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McKinsey on

Business Technology
Number 22, 2 14 26
Spring 2011 Nine questions An IT growth strategy How IT is managing
technology leaders for insurers new demands:
should be asking McKinsey Global
themselves about Survey results

6 24
The rise of the A data center
networked enterprise: goes lean
Web 2.0 finds its
2 Feature article

Lloyd Miller
An IT growth strategy for insurers

Emerging technologies could spark product innovations that change the way the industry
serves customers. But insurers must match technologies with strategic goals.

Stefano Martinotti, As the insurance industry emerges from recession, financial and risk-pool management to M&A but
Oliver Schein, it faces a sea of challenges. The economic slow- also develop innovative, growth-oriented products
and Fabio Torrisi
down has intensified price competition, hitting that can secure the loyalty of existing customers
margins at a time when market turmoil has and attract new ones. Yet in the face of this challenge,
depressed revenue streams from many insurance insurers may be neglecting an important tool:
holdings. Similar difficulties in adjacent technology. Across a number of industries, rapidly
financial sectors have brought new competitors— changing technologies have been changing the
for instance, joint ventures between banks and postrecession competitive dynamic. Web and com-
financial advisers—into the insurers’ traditional munications technologies are spurring ways of
terrain. Structural changes continue to shift creating products and reaching customers, as well
global revenue pools to emerging markets, while as opening doors to more efficient and effective
customer behavior is shifting as more trans- ways of delivering products and services. They are
actions move online. also giving rise to entirely new business models.

In this environment, the industry must not only For two reasons, some insurers may find crafting a
focus its strategic attention on areas from better new approach to technology difficult. One is that

Emerging technologies
will create business model
disruptions as well
as new opportunities
for insurers.

Digital technologies will

allow the industry to they often see IT primarily as a cost center prone We believe that business
create highly customized to overruns and a megaproject mentality; the and IT leaders together should begin examining
products, develop industry spends 25 percent of its operating budget technology at a level that matches their strategic
new distribution challenges,
on IT, and executives often lament poor returns goals and appetite for change.
and bring down
costs with automated on the investment. Second, the industry is built on
service delivery. high levels of trust in product offerings and
The very nature of risk often on personal relationships between company Where technology matters
sharing could change as representatives and customers. As a result,
social technologies insurers fear to experiment with new technologies In four areas we have identified, technology
allow the formation of
that could damage these fundamentals. could improve the operational performance of
affinity groups for
insurance purchases. insurers, bolster their growth prospects, and
With costs and competition rising and growth perhaps even change current business models. The
A strategic approach to IT
will require a clear view facing limits, this is a good time for insurers to industry players in the following examples
of technology goals, close reexamine their IT options. Rapidly evolving are technology leaders. Most insurers still have
collaboration between technologies will probably change the industry’s a sizable window of time to assess which tech-
business and IT, and a more
competitive patterns. Forward-looking nology path makes sense for them.
robust talent base.
companies are already taking steps to gain first-
mover advantages through the intensive use New interactive channels
of technology, which could facilitate new types of Interactions with customers often rely on personal
interactions with customers and company contacts and face-to-face meetings. But most
agents. In a growing number of areas, for example, consumers—indeed, most participants along the
IT may allow insurers to automate processes industry’s value chain—are experienced users
and cut costs without damaging service delivery. of the Web, “smart” devices, and social networks.
Customized products that rely on data and Other industries, notably airlines, retailing,
better risk analysis could provide new avenues for and telecommunications, have swiftly adopted
growth-boosting innovations. Finally, the such technologies to multiply internal and
combined effects of technology could change the external interactions. Today, some insurers are
nature of insured risk, leading to market exploring ways to link customers, agents,
disruptions that insurers will need to understand. brokers, and back offices through these
new channels.
None of this is to say that the industry should
pursue technology at the expense of core strengths, Channel choice. For several years, insurers have
like empathy, service, and trust. Technology can- been experimenting with new delivery channels for
not replace the trust-based relationship between insurance purchases. South African Metropolitan
insurers and their clients but it can enhance it— Life, for example, has introduced a pilot life insur-
offering better ways to understand and satisfy cus- ance plan named Cover2Go, which allows new
tomer needs. (For more, see the video “Technology customers to contract for short-term life insurance
can’t replace trust: An interview with Generali simply by sending an SMS.1 Similar delivery
1 Short message service. Deutschland’s COO,” in this article, on modes are being explored in Asia, where the clients
4 McKinsey on Business Technology Number 22, Spring 2011

of AXA Thailand, for instance, can renew their property damage as well as liability. Customers,
motor policies via text messaging—and are meanwhile, are slotted into fixed risk categories.
encouraged to do so by a small gift as an incentive.
Although these channel choices might not be Some insurers are now using their huge volumes
applicable to all situations in all regions or policy of data on the needs, preferences, incomes,
types, they demonstrate the possibilities opened and lifestyles of consumers to roll out “mass-
up by new technologies. customized” policies, which combine many
predefined options that adapt products to the
Convenient, cheap, ad hoc insurance. We know needs of individuals. (Automobile manu-
of one insurer that is drafting plans for low- facturers have done so successfully for some
cost, one-day ski insurance policies. The purchase time.) The advantages are clear: customers
process would be extremely simple: via cell get a bespoke product, while insurers apply the
phones, customers would send an instant message logic of mass production to lower their costs. One
with a photo of an ad to a number displayed large insurer we know of plans to build
on it. Policy charges would then be added to their continental-scale back-office factories with IT
phone bills. systems based on algorithms (also known
as “rules engines”) that can adapt policies both to
Information sharing. In a Facebook training customers’ preferences and to specific market
initiative, 17,000 State Farm agents have created regulations. The idea is to combine the cost benefits
groups of “friends” to discuss new products of extreme scale with the flexibility needed
or trade experiences about customer service and to accommodate a wide range of products
ways to handle claims more effectively. and services.
German insurer Generali Deutschland is using
a social network to share information among On another front, auto insurers are implementing
its brokers. dynamic coverage based on driving patterns
and behavior. One leading carrier in the United
Partner networks. The vehicle repair company States, for example, uses a tracking device to
Motorcare has created a wide-ranging digital net- monitor drivers and applies discounts to policies as
work that connects insurers to its 800 garages a reward for safe driving. Ultimately, sensors
in Germany. It has processed some 140,000 claims installed in customers’ vehicles could track other
and reduced repair costs by up to 20 percent. kinds of higher-risk activities (for instance,
parking in high-theft areas). As technologies
Product innovation: Flexible, customized evolve, some of these features, delivered by GPS in
policies mobile devices, may soon be commonplace.
Insurance products most often come in Similarly, health insurers are studying ways to
standard packages with only a limited range of track their customers’ activities, such as diet
consumer options, such as the dollar amount and exercise, to fashion insurance packages that
of coverage and a few other basics—for instance, reward healthy behavior with lower rates.
auto insurance that covers theft and ancillary
An IT growth strategy for insurers 5

Elsewhere, insurers are encouraging customers players (including AXA, the UK-based company
to help cocreate new products. Allstate Insurance, More Than, and Zurich) have already taken some
for instance, has set up social-network forums to initial steps along this path: iPhone applications
facilitate interactions among motorcycle customers that clients can use in car accidents or other
and enthusiasts. It solicits suggestions and uses emergencies. Policy-holders get in touch with the
them to inspire new products and services. insurer’s emergency assistance center, which uses
GPS to note the accident’s location. Customers can
Highly optimized, automated service delivery use their phones not only to highlight damaged
The industry relies on labor-intensive, often paper- areas by tapping images of their cars on their
based processes for issuing and administering iPhone’s screen but also to send the center photos
policies and for managing claims. IT can improve of the accident to expedite claims handling.
productivity by reducing the number of handoffs
among agents, adjustors, and payment staff and by The changing nature of insured risk
automating straightforward payment decisions Leaders should know how technology could
through the use of expert software. New claims- lead, over the longer term, to more disruptive
management systems, for example, can auto- change. Risk sharing, commonly known as
matically divide claims into clusters based on their mutualization, lies at the heart of the insurance
complexity, their estimated value, and the risk business model. A growing ability to crunch
of fraud. Some claims are paid automatically, data on customers will allow companies to seg-
others assigned to the appropriate adjustor. This ment them and risk pools much more finely.
approach improves cycle times, increases Competitors with such strengths could offer policies
customer satisfaction, and reduces revenue leakage at favorable rates to consumers with more
from fraud. profitable risk profiles.

One large auto insurer has launched a prototype Social networks play a new role too. Beyond their
insurance project that combines a wide range of value as tools, they could spawn novel, self-
technologies. Deceleration sensors and GPS devices defining markets. Insurers should monitor the way
in vehicles can detect a collision, identify its affinity groups on Facebook or other social
location, and automatically notify the insurer. networks could, for example, coalesce into
A tow truck is dispatched to the accident scene “minimutuals” that contract for coverage directly
while additional sensor data help evaluate with reinsurers, bypassing traditional insurers.
the damage remotely. Software programs While still a novelty for the insurance industry, the
determine the payments and automatically idea of forming spontaneous, ad hoc groups of
dispatch them, bypassing a range of adjustors and Internet users to negotiate preferential rates with
clerical staff. The insurer forecasts a 30 to 40 providers of goods and services isn’t new: Groupon,
percent reduction in process costs thanks to this which specializes in precisely this type of deal
automated process. An increasing number of cutting, has offered online discounts since 2008.
6 McKinsey on Business Technology Number 22, Spring 2011

Capturing opportunities: solution that delivers acceptable reliability rather

A strategic approach than paying out large sums for something
more ambitious.
Technology is not a panacea for the industry’s
current challenges. Insurers face broadly differing Fast followers pick up selected technologies at
competitive environments, and individual a relatively early stage to gain competitive
companies have different capacities for absorbing advantage—but only once it’s clear they add value.
and deploying new technology. Nonetheless, Such companies are rarely early adopters;
insurers must develop a greater awareness of how they wait for others to prove that a concept
to apply technologies meaningfully. Essentially, works and then rely on execution muscle to adopt it
they must set a technology-adoption target aligned quickly and, where possible, to use it more
with their strategic goals, forge closer ties successfully than first movers do. The key for fast
between IT and sometimes skeptical business followers is to create an “observation deck”
leaders, and develop a cadre of IT leaders so that the organization can spot potentially
who can meet the new challenges. Our experience disruptive technologies early on.
suggests that insurers could usefully consider
the following approach. Consider the UK wealth-management operations
of a major insurer. In this market segment,
Develop a clear picture of the target an advanced advisory platform for high-net-worth
technology state clients is a differentiating feature. The insurer
A key first step is to determine which strategic IT wasn’t the first company to develop such a platform
posture best fits the organization’s business but was very alert to those launched by the
strategy. In our experience, most companies fit competition and to the features that made them
into one of three categories. more (or less) popular with customers, and
thus affected market share. The organization
Opportunistic companies generally adopt IT learned from others quite effectively, and
innovations for defensive reasons, and only when its advisory platform, once launched, rapidly
technologies are mature and well established became one of the best on the market.
in the industry. This strategy best suits insurers
with highly specialized businesses (for Digital insurers are aggressive, trendsetting,
instance, maritime insurance), where success visionary companies—the “Apples” of the insurance
depends more on expert knowledge than on industry—that have a well-developed capacity for
technology. Companies competing in markets or IT innovation and believe that technology is the key
countries less open to competition also fit to gaining and sustaining competitive advantage.
the opportunistic profile. Since such organizations Companies such as Admiral in the United Kingdom
see technological innovation as something of tend to be “greenfield” attackers, actively leveraging
a necessary evil, their chief concern for IT invest- technology to access new markets and offer new
ments is efficiency—adopting the lowest-cost services. Another leading carrier, in the United
An IT growth strategy for insurers 7

States, allows prospective customers to tailor their the satisfaction of internal customers. Funding for
auto coverage through an interactive application “change the company” IT projects (as opposed
on the insurer’s Web site. to the usual “run the company” ones) has grown to
60 percent of all IT funding, from 40 percent,
Increasingly, we find that units within established while IT’s total cost has remained constant in
major players are adopting this posture. The the short term and is expected to decrease
UK-based pay-as-you-drive car insurer Coverbox, in the long term.
for instance, offers discounted motor insurance
to drivers who install a tracking system in Strengthen IT talent
their vehicles. A strategic road map and collaborative leadership
are essentials, of course. But they will be
Align IT with the business meaningless if an organization can’t execute very
No matter which of these strategic postures an well on both the IT and the business sides.
insurer chooses, successfully deploying innovative That means efficient processes and strong talent.
technologies requires the IT organization and We see encouraging signs, within the industry,
business unit leaders to align closely. While this of recent efforts to improve IT management and
may seem self-evident, the interactions of of the more and more frequent use of “lean”
business executives with IT are often patchy, methods. Many insurers are therefore benefiting
tending to focus narrowly on efficiency or from faster times to market, while productivity
localized investment, not on defining a coherent, improvements in the 15 to 30 percent range
company-wide IT portfolio. It’s not surprising are common. The business and IT skills needed to
that the industry’s failed product launches often implement IT innovations are in short supply,
result from inadequate or even nonexistent however, so insurers must invest wisely in internal
collaboration between IT and business. Both sides talent. And if a company is to apply tech-
should work to develop forums and decision- nology successfully, the entire leadership team
making bodies where fruitful interactions can should have a thorough grounding in the
take place. latest trends in customer needs.

In this vein, one global insurer with multiple One global insurer has instilled more dynamism
business lines has overhauled its process in its ranks by emphasizing meritocracy. The
for defining and investing in new IT projects. senior leadership has adopted a forced ranking of
Divisional CEOs and senior executives of performance and created clear career paths
businesses must now meet regularly with the CIO that let high-potential staff members advance
and his direct reports in workshops that quickly while requiring them to rotate periodically
examine the relationship between key business through various business lines. The goal:
initiatives and IT. The program, rolled out to develop well-trained, highly motivated IT
to more than 50 countries in the group, has executives who possess a broad understanding of
dramatically improved collaboration and the company’s business and have created net-
works beyond IT that will give them an outsider’s
view of IT’s performance.
8 McKinsey on Business Technology Number 22, Spring 2011

Insurance executives who set clear targets for

a transformation, align the business with IT,
and develop a strong talent base before beginning
For many insurers, IT innovation will require a the journey can improve the chances that
major rethink of how the business is run and technology will become an important strategic
a transformation of IT management. To kick off lever in challenging times.
the thought process, it might be helpful to look
beyond the insurance industry to spot promising
opportunities offered by new technologies
and by new business models that embrace
those opportunities.

Stefano Martinotti ( is an associate principal in McKinsey’s Zurich office,

where Fabio Torrisi ( is a consultant; Oliver Schein (
is a principal in the Munich office. Copyright © 2011 McKinsey & Company. All rights reserved.