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Strengthening a Collaboration between Insurtechs and Commercial Incumbents in the Insurance Industry



Companies across industries are seeking to embrace digital technologies—to support new business models, improve efficiency, and gain a competitive advantage. Commercial insurance executives recognize the benefits of digital but face several obstacles in making headway.

Large incumbents lag behind because the complicated nature of underwriting and claims often requires human judgment and interaction, transactions are sometimes low volume and bespoke in nature, and legacy IT systems and processes make the transition resource intensive and complex.

What’s more, commercial insurance has historically been slow to change, and a lack of companies with clearly demonstrated impact from digital has left many executives focused on their own plan of action.

Rather than seeking to completely transform commercial lines, most insurtechs are focused on enabling or extending the insurance value chain. In personal insurance, insurtechs have played the role of digital attackers and captured market share at specific points in the value chain.

Lacking the scale and expertise needed to excel in commercial, insurtechs can be viewed by executives not as competitors to be feared, but as potential partners that could accelerate their digitization efforts.

The rapid proliferation of commercial insurtechs has created a challenge for large incumbents: how to identify and prioritize worthy candidates for investment and collaboration. Due to this uncertainty, many commercial insurers have been sitting on the sidelines.

The urgency to embrace digital is accelerating, however, so those who wait may miss out on opportunities to benefit from this wave of innovation. As a first step, executives should become more familiar with the areas in the value chain where insurtechs are concentrating their efforts.

Armed with this context, insurers can prioritize their engagement toward insurtechs in ways that can add value to their own strategy. This strategic collaboration can help to usher in new, tech-enabled approaches that should inspire commercial incumbents and accelerate the digitization of their enterprise.


Impact of insurtechs on incumbents

Over the past few years, global investment in insurtechs has grown by leaps and bounds—from $250 million in 2011 to $2.3 billion in 2017. Although the United States was the pioneering market for these companies, only 38 percent of all insurtechs are currently headquartered there. According to the latest figures, there are more than 1,500 insurtechs globally, and 37 percent are based in Europe, the Middle East, and Africa (EMEA)—in particular, Germany and the United Kingdom. An analysis from McKinsey’s Panorama Insurtech database shows that around 39 percent of insurtechs are focused on the commercial segment, mostly in small and medium-sized enterprises (SMEs), as shown in Exhibit 1.

As the number of commercial insurtechs grows, their influence will take different forms. Some will partner with incumbents to provide innovative new products and services, and others will be acquired and integrated into incumbents. The majority of commercial insurtechs (63 percent) focus on enabling the insurance value chain and partnering with incumbents. Only a small number of insurtechs (9 percent) are attempting to fully disrupt the insurance market (Exhibit 2).

These companies do not currently pose a serious threat to incumbents, but in the coming years they might be able to make inroads in certain segments or niches and take market share.

Despite significant digital advances, commercial lines still rely heavily on human judgment and manual processing—particularly in underwriting. This high-touch model not only increases operating costs but also limits the ability of incumbents to provide superior customer service (such as risk prevention and loss control) for a select few clients, specifically those with large accounts or where change in risk behavior would have considerable impact.

Insurtechs, however, can help scale and expand risk-prevention services. In doing so, companies can extend their services beyond the largest accounts while significantly improving performance and efficiency.

Digital interaction models. Inspired by the success of digital brokers and advisers of insurtechs in personal lines, a number of commercial are providing new and seamless digital customer experiences. The new digital interaction models also lower the cost to serve customers and increase transparency in pricing and coverages.

Furthermore, some of the digital brokers interact directly with reinsurers and other capital providers while outsourcing insurance processes, such as claims handling. These emerging models may support consolidation in today’s heavily intermediated value chain. Notably, the digital interaction models used by commercial insurtechs will most likely have the greatest value in the SME segment.

As the customer decision journey for the lower end of commercial lines starts to resemble personal lines, North American traditional companies and insurtechs are actively pursuing commercial SMEs using digital solutions. Key trends include more automated or streamlined underwriting, a shift from brick-and-mortar to digital service and delivery, the replacement of intermediated with “direct” customer engagement, and the development of aggregator solutions.


Digital core insurance capabilities. By adopting new technologies, insurtechs in commercial lines are at the forefront of reducing manual touch and enhancing human judgment in key insurance processes, such as underwriting and claims. The increased dependence on technology lowers costs and allows insurers to adjust their approach from “art” to “science” in key disciplines, including underwriting, risk selection, and claims leakage prevention.

Moreover, insurtechs are using approaches with the potential to provide new services to their customers, better enabling them to monitor, prevent, and mitigate their own risk at an affordable cost.

It is still unclear where digital innovation will have the greatest impact on commercial lines. However, recent analysis found that administrative costs for Greenfield Insurers are, on average, half those of incumbents—sometimes even less. Their cost leadership is partially due to a monoline focus and the absence of legacy IT systems and processes, as well as digital-by-design products. While these results are primarily related to personal lines, the impact on commercial lines, starting within the SME segment, will become as significant over time.


Developing a plan of action

When the fintech movement started in financial services, the banks that adapted quickly to meet the challenge formulated a strategy in three phases—understand, engage, and act. Commercial insurers may follow a similar approach to determine the best way to partner with insurtechs (Exhibit 4).

Understand. While some of the larger insurers and reinsurers have made progress across all three stages of engagement, many insurers are currently in this phase. Commercial executives must become more familiar with the evolution of the insurtech ecosystem, gain an understanding of the research in insurtech databases or publications, and participate in insurtech accelerator programs, which are run by a third party. Other insurers have launched hackathons with insurtechs.

Engage. This phase involves interacting with players in the insurtech ecosystem to seek out partnerships or inspiration. Commercial insurers can conduct more formal scouting, partner with insurtechs to develop proof-of-concept solutions, or launch incubator programs. Incumbents have launched incubator programs to provide a springboard to promising insurtechs. Most global commercial insurers have established similar incubator programs.

Act. Commercial executives can use their firsthand knowledge of the opportunities to partner with insurtechs to determine whether to invest in, collaborate with, or adopt an insurtech approach, or to wait and see. A few large multinational primary insurers and reinsurers are also actively investing and seeding opportunities in the insurtech space using a multitude of interaction models, ranging from investments to partnerships to reinsurance support.

Many insurers have launched venture capital funds in the insurtech space. Since the insurtech space is changing rapidly, approaching the “understand” and “engage” phases as ongoing efforts rather than one-off activities can ensure that executives stay up to date on the latest developments.

Identifying insurtech partners

Finding the right insurtechs with which to engage requires a structured approach. Executives should consider several parameters when evaluating an insurtech for a more formal arrangement (Exhibit 5):

Placement along the insurance value chain. Insurtechs have emerged at each step of the value chain, from marketing and sales to administration and claims.

Degree of innovation. The analysis should include activities from improving the current value chain (such as through the introduction of advanced analytics or artificial triaging of quotes), extending the current value chain (such as by providing adjacent services for risk prevention and mitigation), and exploring completely new risk pools and business models (such as through ecosystems).

Strategic relevance and value for the company. This measure seeks to determine the importance of the innovation across the insurance value chain. Relevance and value can vary by function and client segment. For example, insurers seeking to extend the value chain may focus on claims, which allows broadening capabilities and enhancing service levels to insureds. Other insurers may seek to rebuild the end-to-end value chain with new, digital-based business models.

Insurtechs are entering the commercial lines space: many of these start-ups will fail, and only a few will succeed. The most important impact of commercial lines insurtechs is that they provide a source of inspiration for the incumbent commercial lines insurers and reinsurers and a way to leapfrog into digital.

Commercial insurers that are able to find the right insurtechs to engage with could improve margins, expand their client base, and extend their services. Forging such partnerships may allow them to relieve cost pressures and counter eroding margins once new technologies mature.

To reap these benefits, commercial insurers must manage their partnerships effectively and expand IT capabilities to implement the solutions provided by insurtechs. These moves will require investment to understand and engage with insurtechs, define the right business models, and build flexible architecture that will allow insurtech solutions to integrate into IT core systems.

The payoff could include not only increased digitization and new ways of generating value but also a stronger competitive position in the coming years, as disruptive models become mainstream.

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Climbing the Power Curve: Winning in the Insurance Market



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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