We are leaving the valley of digital uncertainty. We’re seeing leading organizations today harness digital and analytics to drive real impact. According to McKinsey’s Digital Quotient, which measures an organization’s performance across four key dimensions of digital maturity (strategy, culture, organization, and capabilities), the insurance industry is well on its way toward effecting tangible change with digital technologies. Indeed, the insurance industry outpaces the global average in terms of digital maturity and outranks several other industries, such as automotive and banking, in the race to create real impact (exhibit).
Of particular note is the insurance industry’s leadership in digital strategy score, which assesses the cohesiveness of a company’s shared digital vision and its short- and long-term goals to meet digital business aspirations. This is exciting but there is much to be done, especially when it comes to rethinking the insurance business model and institutionalizing digital skills and capabilities.
For me, one of the best ways to track the insurance industry’s digital transformation is through our annual Digital Insurance Forum, where digital experts and leaders meet to discuss the state of the industry and road ahead. Two years ago, the industry was far from where it is today. Our Digital Insurance Forum theme in 2016 was “Digital Insurance—Reimagining Our Industry,” and we talked about our digital future as a visionary—but fuzzy—picture. A year later, our discussions focused on the lack of visible impact. In many cases, despite all efforts, there were pilot applications but no fundamental changes. This reality informed our 2017 theme, “Digital Disruption—Cutting through the Noise,” in which we looked at defining value beyond the hype.
Today, the industry is in a position in which executives can start the journey toward measurable impact.
At our forum this year, we discussed five imperatives that will play a central role in rethinking existing business models. In what follows, we will give some insights into each of these moves.
1. Invest: Make big bets
The biggest question on the journey to seeing results is typically around how bold companies should be in their transformation. Based on extensive research across different industries, we have observed that “real hockey sticks”—sharp growth after a short-term sag—do occur. While most companies we observed did not change their relative position over time, about 20 percent of companies significantly outperformed the rest, achieving four times more absolute growth than competitors—earning them a reputation as “value creators.” What distinguishes these companies is their level of investment. Value creators tend to overinvest significantly in big bets during the early phases, often accepting negative economic profit for one to five years, while the rest of the pack optimizes for short-term profitability.
2. Track: Watch digital key performance indicators
Value creators don’t just invest significantly in big bets; they also maintain a tight grip on a relevant set of key performance indicators (KPIs). Players such as DBS Bank (formerly Development Bank of Singapore) identified the importance of doubling down on digital processes early on and adapted its KPI tracking accordingly to measure and guide continuous impact. Measuring the right KPIs and linking them back to their operational influencers is crucial.
3. Focus: Implement a stop agenda
Many paths lead toward a digital transformation, but not all will be successful—and pursuing them all at the same time will be even less likely to succeed. An important component of a structured transformation approach is deciding not only where to invest but also where not to invest further. Executives must have a "stop agenda" that reassigns resources and attention away from poor performers to key aspects of the digital transformation. This typically includes cleaning up project portfolios, reducing business complexity (such as the number of sales partnerships), and streamlining governance.
4. Integrate: Go beyond digital
Transformation approaches must be integrated to achieve an at-scale business-model change. A common narrative should support all digital efforts to drive integration across customer experience, journey digitization, cultural change, use cases, and lean management. To rethink the business model, one principal approach needs to combine the (complementary) elements and adapt them to the overall strategy and operational processes.
5. Lead: Move from chief digital officer to chief transformation officer
Around 2012, many companies created the role of chief digital officer (CDO). Now we see a maturing of governance along with digital transformations, and companies are moving from a CDO toward a chief transformation officer (CTO)—a digital transformer who embodies and translates technological change into the broader strategy to prepare an organization for the digital age. A good CTO will focus on key value drivers in advancing a company’s digital strategy and should have the full support of the board.
There is no shortcut to digital. A digital transformation won’t progress in a giant leap or through an abrupt change. It takes time and commitment. But for those who act decisively and implement these five imperatives, digital transformation can become a profitable reality.
I would like to thank all those who could join us at the Digital Insurance Forum in Berlin this year. We had a great group of more than 80 attendees, from more than 12 countries and 60 companies, including a broad mix of traditional insurers, fintechs, and venture capitalists.
Johannes-Tobias Lorenz is a senior partner in McKinsey’s Düsseldorf office.