With rapidly changing customer expectations, the acceleration of digital technologies, and the growing importance of growth in valuations, building digital businesses has become a strategic priority for insurers by driving innovation and business creation. value. McKinsey spoke with Düsseldorf office partner Pia Schlüter to learn more about the types of digital businesses insurers are building and how leaders can drive success.
McKinsey: What are the latest things you see in building digital insurance businesses? Why has this become a strategic priority for insurers?
Pia Schluter: The insurance industry is at a critical inflection point. Customer behavior and expectations are changing, spurred by customer experience in other industries and now accelerated by COVID-19. Data and technology are increasingly available and allow players to reinvent the way they sell insurance and manage claims, for example by using sensors. New digital players are emerging and attracting record investment, with more than $7 billion in funding flowing to insurtechs alone in 2020. Additionally, profitable growth is gaining importance for valuations.
Established companies that are successful in building new businesses combine the speed of a start-up with the scale and resources of their core business.
These market developments are some of the main reasons why incumbent insurers are creating new digital businesses. These activities allow insurers to protect their core business from disruption and meet changing customer expectations. More importantly, they generate entirely new revenue streams; our research shows that this is a key reason in more than 60% of all business start-ups.
McKinsey: What kinds of digital business builds do you see?
Pia Schluter: We see four archetypes of digital business builds in insurance:
First, there are end-to-end insurers, which are full-fledged digital insurers that design and sell insurance directly to the consumer, aggregators or channels such as brokers, bancassurance or tied agents. Second, there are specialized service companies, digital companies that focus on specific stages and disintegrate the insurance value chain. Our research reveals that around 66% of insurtechs specialize in certain parts of the value chain, such as data collection, while less than 10% aim to disrupt the entire business model.
Approach digital businesses with the mindset of a venture capitalist. In other words, be more obsessed with value than ideas.
Third, ecosystem players that integrate different insurance or service offerings, sometimes centered on a single element of the insurance value chain. And fourth, insurance companies set up by non-insurers, for example car manufacturers offering car insurance.
McKinsey: What are some of the challenges incumbents face when building a digital business? What can insurers learn from their peers who do it well?
Pia Schluter: Established companies that are successful in building new businesses combine the speed of a start-up with the scale and resources of their core business. Leaders can take several steps to successfully approach a new digital business.
- Obtain senior management commitment: Developing entrepreneurial capacity requires clear and sustained sponsorship from the CEO and other senior executives. Leaders should plan to devote significant time and support to these efforts and should allocate people and capital in such a way that they are integrated into the company’s strategy.
- Have an investor mindset: Approach digital businesses with the mindset of a venture capitalist. In other words, being more obsessed with value than with ideas: having a clear idea of the value proposition and the logic around the value creation of the targeted company. Insurers can leverage the benefits of being an incumbent (their data, talent, distribution and branding) to create this value. As milestones are reached, they need to release funds and adjust goals so that these new ventures aren’t tied to financial performance metrics from the get-go.
- Establish a make/buy/partnership strategy: Leaders need to assess which parts of the business they should build internally and which parts they can acquire or build in partnership with another company. This not only speeds up their business creation, but also helps them avoid failures if they lack the required capabilities or scale.
- Adopt an agile culture, test and learn: Of course, companies can’t do everything right at first. But through trial and error, insurers can embed the learnings and ultimately develop the right capabilities. Fortunately, advances in technology allow companies to test their assumptions cheaply and quickly. An operating model in which teams experiment, learn and evolve quickly can ensure the best product-to-market outcome.
- Adopt an open architecture: An open architecture allows teams to easily exchange technology components, an important capability when technology is at the heart of many innovations driving the insurance industry. An open architecture will also enable a variety of partnerships, ecosystems, acquisitions, and local assets, all of which can add value.
- Leverage data and analytics: Our research shows that leveraging data and analytics to make decisions nearly doubles the likelihood of a business start-up exceeding expectations. As such, data and analytics capabilities should be considered a critical part of the business model that can help reduce customer acquisition costs, increase retention, automate data collection or claims and optimize pricing.
- Balance organizational freedom and business support: The new business should be far enough from the parent company to have its own processes and attract new hires, but it shouldn’t be too isolated. Business leaders need to establish a governance structure that provides resources and connections without stifling innovation.
Pia Schluter is a partner in McKinsey’s Düsseldorf office.
To learn more about building a digital business in insurance, check out:
- Building new digital businesses in insurance
- CEO brief: The future of starting a business in insurance
- The future of insurance: Unleashing growth through the creation of new businesses
- Global Insurtech Perspectives