A roadmap for a digital

transformation

No insurance company has yet completed a digital

transformation—one that fully harnesses the power
of digital technology to rethink every aspect of the
organization. But a number of carriers are making
remarkable progress, indicating the direction others
should take.

Digital disruption in insurance: Cutting through the noise 1

 The future of insurance will be digital. have an advantage. And they are keenly
That much is certain. The industry might aware that digital can give birth to entirely
have been slow to feel digital technology’s new business models that shake up
impact, protected by regulation, the size sectors, leaving companies that fail to
of companies’ in-force portfolios, and adapt struggling to survive (newspapers
customers’ tendency to stay put with their are a case in point). They have therefore
insurers. But the pressure is mounting. In taken steps toward transforming their
auto insurance, a handful of direct carriers businesses.
already enjoy the lion’s share of profits.
Disruption of other lines of business
will surely follow. Distribution channels,
products, underwriting technology,
The CEO cannot
competitors, and even business models simply sanction a
digital transformation;
will shift as technology attacks market
inefficiencies and customer expectations
evolve.
he or she must
Most insurers are responding to some
communicate a vision
of what needs to be
degree, albeit often cautiously. Some
see how digital technology will transform
pieces of the business, but find it harder
to envisage how the entire value chain achieved, and why.
and business model might change.
They therefore content themselves
with investing in a new sales channel,
launching a service app, or automating They are far enough advanced to know
a few processes. At other carriers, that each stage of the transformation will
executives believe a transformation will not present challenges. The first will occur at
be completed on their watch, because the the outset, when the CEO must set the
magnitude of change required will leave company on the right course for success.
no part of the organization untouched and More will present themselves during
could take up to a decade. So why bet on the first six to 18 months—the launch
an uncertain future and risk cannibalizing and acceleration phase—when initial
existing profits or alienating distributors changes have to start taking root, and yet
when they face more pressing issues, others will arise during the long haul of
such as regulatory compliance? subsequent years, when digital initiatives
need to be scaled across the enterprise
A growing number of executives, though, and digital capabilities and new ways
are facing up to digital reality. They know of working become the lifeblood of the
that digital technology can significantly company. Already, the industry’s digital
improve the performance of their current pioneers are meeting these challenges
business. They know that first-movers and demonstrating to fellow CEOs ways

2 A roadmap for a digital transformation

 in which they can be overcome. And from 1. Secure senior management
these early efforts and successes a set of commitment
ten guiding principles is starting to emerge
(Exhibit 1). Any transformation will be dead in the
water if it does not have the commitment
Defining value of the CEO and the leadership team.
That statement seems almost glib,
To set a digital transformation on the right given how often CEO commitment is
course a company must place it at the positioned as the solution to any major
core of its agenda, and understand the challenge. But the CEO cannot simply
magnitude of that undertaking. It is not for sanction a digital transformation; he
the fainthearted, but CEOs are heading or she must communicate a vision of
in the right direction if they grasp the what needs to be achieved, and why,
fundamental importance of heavyweight in order to demonstrate that digital is
management commitment, are willing an unquestionable priority, make other
to make significant investments, and set leaders accountable, and make it harder
clear, ambitious targets. to back-track. Hence, in 2015, Allianz
announced that a key strategic growth

Exhibit 1

10
guiding principles
of a digital transformation
stage 3. scaling up
8 Sequence initiatives for quick returns

stage 2. launch & acceleration 9 Build capabilities

10 Adopt a new operating model

4 Start with lighthouse projects

stage 1. defining value 5 Appoint a high-caliber launch

team
1 Secure senior management 6
commitment Organize to promote new, agile
ways of working
2 Set clear, ambitious targets 7
Nurture a digital culture
3 Secure investment

Digital disruption in insurance: Cutting through the noise 3

 initiative was to become “digital by provocative, disruptive, ambitious, and
default”—indicating the extent of the often uncomfortable sponsorship to be
changes ahead. Similarly, ING branded successful.”
its transformation “Fast Forward.”
2. Set clear, ambitious targets

It’s not enough

To set the organization’s sights at the
right level, investments need to be

just to have CEO linked to clear, ambitious targets. This

helps on three fronts. First, it signals the
sponsorship. It needs magnitude of what digital technology

to be provocative,
can deliver. Without targets, people who
find it hard to accept that the old ways of

disruptive, doing things were massively inefficient

might be content to sign up for a 10
ambitious, and percent improvement in cycle time, for
example, when 100 percent is possible.
often uncomfortable External benchmarking can help in this

sponsorship to be
respect by reinforcing the conviction that
cutting the time it takes to, say, process

successful.” a claims submission from 90 minutes to

20 is not good enough if someone else
has reduced it to four. A company can
– Andrew Brem, chief digital be certain that if it does not match that
benchmark soon, others will.
officer, Aviva
Second, setting clear targets at the
outset prevents back-sliding when the
With the vision set, results are then going gets tough. And third, it imposes
achieved through relentless daily discipline on the process of deciding
engagement. Andrew Brem, chief digital which initiatives to pursue for maximum
officer of Aviva, says CEOs need to be impact.
“single-minded and aggressive” about
driving the transformation. “There’s no Targets are needed for each source
way you can do digital transformation of value creation—cost savings,
by halves,” he comments. “Our CEO revenues, improved performance of
is chirping in my ear the whole time. agents, and satisfaction of employees
He is very activist. He bases himself and customers—and for new ways
in our garage frequently. He drops of working and the new capabilities
into meetings. He just starts talking required. They can be set, for example,
to people. It’s not enough just to have for the frequency of releases, the
CEO sponsorship. It needs to be percentage of processes that will

4 A roadmap for a digital transformation

 be automated, the percentage of build new businesses as the insurance
transactions that will be migrated from model evolves. To acquire expertise in
one channel to another, the fraction of new fields and keep abreast of innovation,
new code that will be tested automatically, for instance, insurers will need to invest
the level of personalization that will be in partnerships or a venture capital arm,
achieved, and the number of campaigns perhaps both, as well as in their own
that will be run each month. innovation labs.

Launch and acceleration

An insurer with It is easy to launch change initiatives. It is

premiums worth hard to keep them afloat and spawn more.
Often companies decide to fund several,
more than $5 billion assign people, even set up separate

should expect to
units. But then the initiatives fail to take
off and the old ways of doing business

hire between 20 and continue much the same—at which point

executives wrongly conclude there is no
100 new specialists urgency as the market is not ready for

during the first

change.

18 months of a To ensure early efforts thrive and build

momentum, companies should consider
transformation. carefully which projects to start with
and support them with the necessary
resources. Prerequisites include a high-
caliber launch team often led by a chief
3. Secure investment digital officer (CDO), consideration of
organizational structure, and the nurturing
Digital transformation is likely to require of a digital culture.
significant investment. European insurer
Axa, for example, invested €950 million 4. Start with lighthouse projects
over just two years. Our experience
suggests that in IT alone, companies with To win early support, companies should
outdated systems might need to double start with projects that offer potential for
their current spending over a five-year significant rewards with manageable risk.
period. That investment is likely to result Such projects include customer services
in lower profits for a while—but without activities and the redesign of the claims
it there is a serious risk to profits in the process, from the moment a customer
longer term. Importantly, companies needs to file a claim to the moment
will need to allocate investment both of reimbursement. Customers will be
to improve the current business and to delighted, cost savings can be as high as

Digital disruption in insurance: Cutting through the noise 5

 40 percent, and effectiveness, measured highest caliber a considerable challenge.
in return on investment, can rise by as The scarcity of elite data scientists, for
much as five percentage points. example, has been a factor in some
insurers’ acquisitions of cutting-edge
5. Appoint a high-caliber launch team artificial intelligence start-ups; $5 million
to $10 million per employee can be
The importance of securing a high- commanded in these so-called “acqui-
caliber launch team, often under a hire” deals.
CDO, cannot be overstated. A CDO
can prove invaluable in co-ordinating a
transformation—avoiding duplication by “We have an
advantage when it
devising a methodology for the redesign of
customer journeys that can be replicated
across the organization as digitization
efforts are extended, for example. He
comes to culture. We
or she can also ensure the appropriate are a tech company
in the insurance
technology and skills are in place, decide
the sequence of the transformation,
monitor progress against targets, and
ensure that tactical day-to-day priorities space, not an
get the attention they need. But the
role of CDO is a temporary one. At the
insurance company
end of the nineteenth century, many that plays with
technology.”
companies employed a chief electricity
officer to ensure supplies of what was a
new industrial commodity. A few years
later, none did. Key recruits to the launch
team include designers to contemplate
– Adam Lyons, founder and
customers’ unmet needs and inform the CEO, TheZebra.com
creation of experiences, products, and
services; data scientists; scrum masters
to facilitate agile development; and One way to meet the challenge is to start
developers who can work in the modern by hiring a renowned expert to serve as
IT environment. Roughly, an insurer with an anchor hire, who will help to attract
premiums worth more than $5 billion others, on the basis that they will be drawn
should expect to hire between 20 and 100 to him or her more than they would be to
new specialists during the first 18 months an insurer per se. Some companies go
of a transformation. further than hiring individuals and acquire
agencies that specialize in design thinking.
That is not a huge number, but the To help satisfy the expectations of their
competition for digital talent and the ambitious recruits, companies might have
advantage technology companies have to adapt their traditional value proposition,
in attracting it makes finding people of the based on span of control, with a different

6 A roadmap for a digital transformation

kind that promises empowerment in their development, test-and-learn methods that
work on high-impact digital initiatives. speed progress while keeping the focus
“The talent piece is essential,” says on customers, and cross-functional teams
Andrew Brem. “I’ve hired an entirely that pool specific types of expertise.
new digital team. I’ve brought in people
from the world of gaming, from travel,
from retail, from pure digital. And they’ve “The reason
there hasn’t been
brought in a lot of people too. There are
some particular skills I’d call out. One
would be digital product and design.
Another would be digital marketing on the
more innovation
social side. And another would be data within traditional
distribution ... has
analytics, particularly on the customer
side rather than risk.”

People leadership skills are essential too. been that it’s very
Transformation is not just about tipping
everything upside down, reinventing
hard to find someone
products, and disrupting value chains. It with a digital
skill set who also
is partly about balancing old and new and
integrating fresh talent with old, valued
hands. As Clara Shih, founder and CEO
of “advisor marketing cloud” company
understands field
Hearsay has observed, digital-savvy
hires from outside the industry might ace
sales and vice versa.”
building a digital-direct, e-commerce
business, but are often ill-equipped to – Clara Shih, co-founder and
modernize insurers’ existing channels, CEO of Hearsay Social
where huge, value-creating opportunities
await. “The reason traditional agency
distribution hasn’t innovated is because A digital unit can also help attract and
it’s very hard to find someone steeped in retain those specialists, while offering
digital who also understands field sales, them freedom from incumbents’
and vice-versa,” she says. organizational constraints and the support
of like-minded colleagues. If such people
6. Organize to promote new, agile ways are simply parachuted into the existing
of working structures of incumbents they can
become bored and frustrated at the pace
The way a company organizes itself is key of change. They need to be empowered to
to a successful launch. Setting up a digital make a swift impact, which often means
unit independently of the organization will giving them authority to make their own
promote new ways of working essential decisions.
for digital success, such as agile product

Digital disruption in insurance: Cutting through the noise 7

 Separating a digital component from empowered—will be the default mode
the rest of the organization is not entirely of new recruits with digital skills. These
the answer, however. To begin with, methods also need to take hold across the
newcomers can (unintentionally) run organization, and now is the time to start
roughshod over what is valuable in an nurturing them.
incumbent: the reason many insurance
companies have been around for more So much needs to change. A focus on
than a century is that they excel at what customer needs rather than process
they do. They can also start to create and procedure, continuous customer
channel conflict, particularly if innovations feedback, comfort with testing and
threaten to cannibalize revenue streams. learning and hence with occasional
The digital unit therefore needs to be failure, and collaboration—all are vital.
reintegrated at some stage, and that But insurers can be made to feel they are
becomes more difficult as time passes. being asked to jettison the things that
Whatever the choice, the ultimate goal has have made them successful and adopt an
to be to enmesh the old and the new. untested culture. No wonder McKinsey
research has shown that 46 percent of
financial services executives feel cultural
McKinsey research or behavioral change is the biggest

has shown that 46

challenge they face in pursuing their digital
strategies.

percent of financial They are not, of course, being asked to

services executives abandon the traits that have made them

feel cultural or
successful, but to renew their heritage
with innovative ways of thinking and

behavioral change working (see “Building momentum for

cultural change”). Brad Auerbach, US

is the biggest industry manager at Facebook, describes

it as recalling what initially made them
challenge they face in successful. And there are relatively easy

pursuing their digital

ways to kick-start change and gain
support. For example, rather than making

strategies. decisions by considering the business

case or what competitors are doing, insist
that the starting point is “How does this
create value for the customer?” Moreover,
7. Nurture a digital culture change can begin in areas where there are
fewer risks—in marketing, for example, by
We have touched upon how digital ways of testing messages and channels to find out
working and thinking—fast, collaborative, what is most effective.

8 A roadmap for a digital transformation

“Agile principles paid to building more capabilities. And to
reap the full rewards of a transformation,
are now standard eventually an entirely new operating model

operating procedure will be required.

for software design, 8. Sequence initiatives for quick returns

but they’re also Sequencing with a view to quick returns is

applicable any
key to building scale fast. The more value a
transformation captures as it progresses,

time you need to the more it becomes self-funding and the

greater the support it garners. Often a
orchestrate a large company’s approach is to let a thousand
flowers bloom. But this spreads scarce
number of people resources thinly. Moreover, transformation

to get something incurs costs at a time when competition

is probably putting pressure on margins.

complex and multi- Hence the imperative to thoughtfully

pursue a manageable number of digital
faceted done over an initiatives to tend the performance of the

extended time frame.”

core business while cultivating future
sources of growth (see “Capturing value
from the core”).

— Marcus Ryu, co-founder Initiatives that are strategically important,

and CEO at Guidewire pay back quickly, and reduce complexity
Software are the ones to prioritize. This almost
always means looking for ways to cut
costs—a counterintuitive notion for many
executives who tend to focus on digital
Scaling up technology’s growth potential. But context
matters. A company’s financial pressures
At the 18-month point, companies will shape the sequencing to some
should be making good progress. They degree. So will its IT, if legacy systems
should have a handful of initiatives up and restrict initial choices. And companies
running and be starting to capture value. need to be flexible. It could prove hard to
But just when everything seems under recruit the particular people needed, while
control is also the time to supercharge the technology and customer behavior will
transformation and do everything on a continue to evolve.
grander scale. The thoughtful sequencing
of subsequent initiatives is key to this. In Tracking returns is essential to ensure
addition, close attention will need to be all available value is captured. Often,

Digital disruption in insurance: Cutting through the noise 9

 targets can be raised during the course of reason one large European insurance
the transformation as prototypes reveal group has set up an IT literacy program
greater productivity improvements than to educate and update business line
have been assessed on paper. And when managers, while all newly appointed top
initiatives are successful and deliver the business managers must take a three-day
intended financial benefits, the board and training module to help them understand
top team should be emboldened to push and capture IT’s strategic value (see
to achieve more. But while concentrating “Modernizing IT for a strategic role”).
effort and attention on what works well
matters, so does letting go of what does Ultimately, however, it will be important
not. to help all employees rethink the way
they work, as the end result of a digital
9. Build capabilities transformation is the establishment of a
company-wide agile operating model.
By now it will be apparent that insurers
will have to invest in more than just digital 10. Adopt a new operating model
technologies themselves to scale up
digital initiatives. Marcus Ryu, co-founder Whatever structures a company chooses
and CEO at Guidewire Software, contends initially, it will reach the stage when only
that it is only by modernizing core a fundamental organizational redesign
operating platforms — most importantly will do. Silos drawn along functional lines
policy administration, billing, and claims have always been a drag on collaboration
systems — that insurers can externalize and performance in large organizations.
the data and business logic necessary to In the digital age, when companies need
deliver a satisfying digital experience for to reinvent the way they work on the fly,
the policyholder or distribution partner. an inability to connect all parts of the
organization to share data, expertise, and
Skills as well as systems will need to be talent can be crippling.
boosted. But if a company struggles to
hire 20 to 100 new people for the launch
team, how should it go about hiring several
hundred? Searches are likely to extend to The only way forward
developer communities and to technology
conferences and similar events. The quest
for a company is to
for talent might even lead companies learn as it goes and
figure out how to
to establish partnerships with software
providers.

A huge internal training job will be

apply lessons as scale
needed too. Business leaders will need
to understand IT’s strategic value—the
is built.

10 A roadmap for a digital transformation

That is why companies will have to lean afford insight into decisions relating to
away from a traditional matrix structure technology architecture, data architecture,
with rigid functional boundaries if the and platforms. Customer satisfaction is
transformation is to succeed. They will likely to jump. Cycle times will be shorter
need a network structure, organizing and costs will fall. New ways to accelerate
around sources of value, with product revenue growth will reveal themselves. This
managers empowered to make decisions is the time to double down on efforts.
with implications that cut across functions.
Teams will not be permanent. They will be A closing thought, and perhaps one that
dissolved when they capture the value at reframes the challenge: the term digital
stake, then regroup around new sources of transformation puts the emphasis on
revenue growth or cost reductions. Some technological change. But it becomes
companies call them scrum teams, others clear to anyone who understands digital
tiger teams, portfolios, or tribes. Whatever technology’s potential that what is afoot is
the label, the ossified matrix is giving way less of a digital transformation and more
to a more agile one. In other words, the of a fundamental rethink of the corporate
entire organization, not just IT, will adopt an model, for which digital technology is the
agile approach to working. “Agile principles catalyst. Sources of revenue, efficiency, and
are now standard operating procedure for the organization’s structure are all up for
software design,” says Marcus Ryu, “but scrutiny, as are talent models, which need
they’re also applicable any time you need to to offer more flexible, more empowering,
orchestrate a large number of people to get and more rewarding career paths. Some
something complex and multi-faceted done executives might feel the reframing makes
over an extended time frame.” the challenges more daunting still, others
that it makes the opportunities more
   exciting. We are in the second camp.

Insurers that pursue digital transformation

will meet challenges. IT projects fall behind Tanguy Catlin is a senior partner in
schedule, channel conflicts arise, and McKinsey’s Boston office, Johannes-
unexpected regulatory concerns emerge. Tobias Lorenz is a senior partner in the
Typically, companies also struggle with Düssesldorf office, Bob Sternfels is a
cultural issues and challenges in recruiting senior partner in the San Francisco office,
new types of talent. and Paul Willmott is a senior partner in the
London office.
No rule book will solve all of this. A
transformation is not a science. The only
way forward for a company is to learn as it
goes and figure out how to apply lessons
as scale is built. Along the way there will be
important markers of success. IT strategy
will become clearer as early prototypes

Digital disruption in insurance: Cutting through the noise 11