Insurance industry transformation

Insurance companies are navigating a period of extreme uncertainty that requires them to negotiate an unprecedented set of challenges at the same time. As well as sparking much higher inflation, multiple price shocks, are increasing the odds of recession across the major developed economies. This is especially challenging for insurance companies because it follows a long period of relative economic stability. No one who entered the industry within the past 15 years has experienced an inflationary environment like the one that exists today. The sector’s lack of institutional knowledge across the ranks of middle management is therefore acute.

Insurers therefore face a reckoning. It’s time for a different approach to the levers that insurers typically pull to drive transformation – capital, costs, growth and distribution, ESG, technology, and people. In this report, we set out the benefits of each lever, as well as the difficulties companies have in achieving them. We also identify the lessons we have learned from working with clients as to how the most successfully managed transformation programs organize, deliver, and manage the change. Armed with this insight, insurers can start to deliver transformation at the scale needed in a time of such deep uncertainty.

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Effective transformation levers for insurers

Against the current background of huge macro volatility and industry-specific pressures, firms must find new ways to improve their execution and use the benefits of transformation programs to position themselves for increased growth and profitability. In a series of detailed deep dive articles, we set out the range of levers that insurers reach for to effect transformation.

Costs

Insurers’ underwriting profitability has been meagre to non-existent over the past 15 years, forcing them to rely on investment returns to bridge the gap. The current stresses in financial markets make this situation increasingly unstable. However, most projects fail to focus on a small number of high-impact projects, make half-hearted attempts to adopt Agile, have too few project champions outside the C-suite, and lack relevant metrics.
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Distribution

Distribution is an increasingly complex issue for insurers and one that consumes a growing share of premium income. This trend is likely to intensify thanks to high inflation and a probable European recession that will reduce pricing power. To optimize their distribution, improve customer retention, and avoid margin erosion, insurers need to decide which customer groups to focus on and customize their proposition across channels.
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Capital

The balancing act between risk, return, and capital is becoming more complex. A growing number of financial perspectives – accounting standards, tax rules, and internal priorities – must be understood, managed, and disclosed, while stakeholders are demanding greater transparency. The benefits of effective balance-sheet management are felt both in the short term and in the longer term, often by managing the risks of increased allocations to higher-yielding but illiquid assets.
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People

Widespread desire for hybrid working following the pandemic represents a major challenge for insurers: So how should insurers balance operational effectiveness and compliance with the need to meet employees’ aspirations for more flexible conditions? Achieving the right balance will support efforts to evolve an insurer’s operating model, deliver the capabilities that model demands, and increase employee satisfaction and productivity.
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Technology

Customer needs and expectations are changing, influenced by people’s experiences of using digital services in other sectors, while new entrants have stolen a march on established players by launching innovative digital insurance propositions. However, established insurers are hampered in their transformation efforts by rather monolithic, legacy technology systems that are more difficult and expensive to maintain and upgrade.
ESG

The benefits of fully embedding ESG are broad. They include opportunities for premium growth and new revenue streams, cost and scale benefits, improved risk selection and capital efficiency, and a stronger employer brand. Benefits follow costs in this area and success requires active engagement across a wide range of ESG-related issues.

Transforming transformations: what needs to change?

To execute transformation successfully in an environment with so many variables, insurers would be well advised not to rely any longer on approaches that have required heavy investment, but produced such indifferent results. Instead, they should fundamentally rethink the way they approach transformation. It is more important than ever that transformation programs deliver the promised benefits. To ensure that happens, they need to look again at how they manage these programs and learn from organizations that have achieved success.

We have worked with several insurers in supporting their most complex transformation programs. The drivers for change may be varied, but in our experience, successful transformation programs share common features that companies can use as a framework to help them organize, deliver, and manage change:

1
How to organize: They structure project teams to focus on outcomes, adopt effective governance models, and embed technology fully in the process
2
How to deliver: They build in accountability and devolve decision-making, and take a pragmatic approach to delivery models by deciding when to deploy capabilities such as agile
3
How to transform: They aim to build lasting transformation capabilities across the organization, factor in the additional complexity created by hybrid work models, and rethink how information is relayed to decision-makers

Insurance companies should assess the maturity of their organization against these attributes to identify which areas need to be addressed first. The transformation work can then begin, typically happening in four phases:

1. First, align as a team…

The first step is to unite around a single vision that encompasses business strategy, the company’s operating model, its technology, and people. Then assess readiness across the three key areas – organize, deliver, transform – and identify gaps to be tackled first, as well as informal program leaders.

2. Then, design and plan…

The aim should be to take stock of existing initiatives, integrate coherently with them, and rapidly design what the company needs to build, with stages defined in terms of outcomes for the organization. This is also the point at which to set up the project governance and leadership, and to start identifying quick wins.

3. Do not neglect to set up the change…

At this stage the company must plan how it intends to take colleagues, customers, and stakeholder through the change process. The phasing of the project must be agreed at cohort level, informal change leaders must be identified and prepared, and a supportsquad system should be put in place for complex changes. Delivery of quick wins should begin.

4. Deliver effectively...

Execute the project plan following the pre-defined steps agreed in the design and plan stage. The aim should be to deliver the enhanced capabilities the organization is targeting and transition them to BAU, but also to build in leadership and change capability with teams as a lasting skillset.

This approach offers a way out of the unproductive and debilitating cycle of constant change that many insurance companies find themselves in. Importantly, by using our blueprint for transforming transformations, organizations will be able to achieve tangible progress fast, identifying quick wins that will combat the danger of “transformation fatigue.”