Evolving customer trends and the rising competitive threat from an array of digital players are pushing insurers to digitize quickly. Customers are increasingly turning to digital channels to fulfill a variety of needs, a trend that has only accelerated amid the COVID-19 pandemic. And the direct insurers in the market—insurtechs, digital insurance attackers, and even large tech platforms—have several advantages over insurers, such as their ability to scale quickly, launch products fast, and employ top tech talent.
To compete in this context, incumbents should consider building their own digital businesses. Doing so can be challenging, however, as digital ventures operate differently from traditional insurance companies. For instance, incumbents must leave behind legacy IT models and pivot their focus from investing in their sales and marketing teams to investing in digital channels to support acquisition, perhaps alienating their sales force. Despite these challenges, some traditional global insurers of varying sizes have already built and scaled new digital businesses. A 2020 McKinsey analysis of the top 20 European insurers by measure of gross written premiums (GWPs) showed that within just five years, the share of insurers with a digital business increased to 70 percent, from 1 percent; the same analysis for the United States showed 20 percent of insurers have a digital business, up from zero.
Insurers that want to launch their own digital business should observe how digital attackers operate in four areas—customer acquisition, data and analytics, state-of-the-art technology, and talent—to draw comparisons and see how to support their new business. Insurance companies that can successfully emulate attackers and innovate can leapfrog the competition.
Customer acquisition is digital
Most digital attackers gain customers entirely, or at least primarily, via digital channels. This approach has significant implications for the sales and marketing team’s direction and capabilities. While the combined ratio of a digital attacker will not necessarily look different from that of the parent insurer, as both still have acquisition costs, how acquisition expenses are allocated differ. Direct distribution, for instance, requires investment in digital marketing and digital sales channels instead of hiring, running, and managing a sales force. And since most attackers operate via direct online channels, a significant portion of their acquisition expenses go toward digital channels, such as paid search marketing, display ads, or social media, rather than into sales commissions.
Furthermore, an attacker’s sales and marketing team more closely resembles that of a large e-commerce retailer than that of a traditional insurer. Team members have interdisciplinary skills sets, such as data science and expertise in conversion optimization, to improve the end-to-end lead and sales processes.
Traditional insurers should ensure their new digital business has sales force talent with expertise in areas such as performance marketing, user experience design, analytics, conversion optimization, and hyper-personalization, all of which support digital-customer acquisition.
Data, analytics, and AI are core competencies
For attackers, advanced capabilities are not add-ons; rather, they are carefully considered and integrated into a launch plan. Indeed, many digital attackers develop a comprehensive customer data model before launching. These players may also add external third-party data to their existing data set to help develop a stellar pricing model, focused on accurate, dynamic, and tailored pricing.
Access to data about customer behavior (such as behavior when filling out quote forms) and additional user data, such as device used and location, also help attackers customize individual customer journeys. Attackers can also use data to calculate an updated customer lifetime value for the marketing team and dynamically adjust pricing to optimize conversions or profitability in real time. Finally, artificial intelligence can help automate data collection and processing in claims, improve retention prediction, or even optimize marketing budgets across multiple channels.
When launching their digital businesses, insurers might hire specially trained data scientists and specialized developers in addition to actuaries. Incumbents can also use the wealth of data already at their fingertips to give their new digital business a head start against digital attackers that do not have the backing of an established insurer.
State-of-the-art on the cloud
Digital attackers often run part or all their infrastructure in the cloud. Rather than buy and run one large, monolithic software platform, they connect multiple platforms, vendors, and third parties through more nimble connections such as microservice architecture. To quickly adapt to changes in the market and ensure they own the full customer journey, most attackers fully develop and own the front end themselves. The core insurance system, however, could come from an established vendor and use other elements, such as chat or custom care software, from a software as a service (SaaS) provider.
Traditional insurers are tempted to reuse existing legacy software in their new digital businesses. In many cases, however, these systems burden the new venture by enforcing inflexible existing processes and data models, which is why many attackers opt for more modern, flexible solutions—often running their entire infrastructure in the cloud. Whether an insurer is building a new business from scratch or within its core, hiring the right architects, DevOps engineers, and full-stack, front-end, and back-end developers ensures smoother build-outs of IT infrastructure.
Talent and adaptable ways of working
Unlike traditional insurance companies, many successful digital insurance attackers are run by digital entrepreneurs rather than insurance executives. Digital attackers also have flatter hierarchies, which provide greater transparency into work outcomes, foster open discussions among colleagues, and encourage a willingness to challenge the status quo and embrace new ideas, much like in a Silicon Valley start-up. Many attackers also build agile working models that support quick test-and-learn approaches. Agile methods such as Scrum—a proven framework used by big tech firms and many digital noninsurance players—or objectives and key results (OKR) are also commonly employed. These approaches enable efficient collaboration to support complex product development amid uncertainty.
These flexible working approaches can also help attract and retain top digital talent. The winning talent combination, however, is a mix of outside noninsurance digital experts and people with deep insurance knowledge, the latter often coming from the incumbent sponsoring the attacker. Insurers that invest in hiring a good balance of digital and traditional insurance talent could see the benefit to core business down the line. Over time, talent from an insurer’s digital business venture might transition over to the core insurance business, especially if incumbents adopt more flexible ways of working.
Never has the need to digitize been more critical, given evolving customer behavior and the ever-increasing competitive threat. By observing established digital attackers, incumbents can uncover valuable lessons when building their own digital businesses. Indeed, insurers that take this path will soon gain confidence and realize that they can innovate and generate impact beyond writing more GWPs or leveraging new digital channels—helping them leapfrog the competition.
