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How to monetize data and analytics in the Insurance industry

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Many insurance firms collect a wealth of data, but few have found a way to monetize this asset. New “data as a business” models point the way forward.

Insurers have historically collected a wealth of data, but they have been slower to monetize this asset– by creating new business lines or models to capture the value of data and analytics. As more insurance consumers move online to interact, compare products and prices, and make purchases, the volume of available data is increasing exponentially.

Even more significantly, powerful new analytics technology enables insurers to use that data in ways they had not previously considered.

However, many insurers face organizational challenges to becoming data-driven companies. Others are waiting for business opportunities to emerge before enhancing their analytics capabilities. As a consequence, insurers have lagged behind other industries in their investment in and adoption of analytics.

As first movers among insurers create new business models and seek to harness the potential of their data, those that wait will be at a significant competitive disadvantage. To become a data-driven insurance organization, firms must rethink their approach to building and managing data and analytics assets and develop distinctive go-to-market capabilities that allow them to offer clients data-centric solutions.

Building and managing data and analytics business

However, the question often asked by insurance executives is, “Where and how do we start?” Insurers should follow a five-phase approach to design, launch and successfully manage a data analytics business (exhibit).

Phase 1—Define aspiration and set vision.

The first step in shaping a “data as a business” strategy is for an organization’s senior leaders to define a compelling aspiration for the new business.

Given the enormous economic potential the data hold, the aspiration should be bold and include business-backed, strategic use cases. A rallying cry for the organization could be, “Through launching a new data business, we expect to radically redefine the homeowner’s insurance market and double our market cap in three years.”

Creating a yardstick to measure progress will ensure that the organization is thinking boldly enough. A high-level business and economic model based on the aspiration should also be developed during this phase. Throughout the following four phases, these elements will be pressure-tested and adjusted as appropriate.

With the aspiration set, senior leaders must determine the most appropriate course to mobilize the organization to pursue it. This task includes appointing and visibly backing a leader to drive the next four phases.

Phase 2—Evaluate assets, capabilities, and value-creation opportunities

With the aspiration and strategic use case as the foundation, insurers must next determine which of their assets they can harness to build the capabilities required to achieve the strategic use case. This process includes not only understanding the types and value of existing data but also building the analytical and business capabilities needed to transform raw data into valuable insights for partners and customers.

Understanding the ecosystem of analytics partners is critical to generating impact from analytics. Carriers should identify best-in-class companies that deliver impact through data, analytics, and insights across the industry value chain. Equally important is finding “white spaces” in the market where no solutions exist. The key here is to understand how to create value in these opportunity areas and which analytical capabilities matter most to the solution.

For example, partners to evaluate can include those with:

  • Proprietary data sets, machine-learning models, and approaches to continuously improving the model
  • Flexible data and analytics infrastructure to execute high-priority use cases
  • Tools that allow customers to efficiently access, understand, and act on data and insights
  • Go-to-market capabilities including commercializing and pricing high-impact analytical solutions
  • Capabilities to quickly make improvements to meet customers’ changing needs and stay ahead of competitors

At the conclusion of Phase 2, management should align on the data assets and capabilities that best fit the strategic use case, the gaps that will need to be addressed and the high-level business case. To rally stakeholders, leaders need a compelling reason for the changes they intend to make, and must clearly describe the impact that analytics can have on the organization, its clients, and employees.

The key challenge is to ensure that these assets link clearly to business value; without this connection, the resulting assets will have no real impact.

Phase 3—Define specific use cases and business model

The next step is defining specific use cases and associated customer value propositions– in other words, the building blocks of the aspiration and strategic use case. Where applicable, management should consider further refining the list of potential use cases through market research with potential partners and customers.

This exercise gives the team a clearer understanding of potential demand for each use case and the primary monetization mechanisms (for example, price premiums for current products or incremental subscription fees for new data products).

As building the necessary capabilities might also require partnerships or acquisitions, insurers should conduct the external assessment with an eye toward this possibility. This assessment can help to identify potential business models

Phase 4—Conduct pilots

The team proves the value of the new business by piloting two or three minimum viable products (MVPs). Carriers should take an iterative, test-and-learn approach to pilots, with each lasting no more than 8 to 10 weeks. It is important to keep the scale of these pilots manageable and not attempt to perfect final offerings.

Also, metrics to gauge a pilot’s success should include a mix of learning and financial impact (with more emphasis on the former) as well as test-versus-control experiments where applicable to measure the incremental value delivered by analytics.

Phase 5—Establish new business unit and scale operations

Scaling successful prototypes and establishing foundational capabilities by recruiting talent and building the “data factory” will position an insurer to formally launch the new venture and begin the scaling process. The new venture will call for new roles in the organization, including not only data scientists who can analyse big data and solution architects to manage the delivery road map, but also experts who can translate business needs into analytics language.

As the data-driven business matures, firms should explore establishing a new branded unit based on its capabilities and revenue growth projections. Insurers should also establish and manage key metrics to assure implementation is on track and that the business unit is delivering anticipated value. The primary focus should always be on value delivered and on investments based on clear value realization milestones.

Building a data-driven business is often a multiyear journey requiring parallel efforts in such areas as data and analytics modelling and business building, along with a heavy customer engagement and go-to-market component.

Implementing an agile cross-functional operating model

Developing a data monetization business calls for strong go-to-market capabilities. Insurers must quickly develop the data analytics offerings, conduct tests with real customers, refine them in quick iterations, and price solutions based on the value delivered and the customer’s willingness to pay.

For most insurance carriers, this approach will represent a change from their traditional way of operating. However, leading digital companies around the world are using such agile approaches to deliver business and customer value quickly and effectively.

Carriers should consider taking the following actions:

Get close to customers and collaborate with them on solution design.

Instead of relying on the judgment of select stakeholders such as sales executives or on market research, insurers should base each step of a solution’s design and development on active customer engagement and feedback. This focus should also help inform the value at stake for customers and their willingness to pay.

Create cross-functional teams that own well-defined business and customer outcomes.

Typical insurance carrier silos such as sales and marketing, product, IT, finance, and HR create significant coordination overhead. Dedicated cross￾functional teams (preferably with dedicated resources) can own the solution end to end and focus on customer outcomes.

Adopt a test-and-learn approach and focus on launching in weeks rather than months.

Rather than aiming to build feature-rich, comprehensive solutions that take months and years to design, develop, and launch, carriers should focus on quickly delivering an MVP followed by subsequent releases to expand and improve on features, functionality, and reach. Each release should be based on meeting a set of milestones and success criteria agreed upon in advance.

Since this approach to developing and running a business represents a sharp break for most carriers, executives should consider establishing the new business so that it does not get burdened by the larger organization’s requirements and processes.

For example, a new business will need to attract different talent profiles and develop unique partnerships, so established processes and lead times (for instance, hiring processes) might not be effective. Senior leaders should proactively think about addressing these issues while building momentum, generating excitement, and celebrating successes.

In summary, the exploding volume of data available to insurance carriers is giving rise to new business models, revenue streams, and enormous opportunities to increase value. Embarking on the journey to monetize data requires insurers to rethink their approach to building and managing data and analytics assets and to develop distinctive go-to￾market capabilities to bring new data-centric offerings to their clients. Executives that can manage investments in analytics while identifying new business lines can capture significant rewards.

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Insurance

Climbing the Power Curve: Winning in the Insurance Market

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Insurers can take concrete, evidence-backed actions to move them in the right direction and, cumulatively, improve their odds of long-term success. Purposeful, bold moves aimed at shifting resources, boosting underwriting margins and productivity, and delivering on a series of programmatic M&A deals can dramatically improve an insurer’s odds of reaching the top quintile of economic profit. While these moves may sound instinctive, many companies fail to pursue them rigorously. In fact, these moves are most powerful when undertaken in combination, at or beyond the thresholds of materiality described in this narration. The point isn’t that there’s a magic formula for achieving strategic differentiation. Rather, by taking a hard look at the potential of your key initiatives to achieve bold results in these areas, one can get a realistic forecast of the odds that one’s strategy will transform performance.

Understanding the power curve and how to apply it

Research identified a power curve—proof that economic profit is unevenly distributed among insurance companies (exhibit) across geographies from 2013 to 2017. The power curve illustrates the uneven distribution of insurance industry economic profit.

These findings may come as a wake-up call to insurers that find themselves outside the top quintile—but embarking on an effort to move up the power curve is difficult.

How to move up the power curve

Research shows that moving up the power curve requires a laser focus on the factors such as foundational factors and bold moves that have an outsized impact on success, measured as economic profit.

Pursuing the five bold moves by Insurers

While the five bold moves may seem intuitive, and many companies may already be doing them in some form, two factors set these actions apart. First, magnitude and intensity matter; these efforts force insurers to break free from their standard processes of investment and initiative prioritization. Even if a company is doing something in each of these dimensions, how much it is doing often makes a difference. In other words, strategy is not only about the directionality of moves but also their materiality.

Second, the impact of these moves is cumulative. Companies that employ three or more of these moves in concert are likely to be propelled up the curve. Findings show empirically that companies that focus on multiple moves over time can learn from and adapt to them, reaping even further benefits.

Dynamically shift resources between businesses

Some carriers offer customers too many legacy products that do not produce meaningful profit. These legacy products take attention away from distribution, product development, and policy administration. Instead, companies should reallocate capital to higher return-on-equity (ROE) activities and away from lower-ROE lines of business. Proactive measures are critical given the sector’s highly competitive pricing environment.

Resource allocation should also be employed across various strategic lines, not just products. Based on research, the threshold for outperformance is the reallocation of 60 percent of surplus generated over a decade. Insurers that optimize their business mix accordingly have a better chance of improving their odds of ascending the power curve. This threshold parallels our findings across industries that dynamic resource reallocators gain approximately three to four more percentage points of total return to shareholders each year compared with low reallocators.

Other companies have increased economic profit by divesting underperforming assets. In the wake of the financial crisis of 2007–08, a number of companies exited underperforming businesses through closed-block transactions through either legal entity sales or reinsurance transactions. These transactions were with organizations that were more natural owners of the distressed assets by virtue of their capital structures or business models. These back-book transactions, when thoughtfully structured, have freed up capital that helped move sellers up the curve.

Reinvest a substantial share of capital in organic growth opportunities

Reinvesting earnings in profitable and well-performing businesses is a reliable way to increase economic profit, but finding these opportunities has been challenging for many insurers over the past ten years. Companies meet the threshold in this area if they are in the top 20 percent of the industry by strategic reinvestment relative to new business premiums; typically, that means spending 1.7 times the industry median.

Often considered innovators in the industry, companies that achieve this high ratio of reinvestment to sales have a track record of introducing disruptive products and services, enabling them to grow faster than their peers. Indeed, these insurers are successful at finding accretive internal rates of return. And as they push the boundaries of new offerings, they are often able to achieve higher margins (and ROEs) thanks to the reduced competition at the vanguard.

Pursue thematic and programmatic M&A

The third move centers on the use of programmatic M&A, an important approach for insurers with financial flexibility and access to available targets. A programmatic approach to M&A focuses on executing a series of deals in which no individual deal is larger than 30 percent of market cap but in which the total over ten years is greater than 30 percent of market cap. This is often done in thematic areas of technology and capability building or in extensions to new product lines and geographic markets. Typically, programmatic M&A outperforms both pursuing very large transactions and avoiding M&A altogether. By using a series of small, thoughtfully curated transactions to advance innovation and growth, programmatic acquirers have several advantages: they can simplify integration, avoid competitive bidding, and facilitate the exploration of new opportunities without committing large amounts of capital up front. This approach to M&A also enables more effective acquisition of new capabilities, such as digital and analytics.

Enhance underwriting margins

The fourth bold move involves making ROE improvements through better underwriting and lower loss ratios—a particularly important objective given how, as a core competency of all insurers and particularly in the P&C segment, underwriting efficiency can serve as a differentiating factor that leads to higher economic profit. Insurers accomplish these results either through privileged access to particular customer segments or better use of customer or risk data through analytics. Benefits from productivity improvement are often reinvested to improve product margins. To maximize the odds of moving up the curve, companies need to be in the top 30 percent of the industry by gross underwriting margin.

Make game-changing function improvements in productivity

Insurers feel continued pressure to reduce costs because of increasing price transparency, the effects of digitization, and low interest rates. Indeed, new entrants are closing the gap on incumbents. It’s generally recognized that even though the loss ratio has the greatest leverage, insurers benefit significantly from improving efficiency, lowering expense ratios, and increasing revenues per employee. Many executives in the industry believe that a dramatic wave of efficiency and retooling will crest in the next three to five years, and many are embarking on these high-ambition, enterprise-wide efficiency journeys now. Research reveals that to maximize the odds of entering the top quintile, companies should aim for a cost improvement that is in the top 30 percent of the insurance industry.

The odds of moving up the curve become exponentially larger as insurers pull more levers, while a strategy that does not incorporate any of the moves will likely fail. Indeed, the CEO, CFO, other senior executives, and board members can often use these bold moves as a test of strategies brought to them by their teams. Strategies that neglect to engage these actions typically have a one in ten chance of succeeding, compared with one in two (or better) for those that do.

Rather than thinking about strategy as primarily a matter of frameworks and broad themes, leaders should ask themselves what they are doing to make bold moves along the five dimensions that matter and whether efforts already underway are truly significant. The extent of the moves matters a great deal—materiality matters, not just directionality. And CEOs are in a unique position to calibrate materiality; this, in fact, is one of the greatest aspects of their role and a productive means of challenging their teams. If proposed plans don’t meet the required threshold of activity to bend the odds of moving up the power curve, they are likely not aggressive enough. What often gets in the way is a resource allocation process hindered by social dynamics. Other common obstacles include a lack of objectivity on opportunities and an insufficient understanding of critical thresholds needed to move the needle. As a result, too many companies simply check the box on certain priorities while investing too little in the ones that truly matter.

Improved economic profit is within reach for insurers that can adjust their business models in the face of an efficient market and inject a newfound objectivity into their strategic processes. Indeed, insurers that have a favorable endowment, navigate industry and geographic trends, and make bold moves will be in a good position to climb the power curve.

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