P&C insurers are using innovation to build resilience in 2020
Digital distribution is no longer just a differentiator. It's a matter of survival for insurance carriers.
The COVID-19 pandemic has disrupted the P&C operating model and added complications to an already quickly-evolving risk landscape. The pandemic also has accelerated the shift to digital channels: physical distancing measures mean face-to-face interactions between customers and insurers are not feasible in the near term. That trend has intensified the need for insurers to incorporate data and advanced analytics at scale and find new ways to connect with customers digitally.
Increased access to data, analytics and digital technologies was already changing the game in several areas of the insurance value chain, such as underwriting and pricing. But many P&C carriers have yet to tap the full potential of those tools and technologies across all areas of their business models.
In part, this is because insurance carriers have fared well enough with traditional methods and were slow to make necessary investments. The predominance of legacy IT systems also means many insurance companies must modernize their infrastructure to accommodate digital interface requirements and increasing data volumes expected via digital distribution — a costly and complex endeavor.
In the current pandemic, however, P&C carriers must speed up their digital adoption and take action to develop capabilities and meet increasing customer demand for immediacy and continuity.
Digital distribution, when integrated effectively with established and resilient traditional channels, is no longer just a differentiator but a matter of survival. Ecosystem distribution, for instance, is already growing and disrupting distribution models. It is estimated that “more than 30% of global personal lines’ P&C premiums will be distributed via ecosystems by 2030, particularly via products and markets where ecosystem orchestrators and distributors own the last mile and the brand.”
Agents and insurance companies will not disappear, but they must now work together to build the right digital channels and capabilities to keep pace with the distribution disruption.
The message for agents and insurers
Even before the pandemic, the agent model in P&C was facing challenges.
According to a McKinsey analysis of personal lines, from 2009 to 2017, direct distribution significantly increased its share in U.S. personal auto, with a moderate increase in penetration among homeowners. At the same time, the independent agent channel has held onto its market share in personal auto and significantly grown in homeowners. In contrast, the captive channel lost seven to nine percentage points of market share in both segments. In Europe and developing Asia–Pacific markets, price comparison websites are growing quickly and have become the main distribution channel in several countries, including Italy and the United Kingdom. A recent survey of European consumers found that 54% would prefer to purchase life insurance online compared with only 38% six months ago, according to a McKinsey survey of more than 3,000 consumers in three European markets.
Now, COVID-19 is further testing the traditional model. According to a recent McKinsey survey of U.S. agents conducted in May 2020, less than 5% of agents had any in-person conversations with customers, compared with a January 2020 survey finding where nearly 70% of life insurance agents’ ongoing customer conversations were conducted in person. These findings highlight the urgent need for digital and remote interaction models and tools that can facilitate customer, agent and carrier communications as well as digital distribution.
Insurers will need to integrate digital solutions and tools in their daily operations while also making those tools available to agents and brokers. In the medium to long term, we anticipate an accelerated shift to toward omnichannel, with more digital interaction between agents and customers despite the fact that new business is slowing in the short term.
Three imperatives for distribution
Carriers that prioritize digital distribution and data and analytics now can increase their resilience and help agents secure their future. To support the move toward digital, P&C carriers need to focus on three areas:
- Invest in technology or develop partnerships;
- Optimizing distribution of products to meet digital demand; and
- Supporting digital capabilities and the subsequent agent training.
Here’s a closer look that these three action items…
Invest in partnerships to acquire data and support sales.
Insurers have traditionally spent more than 50% of new premiums on customer acquisition via agent commission and overrides. Now, to lessen the financial burden, more insurers are exploring partnerships with digital players as an effective way to reduce the cost of customer acquisition and find ways to distribute new products. Insurers will need to gain privileged access to user behavior data, which will require cultivating the right partnerships and determining what data is valuable enough to pay for.
Indeed, amid COVID-19, there is even more pressure on insurers to make sales, which means this is a good time to think about insurance marketing organizations (IMOs) or affinity relationships. Expanding distribution partnerships could also help sales teams provide products to more customers in need while maintaining sales volume in a time of crisis.
This approach becomes increasingly important as a virtual agent model increases the pressure on agents to add value.
Optimize distribution of products to meet digital demand.
Carriers will increasingly face competition — at least by measure of distribution — from multiple industries that have voice-or remote-control devices used in homes (such as telecom boxes, smart-utility meters, and voice assistants). However, the contextual data from these devices (accessed via strategic partnerships) can reveal market opportunities and potentially help carriers develop new products and effectively distribute them.
For instance, we know that auto insurance coverage is changing due to the prevalence of ride-hailing companies and reduced vehicle ownership. As insurers adapt their policies and products, they will need to meet the current needs of the market and customers while also being simple enough to purchase via digital channels.
Build digital capabilities and acquire the right talent.
Many insurers and agents do not have the technical skills required to interact productively with customers via direct channels and meet their evolving needs and preferences, so they will need to approach capabilities and skill-building strategically.
Carriers can promote digital channels across all segments of the value chain, from equipping agents with remote capabilities to supporting customer engagement through digital payments, submissions and claims. For instance, carriers might invest in advanced analytics tools that can help agents better distinguish the right moment to facilitate conversations with customers or potential customers about a specific insurance offering based on their previous responses and behaviors.
Organizations could also focus on hiring agents and employees that have the appropriate technical skills (or can develop them) to interact with customers on their terms via digital channels. These capabilities are important because they can help agents and insurers build strong customer relationships in the long term.
The coronavirus pandemic has only accelerated customers’ desire to interact with carriers and agents via digital channels. Even once physical distancing measures are lifted, the increased use of digital interactions is likely to endure. The P&C industry now faces an even greater imperative to improve digital distribution capabilities, ultimately creating a better customer experience and retaining top agents.
Erwann Michel-Kerjan (Erwann_Michel-Kerjan@mckinsey.com) is a partner in the Insurance Practice of McKinsey & Company. These opinions are his own.
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