tweaked appropriately to meet business needs, and, most important, puts the onus and accountability on individuals to successfully carry out these goals.
Third, insurers should fix their operating models. Getting the right operating model to scale is critical for laying the foundations for a more agile, cross-functional, and engaged organization. Operational leaders who have successfully built resilient, agile organizations have focused on several aspects, including establishing a common strategy and purpose; using modern, AI-based operations tools to maximize time spent on value-adding activities; establishing modern management systems adapted to hybrid and digital-first ways of working; and systematically building capabilities for employees.
Fourth, insurers should build a rigorous performance management system. Having this system in place ensures the impact of the technology transformation is measured clearly and visibly at all levels of the organization. It also helps create a cascade of information from the front line to the CEO on metrics, KPIs that track progress, and any impediments.
Khushpreet Kaur is a partner based in McKinsey’s New York office.