True innovation is upon the insurance industry, and companies that are embracing new platforms and a spirit of reinvention are seeing positive results, according to a recent McKinsey podcast.
“Quite a few players along the value chain—both those focused on AI [artificial intelligence] and those working in pricing, claims, and so on—are actually already very successful,” said Jörg Mußhoff, McKinsey senior partner and co-leader of McKinsey’s Insurance Practice. “Some are making margins of 30 or 40 percent.”
Mußhoff was joined by practice co-leader and McKinsey Senior Partner Fritz Nauck on an episode of McKinsey on Insurance podcast at the 2023 InsureTech Connect conference in Las Vegas to discuss the top trends and innovations for insurance executives in 2024. Among the many different industry trends discussed, one of the most significant includes artificial intelligence (AI) and generative AI (gen AI).
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Mußhoff said, “We’re seeing a lot of platform tech-related plays, which are amazing. We’re seeing various players in the AI space bringing true innovation and making a difference. We see AI in software and in support activity, thinking about call centers and others. The current mood is about reinventing, and new players and incumbents are working jointly on it. I think this collaborative approach will be game changing.”
Expense, Efficiency, and Technology
Describing some of the themes expected for 2024, Mußhoff and Nauk mentioned expense and efficiency, and technology, including AI. “First, I think we are going to see players embarking on a step change in terms of productivity,” explained Mußhoff. “And this relates to what we just described about supporting players along the value chain. Our frameworks and analyses show that over the next years, up to 50% of the workforce might be radically changed, and there is room for a lot of productivity improvements. A lot of players are leveraging technology, including AI and gen AI, to make a step change along the value chain. And this is not unique to insurance.”
Mußhoff also expects gen AI to impact the industry’s distribution model. “Take the agent and broker channels, which are still fairly dominant in our industry: gen AI will change that game. I’m quite optimistic that over the next two or three years, we will see these things happening,” he said.
Discussing further anticipated innovations stemming from gen AI, he added, “We will see a drastic change in thinking about call center activities, which will both dramatically change the way we interact with customers and fundamentally impact our cost structures in these support areas. I think this innovation is real, and the use cases from some of the more innovative players are supporting that change.”
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Mußhoff also mentioned embedded insurance as a significant growth area globally in all types of industries. “Think about telcos and OEMs. We have 30 or 40 very innovative claims players here today,” he said.
Data and Risk
Nauck discussed data as another area where he expects innovation in 2024. Every executive has realized that, to take advantage of the benefits of the cloud and technology and the benefits of AI and gen AI, their data architecture and data usage has to be clean and updated frequently with the right data,” said Nauck. “So, I think there’s much more focus on the underlying data: where you get it, how it’s updated, what the lineage is, and how the model is validated to capture the benefits of new technology.”
Nauck also discussed risks outpacing the industry’s ability to protect against them, and how insurers and reinsurers will deal with that. “The insurance industry by itself—and even with reinsurers—is not sufficiently capitalized to help every person and company protect against the range of risk they have. And so there’s the notion of how to enable third-party capital to enter by correctly identifying risks, measuring the risks, and then transferring those risks into the trenches that third-party capital is willing to invest in—as either a hedge or a pure investment. That has obviously happened for a long time, but it is on the cusp of increasing significantly given the evolving nature of risk.”