Insurers who fail to digitally innovate could soon find themselves lagging behind their more progressive competitors, researchers have suggested.
Insurance has so far largely resisted the disruptive forces of digitization, but could potentially be upended – like other formerly heavyweight industries such as retail music, book stores, travel, and traditional print media.
According to a report by researchers at McKinsey, the insurance industry is in the beginnings of a period of digital flux.
“For a long time,” the report stated, “the traditional insurance business model has proven to be remarkably resilient.
“But it, too, is beginning to feel the digital effect.”
And it will be those companies who lead the impending digital revolution who reap the rewards, while those who lag will get left behind.
“You don’t have to be the first ones to move,” one of the report’s authors Johannes-Tobias Lorenz said, “but you must follow on very soon and change very fast.”
A co-author, Tungay Catlin, said the time for change was underway, noting: “I think the train has left the station. We are in mile one of a marathon, but there’s a long, long way to go.”
The auto insurance sector has introduced the most technological advancements to date, and, as the researchers stated, “a handful of direct carriers already enjoy the lion’s share of profits.”
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“About 25% of people who shop for auto insurance in the United States, for example, buy online directly from the carrier, with several direct underwriters enjoying high growth and profitability as a result.”
Lorenz said the key for digital success will be a cultural acceptance of that change – and a willingness to embrace it early.
“The biggest challenge to overcome is the cultural one… giving up long traditions and trying out new things,” he said.
Rather than small digital changes, or partial upgrades, the way to thrive in many instances will be a digital overhaul – creating new ways of doing business with a consumer focus.
“[It is about] upending old business models and rapidly building entirely new ones,” the report stated.
“Circumventing the need to build traditional fixed assets, the likes of Amazon, Netflix, Uber, Airbnb, and a host of fintechs have disrupted incumbents in the space of a few years by using digital technologies, data, and analytics to create value without owning, respectively, physical shops, cable connections to viewers’ homes, car fleets, hotels, or bank branches.”
A McKinsey survey of more than 2,000 executives “in industries affected by digital technology” revealed that companies who enjoyed the highest revenue and earnings growth “approached digital opportunities across all elements of their business model, not just one or two, and either led the disruption or were fast followers.”
Companies that procrastinated risked “disappearing”.
“In insurance, as in other industries, it takes a while for customers and companies to embrace digital technology, but as the pace of change accelerates incumbents’ scope to adapt diminishes,” the report said.
“There comes a tipping point where those that have not adapted their strategies fade away—as in traditional print media, for example.”
Business culture change is the biggest challenge financial services executives face, according to McKinsey research. And, in particular, researchers said, “insurers scored poorly when we measured their cultural preparedness for a digital world.”
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