Five steps to improve insurance innovation | McKinsey

Insurance is not typically seen as a bastion of innovation, despite a long history of creating exciting new markets around emerging risks and consumer demands. For example, the relatively nascent cyber insurance market is forecast to exceed $22.4 billion by 2026 with an annual growth rate of more than 25 percent over the next five years, according to market research and consulting firm IndustryArc. 1 1. Cyber Insurance Market: Forecast (2021-2026), industryarc, June 2021, industryarc.com. In reaction to the COVID-19 pandemic lockdowns, many insurers quickly digitized their customer and agent experience, permanently moving away from the traditional face-to-face service model. other operators are responding to consumer demand for more meaningful interactions with loyalty and gamification programs that promote customer engagement. For example, South African insurer Discovery’s Vitality loyalty program gives customers points as incentives for practicing healthy habits and good driving behavior, and then grants them access to rewards and benefits.

The c-suite is already taking notice of the key role innovation will play in delivering long-term value: Data from a 2020 survey shows that while executive teams focused on short-term cash management and the well-being of its workforce at the height of the pandemic, innovation now ranks as one of its top two priorities.

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But while the industry as a whole has spawned pockets of innovation, few operators have pursued innovation in a systemic way. today, new customer expectations, low interest rates, and new sources of competition (such as leading tech companies, insurtechs, and third-party capital) are pushing operators to take a more systematic approach. For innovation to deliver sustainable growth, it must be embedded in the company’s growth model and fully embedded throughout the organization, bringing together cross-functional teams to address challenges in new ways.

and that’s not easy. Successfully profiting from innovation is a complex enterprise-wide effort, and most insurers have yet to crack this code, at least not consistently. In fact, a 2017 survey of life and annuity executives found that only 12 percent believe they have a process that delivers strong product innovation. 2 2. Marianne Purushotham et al., Understanding the Product Development Process of Individual Life Insurance and Annuity Companies, Society of Actuaries, 2017, soa.org. and less than 30 percent of financial services executives say they have the experience, resources, and commitment to successfully pursue new sources of growth.

Fortunately, there are ways to establish and implement cross-cutting practices and processes to structure, organize, and foster innovation for sustainable growth. Here are five steps to embed innovation in the way an organization works, competes, and grows.

1. shift resources from core business tasks to breakthrough innovation initiatives

Innovation is not just about creativity and generating unique ideas. it’s about identifying unmet needs and untapped markets and addressing them, sometimes with unproven solutions and unproven business models. however, too many leaders accept these risks without changing enough people, assets, and management attention to make these ideas a reality. Simply put, nothing comes from nothing; If a company wants to innovate, it must allocate resources to innovate.

Indeed, one of the biggest challenges keeping insurers from innovating is capacity—both physical and human capital and the minds of executives. Business as usual has remained the priority for traditional incumbents, particularly as they have sought to provide stability for clients through the disruption and uncertainty of a global pandemic. Upgrading existing products, maintaining existing systems, and making incremental changes have taken up most of insurers’ time, attention, and effort. these short-term initiatives feel safer, particularly given the pressures facing insurers in recent years. but strong opportunities await insurers who adjust their valuation criteria and free up capacity for bolder moves.

By reallocating needed resources from core business tasks to potentially disruptive initiatives, insurers can rebalance their product portfolios away from short-term product enhancements and toward potential breakthroughs or new business models, forms of innovation that they often have greater potential to generate sustainable sources of growth and extraordinary returns.

2. develop distinct product development pathways and processes

Different innovation initiatives require different approaches. for example, most organizations can predict with some certainty the likely gain in gross written premiums or combined rate from an improvement to existing coverage or adjustment to a core process. this knowledge leads to clarity about the risks and how to mitigate them. This type of innovation is very different from developing a disruptive new product, such as a new life insurance policy with unprecedented flexibility across all life benefits. Disruptive products carry a host of risks, from understanding the market opportunity to effectively communicating the value proposition, and organizations are less clear about it.

The rapid rise and fall of mutual aid platforms in Asia illustrates the importance of maintaining a balanced innovation portfolio with different development paths. In 2019, several companies launched platforms that provide simple access to basic health coverage by radically rethinking product design and customer engagement. Within weeks, the most successful of these platforms, Ant Financial’s Xiang Hu Bao, attracted tens of millions of users, peaking at more than 100 million participants. 3 3. georgina lee, “ant financial mutual aid platform xiang hu bao attracts 100 million users, boosts insurers’ sales by 60 percent in first year,” south china morning, 27 November 2019. but these programs are now winding down. the model encountered increasing regulatory requirements and adverse selection as young, healthy members left the program, increasing cost sharing by remaining participants.

thus, managing the delivery of an innovation portfolio requires organizations to develop distinct pathways for product development (figure 1). each pathway has a specific set of features:

derisking: This route competes with part of the core business and has a high level of ambiguity in the delivery route.
De-risking and acceleration: With an unknown path to solution, this approach uses technologies and capabilities that are new to the business and requires significant cross-business unit (BU) and change management.
Acceleration: This path has generally known solutions and previous use cases, but its cross-business, infrastructure, and delivery implications are limited.

one operator, for example, instituted different development paths for different types of products:

new product development: totally new product that the organization has never done before; it is not based on an existing product chassis.
existing product refresh: building on an existing product chassis, but developing substantial changes to product features, price and experience to create a new distinguishable product experience
simple modification of the current product: existing products that require very minor updates, such as changing the price or adding minor features that already exist in other products

creating a separate product development process for each segment allowed the operator to maintain its market share by modifying existing products while retaining capacity dedicated to new products that have the potential to unlock new markets or value groups.

Risk/return profiles are also used to determine product development paths. By analyzing the economics of each portfolio product and its chances of success, insurers can determine which products should be redesigned and which should be combined with other products. examples include incorporating annuities and other guaranteed income options into target date mutual funds.

3. design value propositions that incorporate new approaches to customer engagement and distribution

Innovative value propositions are not just about products; They integrate insurance protection and prevention, customer participation, and distribution and marketing. Historically, carriers have developed new products through actuarial innovation, often adding complexity that appeals to agents more than customers. Separately, they invest in the modernization and digitization of their distribution platforms and in the strengthening of subscription capacities and new businesses.

but carriers must incorporate all three components into their innovative value propositions to deliver a differentiated experience to customers and distribution partners (chart 2).

post covid-19, a changing customer landscape will continue to encourage operators to adapt products to offer a more personalized user experience. this means brainstorming based on unique customer needs and developing a deeper profile of customers to personalize offers and tailor messaging for even the smallest customer segments.

4. ensure that innovation is a continuous and integrated process

A common cause of failure is starting an innovation lab or team without fully integrating it into the business planning cycle. Innovation teams that are not fully integrated often lack clearly defined short-term metrics for success. They may not understand how their own success is critical to the success of the company as a whole and of specific lines of business, and they may lack clear links with other parts of the organization to ensure that the innovations they develop are implemented and spread. scale.

By facilitating ongoing dialogue between business and innovation teams, insurers can foster a common understanding of the market landscape, identify potential opportunities and realize their aspirations. while the exact cadence may vary for each carrier, it typically includes three main activities throughout the year:

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Assess: During this phase, the team conducts a quick sprint (approximately two to three weeks) to develop a clear understanding of the market within the strategic planning cycle and identify key issues that need to be addressed. resolve (such as customer issues). , dealers, or competitive opportunities). This research will inform the airline’s annual strategic planning and determine the focus areas for innovation throughout the year. in faster-paced markets, this process may take place more frequently.

The goal is to have a solid pipeline that is continually pruned and refilled, with an accumulation of ideas that puts constant and productive pressure on initiatives currently in development. This pressure helps leaders and teams avoid sunk cost biases and encourages them to weigh the relative value of investing in one current initiative versus starting another.
Aspire: In this phase, the team develops a vision of new product opportunities based on user testing with customers and distribution partners, establishing a portfolio of specific opportunities that can be prioritized and examined before moving to detailed product design.

Initially, a carrier may conduct an accelerated series of workshops to “collide” different ideas. but once the pipeline is established, it must be continually updated, and the backlog of ideas must be frequently evaluated and prioritized. Critically, premium and earnings growth from this portfolio of innovations is fed into the overall financial plan and individual executive responsibilities, with the understanding that not all ideas will work, but some must be successful for the organization and leaders to achieve their goals. goals in the coming years. We call this overall portfolio goal “the green box,” a quantification of how much revenue or profit growth a company’s innovation should provide in a given time period, translated into cascading key performance indicators (KPIs) and incentives. .
Design, Build, and Launch: At this point, the team has identified one or more innovation opportunities to bring to market and is ready to proceed with detailed concepts, design, and build of the product (including prices and insurance presentations). 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. these business cases can, in turn, inform a set of “deal-killing assumptions” that can be tested, refined, and linked to clear milestones and stage gates for each step of a given product’s development journey. For example, proof of concept may involve successful backtesting of a new subscription approach that results in increased expressed interest in purchasing the product among at least 20 percent of potential customers. These go-or-go decision points are critical to the team being able to quickly re-prioritize opportunities, as this phase is often the most costly and resource-intensive. By gaining a clear line of sight into what each innovation needs to succeed, and by testing assumptions early, teams and leaders gain early visibility into initiatives that are likely to succeed or fail so they can refocus efforts and resources. resources accordingly.

5. pursue more significant product innovations with an accelerator

Creating a diverse innovation portfolio and developing a differentiated value proposition require new, cross-functional ways of working. The right innovation operating model will depend on an insurer’s innovation priorities, from developing capabilities that improve core operations to seeking more disruptive opportunities outside of the core offering. external partnerships, strategic mergers and acquisitions, venture capital models, and traditional research and development can quickly open up opportunities to leverage innovative capabilities, products, and processes (figure 3).

But many companies can balance these approaches by driving an accelerator to pursue transformative innovation and other “exit” opportunities. Although an accelerator is a separate entity designed to drive product innovation, it still needs to be approached with clear KPIs and measurable success criteria, including defining the precise amount of innovation-driven growth that will help fill gaps in the company’s strategy. existing growth of the insurer. such a unit must also be carefully connected to the existing organization’s centers of strength (distribution, subscription, and data) so that it can take advantage of those scaled capabilities while maintaining the freedom and space to explore opportunities that are more ambitious and less secure.

For example, after nearly a decade without launching a truly new product, a North American life insurer installed an accelerator and quickly built a strong portfolio of innovation that leveraged the company’s digital, underwriting, and product capabilities. organization. the company designed and developed a fundamentally new value proposition for an emerging customer segment in less than a year.

Now is the time for insurers to increase the quality, pace and breadth of innovation. customer expectations are evolving, challenging carriers to deliver personalized, consumer-centric products. At the same time, the c-suite is recognizing the power of innovation to accelerate the pace of change. For innovation to deliver long-term value, it must extend beyond risks and product offerings and become embedded in an operator’s DNA through carefully considered priorities, mutually beneficial partnerships, and fully leveraged resources.

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