Building new businesses: How insurers can leap ahead

 

New insurance business ideas can have an outsize impact on enterprise value, but many insurers struggle to build and scale them. A new approach can help improve their success rate.

Successful new-business builds contribute disproportionately to enterprise value. Our analysis shows that across sectors, they generate on average more than twice the revenues of their parent companies’ core businesses. Not surprisingly, leading companies are increasingly turning to new-business building to drive growth. In a 2022 McKinsey survey,1 24 percent of insurers named business building as their top priority and 65 percent saw it as one of their top three priorities, up from just 27 percent in 2017. Backing conviction with action, more than half of the insurers we surveyed launched four or more new businesses in the past decade.

Unfortunately, most of these efforts have yet to bear fruit. In fact, our research shows that only 19 percent of newly launched insurance businesses have become viable large-scale enterprises. In this article, we examine why insurers are struggling to get new businesses off the ground, offer ideas on where to look for the most promising business-building opportunities, and suggest how insurers can improve their

The struggle to remain relevant

Insurers in North America and Europe are facing sluggish growth, with developed markets tracking or lagging behind GDP growth rates. In the United States, for example, property and casualty (P&C) and life premiums as a share of GDP declined by 12 percent between 2005 and 2022 (Exhibit 1).2 Shareholder returns have partly recovered from their 2020 low but remain uneven. In the United States, Europe, and Asia, insurers’ TSR performance trailed that of the financial sector as a whole in most years from 2016 to 2021.3 Moreover, emerging value pools—such as cyber in P&C and middle-market consumers in life and retirement—have yet to be addressed at scale.

With growth in established markets hard to find, our survey found that many insurers have turned to building new businesses, whether to respond to changing customer expectations (cited by 47 percent of respondents), create new revenue streams (43 percent), or protect against disruption (30 percent). However, these efforts have yielded limited success. Our survey shows that insurers have been much less successful at scaling new businesses compared with other sectors. Across industries, 50 percent of new businesses contributed at least 20 percent to their parent company’s total revenues, but in insurance just 37 percent of new businesses did so (Exhibit 2).

This lackluster track record is not for want of investment. On average, insurers spent more than other types of organizations on their new businesses, with an average capital expenditure of $42 million per business, compared with $31 million across sectors. This higher spend may explain why a third of new insurance businesses have yet to break even, compared with 18 percent in all industries.

Despite this somber outlook, an analysis of past business-building efforts suggests that insurers can still tip the odds of success in their favor if they do two things. The first is to focus on the existential challenges facing the industry—challenges that offer disproportionate rewards for insurers that crack them (why and where to build). The second is to de-risk their new ventures by committing the right talent, technology, and CEO involvement 

In our experience, most of the new insurance businesses launched over the past decade or so—especially by life and commercial providers—have been digital replicas of analog businesses. Their main point of differentiation is that they allow customers to purchase coverage online rather than from agents or branches, in line with the ongoing shift to digital channels in most sectors. An online model enables insurers to bypass the personnel constraints of traditional agent-led distribution and open their digital shopfronts to hundreds of millions of consumers.

Even so, insurers experienced little of the dramatic rise in online purchasing spurred by the pandemic. E-commerce penetration doubled in the United States in the first quarter of 2020,4 but that did not yield commensurate growth for insurers. One likely reason for this shortfall is that the ease, convenience, and range offered by online shopping do not fully translate to the insurance sector. Insurance products are complex, purchases are infrequent, and many policies, especially in life and commercial insurance, are discretionary—attributes that limit the advantages digital channels can provide.

Given that digitalization alone is no longer a differentiator, insurers need to look elsewhere for their competitive edge. We believe they should raise their aspirations and tackle three neglected areas that could pose an existential challenge to the industry: new and rising risks, underserved segments, and lagging customer experience. They also have an emerging area of opportunity to address in the form of fee-based complementary services.

Given that digitalization alone is no longer a differentiator, insurers need to look elsewhere for their competitive edge. We believe they should raise their aspirations and tackle three neglected areas that could pose an existential challenge to the industry: new and rising risks, underserved segments, and lagging customer experience. They also have an emerging area of opportunity to address in the form of fee-based complementary services.

New and rising risks. Insurers need to consider how they can viably serve clients in markets that are rapidly becoming uninsurable. One major challenge is protecting clients in the intangible economy. Intangible assets account for more than 80 percent of the enterprise value of S&P 500 businesses,5 yet solutions for managing and protecting these assets are still in short supply. One insurer moving into this territory is Aon, which launched its Intellectual Property Solutions division in 2018. The new business provides innovative coverage for liability against litigation related to intellectual property (IP) and the first IP-backed lending fund.

Insurance coverage is also lacking in cybersecurity: 80 percent of cybersecurity losses in the United States were uninsured in 2021, resulting in about $7 billion in losses.6 Part of the problem lies in the complexity of enforcing coverage with well-defined limits and understanding the extent of loss. To tackle this complexity, insurers could partner with cybersecurity start-ups to help customers protect against cyber incidents through full integration, with their expert partner having access to the state of core systems. By developing capabilities to track cyber risk in close to real time, insurers could open opportunities to not only understand the size of blast radius and inform coverages but also develop pathways to prevent attacks before they happen.

Underserved asset classes exist in other categories too. Insurers could, for instance, address the reputational and brand risks associated with operating in the modern social media environment. Other promising opportunities lie in creating solutions and underwriting partnerships to support clients in tackling physical risks such as climate change. Insurers could provide adaptation and resilience services to help corporations deal with climate impacts, or they could even partner with investors on major carbon-reduction capital projects such as wind farms to build a loss history and adequate underwriting capabilities.

Underserved segments. The growth in underinsured populations opens up opportunities to offer innovative new forms of insurance. For instance, the expansion of the gig economy—which now accounts for more than a third of the US workforce7—has created a need for flexible, portable insurance policies that allow for more-seamless transitions between jobs.

Underserved segments can also be found in specific sectors, such as health. Recognizing that people with type 1 or 2 diabetes had difficulty obtaining life insurance at an affordable price, Vitality and John Hancock developed Aspire.8 This program offers policyholders consultations with experts in virtual diabetes clinics, discounts on fitness devices, and reduced policy premiums as a reward for healthy behavior. By factoring in how policyholders’ actions influence their health, this approach represents a paradigm shift from traditional underwriting based purely on historical drivers.

Another option for insurers is to participate in ecosystems offering related products and services and position themselves as a trusted source of advice and services for distinct customer segments. One leading life, wealth, and benefits company is working to provide the owners of small and medium-size businesses with a comprehensive suite of services for protecting their business and personal assets. Meanwhile, a P&C carrier is exploring how to extend into property management and domestic services for affluent homeowners. With the right design, such businesses can not only boost sales of core insurance offerings but also improve loss ratios and enhance insurers’ relevance to customers.

Additional ecosystem ideas that could help carriers serve underserved segments include the following:

• packaging bundled auto or travel insurance products such as car sharing, car parking, and health tourism for specific digital platforms to pass group discounts on to consumers
• integrating insurance with housing appraisal, sales, and local-government property registry sites to track buyer activity and offer homeowner’s insurance based on the building and zip code history
• partnering with digital banks to offer discounted general liability insurance for microbusiness customers and upselling other small-business services through the digital-banking marketplace as needs evolve
• developing the equivalent of Apple Care for big machinery to be offered on primary or secondary market sites
• partnering with co-working spaces to offer bundled group health benefits

• providing custodial wallet insurance to blockchain marketplaces to protect customers against breach of wallets

Lagging customer experience. McKinsey’s global research across industries shows that improving the customer experience can do far more to drive profitable growth than increasing advertising spending or cutting prices.9 Challenging the common perception of insurance as a low-engagement category, leading firms are demonstrating that superior customer experience can inspire loyalty and attract new customers frustrated by their experiences with their current carriers.

One way to improve the customer experience is to offer insurance when people need it—in other words, as part of everyday purchasing journeys rather than in a stand-alone insurance journey. Some insurers partner with organizations selling cars, travel, and other high-ticket items to embed insurance in their products or services. One example is Allstate’s Square Trade, which works with manufacturers and retailers to offer coverage for customers buying mobile phones, domestic appliances, and electronics equipment. Similarly, as other consumer companies follow Tesla and Ikea into the insurance market, incumbents can forge partnerships with OEMs and manufacturers to help shape and power their offers, bringing distinctive strengths that their partners need, such as distribution, risk selection, and claims fraud prevention.

In addition to tackling these three neglected areas, insurers could also consider addressing an emerging set of opportunities that offer considerable potential:

Fee-based complementary services. Building on the latest advances in AI, fee-based services could take off in the next few years. Insurers could capitalize on their strengths in underwriting, claims, data engineering, or other core competences to expand their offerings in areas such as the following:

• providing underwriting capabilities as a service to help providers price complex risks (for instance, offering multiclass risk assessment models as a service to automate whole-life-policy onboarding)
• building digital twins to capture property information and feed it to brokers and carriers for a fee

• offering claims analytics subscriptions that aggregate claims data from multiple carriers with pattern analysis (for instance, analyzing data from a particular repair shop using similar repair codes and pricing across a variety of incidents)
• providing customized underwriting or claims-assistance chatbots for underwriters or adjusters using generative AI trained on a carrier’s own data
• creating a low- or no-code claims platform for specialty claims (for instance, targeting smaller regional carriers that require simple fit-for-purpose workflows)
• offering a “site engineer in a box” to monitor and benchmark security, air quality, temperature, and humidity conditions for commercial clients for a fee, with preventive actions based on weather and seismic activity
• providing emergency first-response and disaster recovery management for major incidents or losses
• offering fronting services for managing general agents and captive managers

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