While the insurance industry as a whole has delivered pockets of innovation, such as cyber insurance and digital distribution, few carriers do so consistently.
This is part of the reason the sector has seen poor productivity growth. For property/casualty insurers, the need to do better in terms of efficiency may be particularly acute. Their resilience could be tested if climate change results in more and worse natural disasters and their ability to raise prices in response is limited. Indeed, the P/C sector’s cost performance barely budged from 2005-2020.
The problem is that innovation is generally not embedded in companies’ growth models or fully integrated throughout the organization—for example, by organizing data and digital tools in such a way that these capabilities enable and even catalyze continuous innovation. This is the exception rather than the rule. As a result, innovation is episodic rather than systematic.
That does not have to be the case. It is possible to structure, organize and encourage innovation for sustainable growth, based on these five steps.
1. Shift resources to innovation initiatives. Companies that want the kind of innovation that lifts performance need to invest in it. Business as usual, particularly after the disruption of the last two years, is the safe option—but it won’t deliver growth. To do that, businesses need to free up capacity, in terms of both time and money. That may require reallocating resources away from core business tasks.
2. Develop distinct product-development pathways and processes. No two innovation initiatives are alike; therefore, no single process will work all the time. Companies should instead develop distinct pathways for product development.
For example, one carrier with a good innovation record considered the risk/return profile of possible innovations. On that basis, it created one track for the development of new products that could generate significant value; a second that focused on developing substantive changes to existing products; and a third that identified minor tweaks, such as repricing or adding minor features that already exist in other products.
3. Design value propositions that incorporate new approaches. Historically, carriers have developed new products through actuarial innovation. Or they concentrated on modernizing their distribution platforms and strengthening their underwriting capabilities. Little of this is exciting to consumers.
The best approach uses all three to create an innovative value proposition that consumers value. One example is to use these capabilities to personalize offerings and tailor messaging for small but distinct customer segments.
It’s important to remember that consumers have high standards because they are accustomed to having good experiences with online search engines and retailers. That is their baseline expectation for digital interactions. Insurers that fall short on this will not turn even a great new service into bottom-line improvements.
4. Design a continuous, integrated process. The point of innovation is to create value. So, it needs to be fully integrated into the business-planning cycle. That is why it is important for the relevant units to connect on a regular basis.
Innovation teams that are not fully integrated often lack clearly defined, near-term metrics for success. They may not understand how their own success is critical to the success of the overall enterprise and of specific business lines, and they may lack clear links with other parts of the organization to ensure the innovations they develop are implemented and scaled.
By facilitating constant dialogue between innovation and business teams, insurers can foster a common understanding of the market landscape, identify potential opportunities and realize their aspirations.
The innovation process should have three phases.
- Assessment is a short (two to three week) sprint to identify key problems to solve that are consistent with the overall strategy.
- Aspiration is about refining new product opportunities based on user testing with clients and distribution partners and prioritizing targets. Growth in premium and profit from this portfolio of innovations is then incorporated into the financial plan and individual executive accountabilities are determined. The understanding is that not all of the ideas will work out—but some must.
- Design, build and launch is the final phase. With the most promising ideas identified, it is time to proceed with proof of concept, product design, building activities (including pricing and filings of insurance products) and go-to-market planning.
Innovation teams should develop a business case for each product or initiative, carefully documenting all assumptions underlying the estimated value.Assumptions are tested against the value estimates (with proof-of-concept experiments), refined and tied to clear milestones for each step of product development. This makes it possible to refocus efforts and resources on the initiatives considered most likely to succeed.
5. Use an accelerator to advance high-potential product innovations. What innovation operating model to use depends on an insurer’s priorities, whether that is improving core operations or seeking disruptive opportunities. One way to keep up the momentum is to use an accelerator—an organization that supports early-stage and startup businesses through investment, mentoring and training—to pursue particularly promising ideas.
The accelerator is a separate entity, but it still needs to connect to the carrier’s performance priorities. It also needs to be able to take advantage of the carrier’s distribution, underwriting and data capabilities, so that it does not spend time reinventing the wheel.
Time to Innovate
At the height of the pandemic, industry leaders rightly focused on short-term cash management and the welfare of their workforce. But even before the pandemic, only a small number of insurers were earning substantial profits; another subset actually destroyed substantial economic value. Many of the rest did not earn back the cost of capital. P/C insurers, for example, were devoting considerable resources to improving underwriting, but with variable effects.
With the worst of COVID-19 apparently behind us, the question now is how to create strong, sustainable growth. New risks, such as climate and data- and cybersecurity, call for new products—and represent big opportunities. And new technologies, such as applied artificial intelligence, drones and real-time datasets, offer new capabilities—if and only if insurers can attract the talent necessary to turn potential into profit.
To take advantage of these trends, and to build value, innovation is the answer.
(This article is a summary of the March 4, 2022 article, “Five steps to improve innovation in the insurance industry,” published by McKinsey & Company. The full article is available on McKinsey’s website.)