Insurance Practice

Five steps to improve

innovation in the
insurance industry
Insurance executives are recognizing the power of innovation to
accelerate the pace of company change. Yet for innovation to deliver
long-term value, it must become embedded in a carrier’s DNA.

by Kweilin Ellingrud, Alex Kimura, Brian Quinn, and Jason Ralph

©d!sk/Getty Images

March 2022
 Insurance is not typically considered a bastion
of innovation, despite a long track record of
creating new and exciting markets around emerging
risks and consumer demands. For example, the
relatively nascent cyber insurance market is
forecast to surpass $22.4 billion by 2026 at an
annual growth rate of more than 25 percent in
the next five years, according to market research
and consulting firm IndustryARC.1 In reaction to
the lockdowns of the COVID-19 pandemic, many
insurers rapidly digitalized their customer and
agent experience, permanently shifting away from
a traditional face-to-face service model.2 Other
carriers are responding to consumer demand for
more meaningful interactions with loyalty and
gamification programs that promote customer
engagement. For instance, South African insurer
Discovery’s Vitality loyalty program gives customers
points as incentives for practicing healthy habits
and good driving behavior, and then grants them
access to rewards and benefits.
The C-suite is already taking note of the key role
innovation will play in delivering long-term value:
data from a 2020 survey show that while executive
teams focused on short-term cash management
and the welfare of their workforce at the peak of the
pandemic, innovation now ranks as one of their top
two priorities. 3
But while the industry as a whole has delivered
pockets of innovation, few carriers have pursued
innovation in a systemic way. Today, new customer
expectations, low interest rates, and new sources
of competition (such as leading tech companies,
insurtechs, and third-party capital) are putting
pressure on carriers to take a more systematic
approach. For innovation to deliver sustainable
growth, it must be embedded in the company’s
growth model and fully integrated across the
organization, bringing together cross-functional
teams to approach challenges in new ways.
And that’s not easy. Successfully profiting from
innovation is a complex, company-wide endeavor,
and most insurers have not yet cracked this code—
at least not on a consistent basis. In fact, a 2017
survey of life and annuities executives found that
only 12 percent believe they have a process that
delivers strong product innovation. 4 And fewer than
30 percent of financial-services executives say they
have the expertise, resources, and commitment to
successfully pursue new sources of growth.
Fortunately, there are ways to establish and
implement cross-cutting practices and processes
to structure, organize, and encourage innovation for
sustainable growth. Here are five steps for building
innovation into the way an organization works,
competes, and grows.

Successfully profiting from innovation is

a complex, company-wide endeavor, and
most insurers have not yet cracked this
code—at least not on a consistent basis.

1
Cyber insurance market – forecast (2021-2026), IndustryARC, June 2021, industryarc.com.
2
For more about the impact of the COVID-19 crisis on the insurance distribution model, see Simon Kaesler, Matt Leo, Shannon Varney, and
Kaitlyn Young, “How insurance can prepare for the next distribution model,” June 12, 2020, McKinsey.com.
3
Jordan Bar Am, Laura Furstenthal, Felicitas Jorge, and Erik Roth, “Innovation in a crisis: Why it is more critical than ever,” June 17, 2020,
McKinsey.com.
4
Marianne Purushotham et al., Understanding the product development process of individual life insurance and annuity companies, Society of
Actuaries, 2017, soa.org.

2 Five steps to improve innovation in the insurance industry

1. Shift resources from core business
tasks to breakthrough innovation
initiatives
Innovation is not just about creativity and generating
unique ideas. It’s about identifying unmet needs
and untapped markets and addressing them,
sometimes with untested solutions and unproven
business models. Yet too many leaders embrace
these risks without shifting enough people, assets,
and management attention to bring these ideas
to life. Put simply, nothing comes from nothing;
if a company wants to innovate, it must allocate
resources to innovating.
In fact, one of the biggest challenges holding
insurers back from innovation is capacity—both
physical and human capital and executive
mindshare. Business as usual has continued to be
the priority for traditional incumbents, particularly
as they have tried to provide stability to customers
through the disruption and uncertainty of a global
pandemic. Updating existing products, maintaining
existing systems, and making incremental changes
have taken the lion’s share of insurers’ time,
attention, and effort. These short-term initiatives
feel safer, particularly given the pressures facing
insurers over the past few years. But robust
opportunities await insurers that adjust their
valuation criteria and free up capacity for bolder
moves. 5
By reallocating the necessary resources from core
business tasks to potentially disruptive initiatives,
insurers can rebalance their product portfolios to
move away from near-term product improvements
and toward potential breakthroughs or new
business models—forms of innovation that often
hold greater potential to generate sustainable
sources of growth and outsize returns.
2. Develop distinct product-
development pathways and processes
Different innovation initiatives call for different
approaches. For example, most organizations
can predict with some certainty the likely gain in
gross written premiums or combined ratio from
5
Alex D’Amico, Mei Dong, Kurt Strovink, and Zane Williams, “How to win in insurance: Climbing the power curve, June 18, 2019, McKinsey.com.
6
Georgina Lee, “Ant Financial’s mutual-aid platform Xiang Hu Bao attracts 100 million users, boosts insurers’ sales by 60 per cent in first year,”
South China Morning Post, November 27, 2019.
Five steps to improve innovation in the insurance industry
an improvement to an existing coverage or tweak
to a core process. This knowledge leads to clarity
on the risks and how to mitigate them. This type
of innovation is very different from developing a
disruptive new product, such as a new life-insurance
policy with unprecedented flexibility across living
benefits. Disruptive products carry a host of risks—
from understanding the market opportunity to
communicating the value proposition effectively—
and organizations have less clarity around them.
The rapid rise and fall of mutual-aid platforms in Asia
illustrate the importance of maintaining a balanced
innovation portfolio with different development
pathways. In 2019, several companies launched
platforms that provide simple access to basic health
coverage by radically rethinking product design
and customer engagement. Within weeks, the
most successful of these platforms, Ant Financial’s
Xiang Hu Bao, attracted tens of millions of users,
peaking at more than 100 million participants.6
But these programs are now winding down. The
model encountered both increasing regulatory
requirements and adverse selection as young and
healthy members dropped out of the program,
increasing the costs shared by the remaining
participants.
Managing the delivery of an innovation portfolio
therefore requires organizations to develop distinct
pathways for product development (Exhibit 1). Each
pathway has a specific set of characteristics:
— Derisking: This pathway competes with part
of the core business and has a high level of
ambiguity on the delivery path.
— Derisking and accelerating: With an
unknown path to solution, this approach uses
technologies and capabilities that are new to
the company and requires significant cross–
business unit (BU) and change management.
— Accelerating: This pathway has generally known
solutions and previous use cases, but its cross-
BU implications, infrastructure, and capability to
deliver are limited.
3
 Exhibit 1
Insurers need
Insurers need at
multiple [[three?]]
least three development
development pathways
pathways to manage
to manage the of
the delivery
delivery of their innovation
their innovation portfolios. portfolios.
Project archetypes

Potential impact
Upper bound ERR,1 $ millions

Business model innovation

60 Digital engagement
Emerging technologies
Disrupt
Automation/Robotics
50 Advanced analytics

Development
pathways required
40
Derisking

Derisking and
30 accelerating

Breakout Accelerating
growth
20

Core
10

0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Uncertainty score
Indicated range of value divided by high ERR

1 ERR = economic rate of return.

Source: McKinsey analysis

One carrier, for example, instituted different
development tracks for different types of products:
— New-product development: Totally novel
product that the organization has never carried
before; not based on an existing product chassis
— Existing product revamp: Building on an existing
product chassis, but developing substantive
changes to the product’s features, pricing, and
experience to create a distinguishable new
product experience
— Simple tweak of current product: Existing
products that require very minor updates—such
as repricing or adding minor features that
already exist in other products
Creating a distinct product-development process
for each track allowed the carrier to maintain
market share by tweaking existing products while
preserving dedicated capacity for new products
that have the potential to unlock new markets or
value pools.

4 Five steps to improve innovation in the insurance industry

Risk/return profiles are also used to determine
product-development pathways. By analyzing
each portfolio product’s economics and its odds of
success, insurers can determine which products
should be redesigned and which should be coupled
with other products. Examples include embedding
annuities and other guaranteed-income options in
target-date investment funds.
to customers. Separately, they invest in modernizing
and digitalizing their distribution platforms and
strengthening new-business and underwriting
capabilities.
But carriers need to incorporate all three
components in their innovative value propositions to
deliver a differentiated experience to customers and
distribution partners (Exhibit 2).

3. Design value propositions that Post-COVID-19, a changing customer landscape will

incorporate new approaches to
customer engagement and distribution
Innovative value propositions aren’t just about
products; they integrate insurance protection and
prevention, customer engagement, and distribution
and marketing. Historically, carriers have developed
new products through actuarial innovation, often
adding complexity that appeals more to agents than
continue to encourage carriers to adapt products
to deliver a more personalized user experience.
This means generating ideas based on unique
customer needs and developing a more granular
profile of customers to personalize offerings and
tailor messaging for even the smallest customer
segments.

Exhibit 2
Innovative value propositions extend beyond product features.
Innovative value propositions extend beyond product features.
Innovative value proposition
Enhanced policy flexibility Simplification of
(eg, on or off) underwriting process
and communication
Lifestyle use as variable
Ongoing support,
Combination of savings
tools, and omnichannel
and life covers Insurance Customer experience
engagement
Focus on targeted savings
Incentives to
Return of premium if cover promote savings
is not used
New services

Awareness generation
Distribution
and marketing Direct online
traffic fostering
Leveraging of existing
customer base

Source: McKinsey analysis

Five steps to improve innovation in the insurance industry 5

 4. Ensure that innovation is a
continuous, integrated process
One common cause of failure is standing up an
innovation lab or team without fully integrating
it into the business-planning cycle. Innovation
teams that are not fully integrated often lack clearly
defined, near-term metrics for success. They may
not understand how their own success is critical
to the success of the overall enterprise and of
specific business lines, and they may lack clear
links with other parts of the organization to ensure
the innovations they develop are implemented and
scaled.
By facilitating constant dialogue between
innovation and business teams, insurers can foster
a common understanding of the market landscape,
identify potential opportunities, and realize their
aspirations. While the exact cadence may vary
for each carrier, it typically includes three main
activities throughout the year:
— Assess: During this phase, the team conducts a
rapid sprint (approximately two to three weeks)
to develop a clear market understanding within
the strategic-planning cycle and identify key
problems to solve (such as customer, distributor,
or competitor opportunities). This research
will both inform the carrier’s annual strategic
planning and determine focus areas for
innovation throughout the year. In faster-paced
markets, this process may be conducted more
frequently.
The goal is to have a robust pipeline that is
continually pruned and refilled, with a backlog
of ideas that put constant, productive pressure
on initiatives currently in development. This
pressure helps leaders and teams avoid sunk-
cost biases and encourages them to weigh the
relative value of investing in a current initiative
against starting another.
— Aspire: In this phase, the team develops a vision
for new product opportunities based on user
testing with clients and distribution partners,
establishing a pipeline of targeted opportunities
that can be prioritized and examined before
moving into detailed product design.
6 Five steps to improve innovation in the insurance industry
Initially, a carrier may conduct an accelerated
series of workshops to “collide” different ideas.
But once the pipeline is established, it should be
continually refreshed, and the backlog of ideas
should be frequently evaluated and reprioritized.
Critically, growth in premium and profit from this
portfolio of innovations is incorporated into the
overall financial plan and individual executive
accountabilities, with the understanding that
not all of the ideas will work out, but some must
succeed for the organization and leaders to
meet their goals in the coming years. We call
this overall portfolio goal “the green box”—a
quantification of how much growth in revenue
or earnings a company’s innovation needs to
provide in a given timeframe, translated into
cascaded key performance indicators (KPIs) and
incentives.
— Design, build, and launch: At this point, the
team has identified one or more innovation
opportunities to bring to market and is ready
to proceed with detailed concepts, product
design and build (including pricing and filings for
insurance products), and go-to-market planning.
Innovation teams should develop a business
case for each product or initiative, carefully
documenting all assumptions underlying
the estimated value. These business cases
can, in turn, inform a set of “deal-killing
assumptions” that can be tested, refined, and
tied to clear milestones and stage gates for
each step of the development journey of a
given product. For example, proof of concept
may involve successful back-testing of a
new underwriting approach that results in an
increase of expressed interest to purchase the
product among at least 20 percent of potential
customers. These go/no-go decision points
are critical to the team’s ability to reprioritize
opportunities quickly, as this phase is typically
the costliest and most resource intensive. By
getting a clear line of sight into what each
innovation needs to succeed, and by testing
assumptions early, teams and leaders gain
early visibility into which initiatives are likely to
succeed or fail so they can refocus efforts and
resources accordingly.
5. Pursue more significant product
innovations with an accelerator
Building a diverse innovation portfolio and
developing a differentiated value proposition
require new, cross-functional ways of working. The
right innovation operating model will hinge on an
insurer’s innovation priorities—from developing
capabilities that improve core operations to seeking
more disruptive opportunities outside the core
offering. External partnerships, strategic M&A,
venture-capital models, and traditional R&D can
quickly open opportunities to tap into innovative
capabilities, products, and processes (Exhibit 3).
But many companies can balance these
approaches by standing up an accelerator to pursue
transformational innovation and other “step-out”
opportunities. Although an accelerator is a separate
entity designed to drive product innovation, it must
still be focused with clear KPIs and measurable
success criteria, including defining the precise
amount of innovation-led growth that will help
fill gaps in the insurer’s existing growth strategy.
Such a unit must also be carefully connected to
the existing organization’s centers of strength—
distribution, underwriting, and data—so that it can
take advantage of those scaled capabilities while
maintaining the freedom and space to explore
opportunities that are more ambitious and less
certain.
For example, after nearly a decade without
launching a truly new product, one North American
life insurer set up an accelerator and quickly built
out a robust innovation portfolio that capitalized on
the organization’s product, underwriting, and digital
capabilities. The company designed and developed
a fundamentally new value proposition for an
emerging client segment in less than a year.

Exhibit 3
An accelerator
An canhelp
accelerator can helpinsurers
insurersthat
thatneed
needtotopursue
pursuemore
moresignificant
significantproduct
product
innovations and
innovations and other
other ‘step-out’
‘step-out’opportunities.
opportunities.
Typical innovation operating models; choices depend on innovation strategy

Rapid 6
ramp-up of
opportunities External partnerships
Open innovation, partnerships,
joint ventures, in-licensing
Strategic M&A
Capability, technology,
Strategic Accelerator people acquisition, or
imperitive to Traditional R&D Separate entity driving strategic partnerships
innovate Internal product development
development
Venture-capital model
Funding high-potential projects through
Evolve iterative funding rounds
capabilities and
options over time
Incremental or Degree of change Disruptive or far from
close to core from current business core business

Source: McKinsey analysis

Five steps to improve innovation in the insurance industry 7

 Now is the time for insurers to increase the
quality, pace, and breadth of innovation. Customer
expectations are evolving, challenging carriers
to deliver personalized and consumer-centric
products. At the same time, the C-suite is
recognizing the power of innovation to accelerate
the pace of change. For innovation to deliver long-
term value, it must extend beyond risks and product
offerings and become embedded in a carrier’s DNA
through carefully considered priorities, mutually
beneficial partnerships, and fully tapped resources.

Kweilin Ellingrud is a senior partner in the Minneapolis office, where Jason Ralph is a partner; Alex Kimura is a partner in the
Singapore office; and Brian Quinn is a partner in the Chicago office.

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8 Five steps to improve innovation in the insurance industry