McKinsey to the Insurance Industry: Embrace New Technologies and Modernize

The annual global insurance report by management consulting firm McKinsey is making waves. Industry outlets have focused their attention on some of the harsh words the report had to say about the insurance industry’s value generation. But the report isn’t sending a warning, but rather highlighting a truth that other sectors have known for some time: The world has changed, and insurers (and reinsurers) must adopt new business practices and technologies to handle it.

“Several megatrends are shaping a new operating environment for insurers that is hugely disruptive and that challenges traditional ways of value creation,” reads the report, listing the impact of the COVID-19 pandemic as the catalyst for some of the changes that the world economy is now experiencing, which directly affect the insurance industry as well.

The report does not mince words when outlining the insurance industry’s need for change. With an ongoing ‘fight for the customer’, the shift in value distribution, the limited improvement in technologies and digitalization along with capital management are mentioned as issues that the industry should note and adapt to handle.

However, taken as a whole, the report is a good reference point for the new approaches the insurance industry needs to adopt to answer to the rising challenges. Among them, moving to data-driven, AI-based data and analytics models. “As AI becomes more deeply integrated in the industry, carriers need to understand the potential for AI to reshape claims, underwriting, pricing, and distribution.”

The emphasis on AI should come as no surprise to anyone who has been keeping an eye on the growing technology shift in the insurance sector. Data has been the backbone of insurance from the early days of its existence, when actuaries calculated premiums based on pen and paper probability. AI is a natural enhancer of that work.

As we’ve written before, AI adds much-needed transparency into the system. Thanks to machine learning algorithms, highly accurate risk models can be created, which in turn open the door to the creation of predictable, data-driven insurance-linked assets. The reliance on data and risk transparency allows rating agencies to rate these assets, essentially “translating” insurance liabilities into financial instruments the broader capital markets can understand, opening up the reinsurance industry to new streams of capital. Underserved parts of the insurance market can gain access to capital that was unreachable beforehand, stabilizing and democratizing the industry.

Another important aspect is that AI allows insurers to work faster. In a brief released in June of last year, McKinsey analysts stated that “what used to take years must now be done in months or weeks to meet changing demands of the market. Insurance executives must shift how they lead their institutions—from a methodical pace of change to the decisive reinvention of their businesses.” Such speed and innovation, especially when considering the copious amounts of data the insurance industry generates, goes hand in hand with AI, digitalization, and automation.

It will also come as no surprise that McKinsey’s report urges insurers to “develop new businesses for the digital age.” Marketplace approaches, such as Vesttoo’s, can create true liquidity in a market notoriously known for being illiquid. Ten years ago, a liquid market for reinsurance investment products was almost unthinkable. Thanks to AI technologies - this is possible, and will revolutionize the industry.

In many ways the report could be described as optimistic. While it serves as undeniable proof that the (re)insurance industry must adapt to emerging trends that shape global business, it also supplies the bullet points on how to weather these trends and emerge as winners. And insurers have the knowledge and capability to do so. In the words of the report: “Insurers that can develop a tightly defined business model and take advantage of the trends and currents unleashed by the global pandemic can restart growth, expand performance on multiple dimensions, and renew themselves through value creation, securing an industry-leading position in the years to come.”

The means are already in place - Vesttoo is spearheading a “new operating environment” for insurers and investors with its proprietary AI technologies and liquid marketplace approach. and as the saying goes - “build it and they will come.”