Prior to joining McKinsey, I was fortunate to spend 17 years in the insurance industry as a global broker. I entered the business in 2002, when—as one would rightly imagine—the months in our industry immediately following the September 11th attacks were tumultuous and rife uncertainty. Global insurance capacity was crashing, especially in the large commercial property market, and many of the risk transfer and commercial exchange practices that governed the industry for hundreds of years were no longer so certain.
At McKinsey, my role is to enable small commercial insurers to thrive in the digital era. Nearly 20 years ago, medium-size and regional carriers were not subjected to the massive shock and capacity crunch that their large-market peers faced. Now, however, this segment of commercial carriers is at a different crossroads. The explosion of data and analytics resources that can replace traditional underwriting methods is fueling a massive shift toward operational efficiency and the straight-through processing (STP) of risk. Greater volumes of data are becoming available, and analytical tools are becoming ever-more sophisticated in extracting insights from that universe of information. The result is an industry race toward efficiency, meaning that medium-size and regional carriers will need to keep up with their larger peers to remain viable in the small commercial space.
I’ve spent the past year meeting with hundreds of small commercial carriers, brokers, agents, managing general agents (MGAs), and managing general underwriters (MGUs). I’ve also been fortunate enough to spend a good amount of time hearing from many small-commercial-insurance customers. Across the entire value chain, observations seem to be converging around four themes.
1. The game is becoming digital. While small commercial carriers are certainly behind their personal lines peers in the digital evolution process, they are increasingly looking to encourage efficiency in customer interactions by moving them to digital channels. Large established carriers and smaller regional ones are partnering with insurtechs to better equip them to operate in this new digital paradigm.
Recently, I visited with an industry colleague who currently serves as the president of an independent agency in a large Midwestern market. He was particularly interested in how the new digital tool kit of data and analytics could increase efficiency in the specialty casualty market. While commercial auto and property coverages in small commercial are relatively standardized, the casualty coverages are manifold. Finding ways to bring efficiency and simplicity to this space will remain elusive, but technology will play a critical role.
2. Insurtech start-ups are not disrupting as much as they are enabling. Insurance is perhaps different from most other industries in the sense that many, though not all, of the digital competitors are seeking to partner with and not completely supplant existing legacy providers. It would appear that our industry is different from other traditional verticals, such as retail, in the sense that the start-ups are here to amplify the existing value propositions of carriers rather than seeking to compete directly with them.
Recent McKinsey research indicates that 61 percent of insurtechs surveyed seek to empower the existing value chain for incumbent carriers, from product delivery and distribution through underwriting and claims—not to disrupt the role of legacy carriers in the space.
3. Customers are going omnichannel, yet in-person engagement remains crucial. Customers want to interact with their insurance providers digitally, through voice communication, and face to face. Carriers and agents are responsible for meeting their customers where they are, which is increasingly on their phone, tablet, or computer. McKinsey research shows that nearly 70 percent of customers in the information-gathering stage of a small commercial insurance purchase are learning about coverages through a mix of channels (such as online and call centers).
When it comes time to make the purchase, however, the situation changes. Despite the myriad omnichannel options for information gathering, comparison shopping, and the like, customers still tend to gravitate toward a trusted adviser to facilitate the transaction. Our research indicates that 82 percent of customers elect to complete their purchase with an agent when binding coverage.
4. Agents are still vital in commercial lines. Small commercial insurance’s fundamental complexity requires more coaching and advice for customers to secure the right coverage, as compared with personal lines, which is more straightforward. Further, it’s important to remember that customers are not a monolith; preferences vary across industries and certainly across individuals as well. In evaluating the appropriate role of agents and intermediaries in the small commercial space, it’s especially important to gain a true understanding of customer preferences.
Significant density within the small commercial space is due to not only hundreds of business classes but also a complex web of error and omissions coverages that still draw upon wholesale brokers for placement and excess lines markets for capacity. The standardization that drove the commoditization of products in the personal lines world simply doesn’t translate well in commercial coverages.
The winning model of future small commercial will need to draw upon these four themes. Clearly, the ongoing necessity and relevance of the trusted adviser in supporting customer purchasing decisions is paramount. Leading carriers will be those that empower the carrier–agent relationship with data and analytics while still remaining adaptable to the multiple channels that customers choose for interaction.