Attendees at this year’s Digital Insurance Agenda (DIA) operate at the heart of the insurance industry—particularly when it comes to insurtech innovation. While the expected massive disruption in the industry remains to be seen at full scale, it’s clear that the insurtech space is maturing and that the impact in the industry is accelerating. Three insurance megatrends—and one all-encompassing global shift—reveal the direction the industry is heading and suggest which developments we can expect to see in the coming years.
Megatrend #1: New attacker models are forming
Insurance players have an obvious appetite for digitization, and several emerging models propel digital innovations in different ways.
Digital players: The market share of digital players has been steadily growing in the past decade, albeit more slowly than expected. Furthermore, these digital players have continuously outperformed traditional players in revenue growth and profitability. Given their lean and agile business models, digital players can improve financial results and boast more efficient go-to-market results (See exhibit). [[Exhibit 1]]
Insurtechs: We see many new players at the DIA every year—but each year brings more familiar faces as well. According to McKinsey analysis, insurtechs have pulled in more than $10 billion in investments since 2012. With continued investment and healthy profitability, these digital attackers are clearly not just hype; they’re here to stay.
Global tech players: The insurance industry has long been a leading data stronghold—but in recent years, global technology companies have rushed past to build sophisticated data storage and analysis capacity. Recognizing the value of these services to the data-rich insurance industry, these same companies are pushing to enter the industry, causing disruption all along the value chain.
Megatrend #2: Incumbents are increasingly digital
Incumbents are also increasingly digitizing their business models all along the value chain. They have begun to truly capture opportunities in data utilization and processing, ultimately establishing their own lead engines, frictionless underwriting processes, and end-to-end claims processes, powered by analytics. And as incumbents ramp up their digital capabilities, some players are experiencing an increase of up to 50 percent in process efficiency as well as a 3–5 percent increase in underwriting and claims effectiveness—all directly powered by digitization efforts.
Such strong results have raised digital expectations in the industry and can place traditional players in a good position to compete with digital attackers. In claims, for example, we now expect about 75 percent of claims to be handled digitally and more than half to be straight-through processed. Additionally, insurers that achieve these digital performance levels tend to dedicate more than 30 percent of their claims employees to roles in IT and analytics. Just a few years ago, this reality would have been difficult to imagine.
Megatrend #3: The insurance value chain is becoming increasingly disaggregated
We see an overall dismantling of the insurance value chain. As this happens, new partnerships and collaborations will have to form to best address customer needs. One such example is the partnership between insurtechs and traditional players. Many insurtechs are focusing on specific functions along the value chain and are achieving superior profitability levels for these specific functions, making them attractive collaboration partners.
For their part, insurance aggregators, search engines, and lead providers have been tremendously successful in the past few years, earning margins of more than 25 percent on distribution. Further down the value chain, data-driven analytics specialists in actuarial services, fraud analytics, and so forth provide superior value and thus achieve attractive profitability levels. In contrast to the early expectation that insurtechs would lead to massive disruption in the market, we find that, in reality, about two-thirds of players actually add to the value chain. Meanwhile, less than 10 percent are focused on disrupting the insurance business model.
Global shift: Ecosystems are emerging
Across these three trends, we also see an overarching global shift: industries are breaking up and moving away from traditional sector lines and toward ecosystems shaped around distinctive human needs. Of these, five major ecosystems are most relevant to the insurance industry: mobility, housing, health, wealth and protection, and B2B services. The mobility and health ecosystems are among the most advanced, with myriad cross-sector partnerships established. While several insurers have already embedded themselves into these ecosystems, the level of integration will substantially increase in the next years, enabling new growth opportunities.
The DIA brings together insurtechs, traditional insurers, and other global stakeholders that are influencing and building the industry of tomorrow. Collaboration between these players will only continue to grow, and the insurance business model will be shaped by category leaders and value-adding partnerships. Those that understand how the underlying megatrends will affect the global industry and act early to guide their businesses in the right direction will be best suited to benefit from the potential.
McKinsey is proud to be the Knowledge Partner of the Digital Insurance Agenda in Europe.