McKinsey: Road to recovery for South African insurers

By Janet Brice
Seven big moves that could help insurers in RSA survive COVID-19 and thrive in the long term, according to McKinsey & Company...

Insurance companies in South Africa (RSA) should focus their efforts on a “survive and then thrive'' strategy, to recover from COVID-19, report McKinsey & Company who recommend seven moves to future proof these businesses.

The pandemic has hit the RSA insurance industry hard and is predicted to have a deeper impact than the 2008/09 global financial crisis with total gross written premium is expected to fall by 15% in the next two years.

“Our sector analysis suggests that, by accelerating seven big moves, insurers can set themselves up not only to get through these leaner times and absorb the uncertainty but also to thrive beyond them, outlines McKinsey & Company in the report, Beyond COVID-19: Charting the road to recovery for South African insurers.

“While the pandemic is outside the realm of control for insurers, the best course of action for companies may be to focus their efforts inward on a ‘survive and then thrive’ strategy,” says the report.

The paper presents seven moves for survival. “These moves aren’t new, as most insurers are already implementing some combination of them, but previously, they were about driving a step-change in performance. Now they are about survival.

“Many already have initiatives in place to facilitate end-to-end digitisation, improve operational efficiency, bolster cybersecurity defences and enhance the customer experience. Insurers in RSA now need to accelerate implementation and track results systematically to ensure that business value is captured.” 

McKinsey & Company’s quarterly Financial Insights Pulse Survey of South African financial decision makers, conducted in July 2020, reveals a sharp shift in consumer attitudes and behaviour: 45% of respondents expect to engage in fewer physical in-branch or face-to-face interactions and 42% expect to make greater use of mobile and online channels, even after the crisis

McKinsey & Company outline seven moves to recovery:

1. Prioritise a digital-first approach

Leading players are moving decisively on their direct digital-sales channels while also boosting agent productivity through better digital tooling and customer self-service.

When going digital, an important element is customer-focused experience design. A survey in Spain found digital access had increased by almost 30% since the pandemic but the level of customer satisfaction was the lowest, compared with all other sectors. The number-one reason given was that the tools were hard to use.

2. Adopt advanced-analytics-based decision making

Most insurers are not doing enough to harness data through advanced analytics, even though the benefits cut across all areas of the business from lead generation and underwriting to customer service, risk management, and claims handling.

“During a downturn, prioritising digital and analytics transformation has two key advantages,” says Katy George, a senior partner at McKinsey: “it can help management teams understand their businesses better and can improve efficiencies. The past two recessions led to large upticks in fraudulent insurance claims and customer churn. Data and artificial intelligence provide opportunities to counter this through improved underwriting, pricing, fraud-detection and collection practices.”

3. Reinvent the operating model for speed and cost

The average acquisition cost for insurers is about 5% of premiums (3.5% for general insurance and 5.5% for life insurance), while expenses are approximately 10% of premiums (17.4% for general insurance and 8.5% for life insurance). By comparison, top-quartile European insurers have a total expense ratio of approximately 7% of GWP, suggesting that there is room for improvement for South African companies.

4. Strengthen cyber resilience and operational-risk defences

As work-from-home models become the new norm, and insurers move more of their operations online, the insurance industry will be in a constant race to stay one step ahead of cybercriminals. 

Cybercrime was already growing with a leading cyber insurer putting the increase in ransomware-attack notifications against its clients in 2019 at 131% of 2018 levels. Companies could invest in their defences and manage the risk through better monitoring of collaboration tools, networks and end points.

5. Double down on talent

As the pressure mounts to attract, recruit and retain top digital talent, insurers in South Africa may have to look beyond traditional talent pools.

The COVID-19 crisis has opened up new avenues for recruiting while changing valuations may present opportunities for acquiring such skills through the acquisition of tech companies that were previously out of reach. In addition, companies could support talented employees through continued learning.

6. Develop an ecosystem approach through partnerships

Ecosystems are interconnected sets of services or products that allow users to fulfil a variety of needs in one seamless experience. 

In a given ecosystem, insurers can play roles of either orchestration or participation. Prime examples of orchestrators are Discovery, which uses partnerships to integrate non-insurance services into the insurer’s realm, and Ping An China, which arranges its ecosystems using its own subsidiaries.

Another trend, which began in Asia and continues to gather speed, is the rise of “super apps,” such as WeChat. In RSA, several financial-services players are attempting to follow these approaches, often linking super apps to their reward programmes.

7. Consider M&A opportunities

Those insurers with an optimistic, solution-focused mindset that adapt to changing customer expectations and are willing to rethink traditional business models to harness the full promise of digital will be more likely to emerge from the current crisis in a strong position. 

McKinsey & Company predict the key for Insurers to thrive is to look beyond survival but to focus on long-term sustainability.

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