Digital Insurance Strategies: Strategic Planning in the “New Normal” Digital Era of Insurance

In our Strategic Priorities 2020 report, based on pre-COVID insurer survey results, we noted that tremendous changes are still on the horizon for insurance, with new initiatives blurring traditional insurance industry assumptions and boundaries giving way to new customers, technology, processes, products and business models.  These new initiatives and responses to change highlighted in our research showed an ever-widening gap that is redefining a new era of industry Leaders, who are outpacing  Laggards and Followers with 62% and 21% gaps, respectively, projected over the next three years – of which one year is now past. 

Then COVID hit – hard and fast.  And our strategies, priorities and plans all took on a new view, a new focus and in many cases a new urgency – through the eyes of digital engagement, for our customers, employees and channels.   The good news was that many of the initiatives were still relevant.  Many initiatives needed to accelerate because originally defined market assumptions and strategies substantially changed … forever. 

Nearly 7 months later, with a realization that we will never go back to “normal”, insurance leaders have a unique opportunity to re-envision their future of insurance.  Chief Strategy Officers, Chief Innovation Officers and Chief Customer Experience Officers will be crucial to defining their strategies and priorities for 2021, because the planning needs to go well beyond traditional business planning to consider a two-pronged approach: first, operations and second, innovation – a two-speed strategy to power insurers’ survival and growth strategies.

The State of the Insurance Industry

Why the focus on survival and growth?  The state of the industry, in light of the acceleration of change due to COVID, tells the story. 

Pre-COVID, the outlook for the P&C insurance industry was stable, with on average 2.4% growth and combined ratios just under 100 at 98.9%.  However, ripples of change that have grown stronger are challenging this mature yet fragmented market.  From converging macro trends, a changing risk landscape, a continued flow of capital and new competitors, change and digital transformation became the constant.  In fact, InsurTech investment continued to reach new highs with $6.37B in 2019, introducing new technologies, business models, channels and products that would help transform the industry and meet the needs and expectations of a changing customer.  COVID has accelerated the digital transformation of the insurance industry.

Digital transformation needed to be much more than putting a portal on the front-end.  Fundamentally, challenges and concerns with the insurance business operational model were exposed – particularly as compared to other industries – highlighting the need to transform and improve.  Some key stats highlighting this include:

• Average net profit margin for insurers is 2.7%[i]
• Average time to deliver a new product to market is 7 months[ii]
• Average net promoter score for property insurance is 35% and 41% for auto insurance[iii]
• It is estimated that 70% of catastrophic losses are uninsured amounting to a $1.3 trillion coverage gap[iv]
• Distribution and transactional costs as a percentage of premium averaged 30-40%[v]
• Swiss Re noted that nearly all lines of business are projected to be negatively impacted, creating growth challenges for insurers.[vi] 
• 50% of the insurance workforce is expected to retire the next 10-15 years[vii]
• Only 6% of P&C insurers were rated as leaders and only 5% as prominent in the top two Innovation Assessment rankings by AM Best in March 2020.[viii]

The shifting market and competitive landscape, low growth, narrow margins, high operating costs, declining customer satisfaction and slow speed to market for new products place many insurers further behind those leaders who are outpacing them, making their business increasingly unsustainable for the long-term.  In fact, the AM Best Innovation Assessment in March 2020 noted that there is a correlation between innovation and operations.  Those insurers with the best operating performance have better innovation scores and those with the highest overall financial strength ratings have higher levels of innovation. 

Industry Digital Transformation is Crucial

The industry had already begun a digital transformation that was accelerating due to a combination of factors – customer expectations, technology and shifting market boundaries.  Today, the COVID pandemic and its impact to the economy is affecting businesses, employees and daily life, and has exposed the resiliency (or lack thereof) of every industry and the businesses within them to rethink their strategies and plans. With P&C growth correlated closely with GDP, these implications directly and indirectly influence insurance.

The June 2019 McKinsey article, “How to win in insurance:  Climbing the power curve,”[ix] noted that an economic profit gap has been widening between the industries they have tracked since 2010, highlighting that those with future-ready, digital business models were at the top. The top six industries, including software, personal products, technology hardware, media, semi-conductors and pharmaceuticals, outpaced the middle eleven industries and the bottom six industries in terms of economic profit.  Insurance was in the bottom six industries.  And COVID is accelerating the trends that existed pre-crisis and widening the gap between the top and bottom, placing insurance farther behind industries that are looking to play in the insurance space. 

What is really astounding from the McKinsey research is that the bottom 20% destroyed a staggering $976M per company per year, the middle 60% treaded water by producing only an average of $26M, and the top 20% surged with an annual average of $764M in economic profit. This is consistent with the growing Knowing-Doing Gap we identified and have tracked in our Strategic Priorities research that has shown the Leaders to be outpacing Laggards by 41% this last year and Followers by 15%, placing both Laggards and Followers at future risk.    

Why the gap? 

Those industries at the top are proving more resilient versus those at the bottom because of their digital business models that contrast with traditional business models, such as streaming media versus traditional satellite; at-home cooking versus eating out; and home delivery vs. in-store buying.  Within insurance, we have seen the growth in online buying, particularly for many of the new “digital first” startups such as Lemonade, Root, Ladder Life, and others.  These and other companies have resilient, future-ready digital business models positioned to ride the trends and crisis – widening the gap for competitive advantage and positioning them as leaders. 

So how do companies climb the power curve and position themselves as leaders? 

First, you need to know where you are in the Power Curve and Knowing-Doing Gaps as compared to those who are leading the digital transformation with resilient digital business models.  Second, you must prepare and prioritize plans that are crucial to moving you forward. And third, you must execute on these priorities with a sense of focus and urgency. 

This is why strategic planning for 2021 is more important than ever … and the traditional business planning approach may not suffice in this time of dramatic change and pressure. 

Taking action around strategy is so crucial, particularly with the pace of change we continue to experience.  As the McKinsey article points out, strategy is about playing the odds, increasing the amount of “doing,” even if some plans fail, to ensure overall success.   And this is why the two-speed strategy is so important – finding the right balance between optimizing today’s business and boldly creating tomorrow’s business.  

No Turning Back – Making the Bold Moves

COVID has forever changed how our customers, channels and employees engage — from quoting and buying to submitting claims.  Even as businesses and the economy continue to reopen and recover over the coming months or even years, strategy leaders expect a large part of our business interactions will remain virtual, intensifying a new level of competition around the customer experience.   

There is no turning back to “normal”.  Bold moves that embrace the “new normal” will define the next generation of leaders in the insurance industry. 

What this means is that each company needs to rethink how they prioritize and allocate resources – people and capital.  Will you keep things relatively the same, and allocate the same amount to each business unit to keep it operational, and focus on some enhancements for business process and products?  Or will you reallocate some of those resources to make bold changes for the future? 

These strategic decisions made for 2021 will influence and drive if and how the organization is future-ready and sustainable for the long-term.  COVID has given the industry an opportunity to wipe our strategic slate clean, leverage the lessons learned and reallocate the resources to redefine the business and operating models for the future of insurance.  Now is the time for Leaders to take decisive action, not shy away from the tough decisions.  Because we are never going back to pre-COVID.  Nor will there ever be the “right” time to make the bold move.   

Today’s changes require insurers to gain clarity on how to succeed in the future of insurance.  Each company will find their own path. Those that are bold will decide to invest in their future, using capital that normally would be invested for other purposes.  These bold moves to optimize today’s business and create the future business substantially increase an insurer’s potential for success.  Future market leadership and success will be defined by reallocating, reprioritizing and accelerating your 2021 strategies and plans by leveraging a two-speed strategy. 

As the great philosopher Socrates stated, “The secret of change is to focus all of your energy, not on fighting the old, but on building the new.”

What will your future be?  How do your strategies align to what leaders are doing?  What specific moves can you rapidly move from knowing to doing?

Your answers will determine your readiness in a new decade and the future of insurance. 

What is your bold move?

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[i] Hall, Mary, “What Are Insurance Sector Companies Usual Profit Margins?” Investopedia, April 27, 2020, https://www.investopedia.com/ask/answers/052515/what-usual-profit-margin-company-insurance-sector.asp#:~:text=The%20insurance%20sector’s%20net%20profit,casualty%20insurance%20companies%20averaged%202.7%25

[ii] Josefowicz, Matthew, “Speed to Market for Property/Casualty Insurers,” Novarica, March 2019

[iii] “Average Net Promoter Score (NPS) of selected insurance branches in the United States in 2020,” Statista, https://www.statista.com/statistics/1033788/nps-insurance-companies-usa/#:~:text=NPS%20of%20selected%20insurance%20companies%20in%20the%20U.S.%202020&text=NPS%20demonstrates%20policyholder%20loyalty%20and,of%2041%20percent%20in%202020

[iv] Jarzabkowski, P., K. Chalkias, E. Cacciatori, R. Bednarek, (2018). Between State and Market: Protection Gap Entities and Catastrophic Risk. Cass Business School, City, University of London, 26th June 2018

[v] “NextWave Insurance: personal lines and small commercial How insurers must change in a fast-moving world,” Ernst & Young LLP, 2019

[vi] Staib, Daniel, et al., “sigma 4/2020: World insurance: riding out the 2020 pandemic storm,” Swiss Re Institute, July 9, 2020

[vii] “Navigating the talent crisis,” Insurance Business America, June 28, 2018, https://www.insurancebusinessmag.com/us/opinion/navigating-the-talent-crisis-104286.aspx

[viii] “Best’s Special Report: The Advent of Innovation,” AM Best, March 10, 2020,

[ix] DiAmico, Alex, et al., “How to win in insurance: Climbing the power curve,” McKinsey & Company, June 18, 2019, https://www.mckinsey.com/industries/financial-services/our-insights/how-to-win-in-insurance-climbing-the-power-curve