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McKinsey: You cannot overtake fifteen cars when it’s sunny weather, but you can when it is raining

Written by Simon Kaesler (Senior Partner, McKinsey Frankfurt) & Christian Irlbeck (Associate Partner, McKinsey Düsseldorf) on Aug 5, 2022

After more than two years of digital knowledge sharing, global management consultant and DIA’s knowledge partner McKinsey & Company shared their vision with DIA’s audience on stage. In this thought leader piece, they share the key messages from their presentation. Did you know that McKinsey and Company is also on stage at DIA Munich 2022? Get your tickets for DIA Munich here!

Simon Kaesler (Senior Partner at McKinsey in Frankfurt) and Christian Irlbeck (Associate Partner at McKinsey in Düsseldorf) expressed that a lot has happened in these past two years and a lot is still happening. In their keynote, they reflect on what happened in these years and what the future holds. Despite today’s many negative influences, such as war, inflation and high-interest rates, Simon and Christian remain optimistic about the sector.

COVID accelerates digital transformation but not yet in numbers

Reflecting on the pandemic, COVID was expected to be an accelerator of digital as people and companies had to adopt a digital mindset. At the same time, insurers were unsure about the impact on their business results. Simon showed that in reality there was a slightly accelerated growth on both top line and profits, thanks to premiums continuing to grow (2%) and claims going down. A lot of this additional profit was generated in the P&C space, which compensated for decreases in overall profitability in Life due to COVID.

Exhibit 1

A mixed pattern was seen in actual customer behavior. On the one hand, people use digital channels, like digital touchpoints for claims, they used new apps, websites and phones much more than in the past. On the other hand, the share of digital distribution in P&C did not go up (see exhibit 1) and is still less than 20%.

Though this may be a surprising outcome, Simon shared there may be a couple of reasons:

  • Premiums did not go up and as renewal prices were lower than in the past, people did not have the need to switch insurances.
  • Going online to buy insurance was not top of mind amongst customers as they had other concerns.

He shared that in the next five years, the industry landscape will have a more diverse picture with integrated insurers with either (global) scale or clear focus, ecosystem orchestrators owning the customer interface, white-label providers enabling “embedded insurance” and industry technology utilities in core value chain steps – and insurtechs can play a key role in the landscape going forward.

Insurtechs have a positive contribution

Christian praised insurtechs for their positive contribution to the customer side as well as the insurance and distributor side. On the customer side, they are adding to a better customer experience, higher transparency and speed. Towards insurers and distributors, they function mainly as accelerators to innovation.

Overall, McKinsey sees three types of successful insurtech models in the insurance industry landscape

  • Focused models (B2C) that offer differentiated propositions for a certain customer segment (e.g., SMEs or millennials), channel (e.g., aggregators or brokers) or product (e.g., pet or cyber) – several initial successes of having acquired hundreds of thousands of customers or even more
  • White-label models (B2B2C) that drive “embedded insurance” across new customer control points
  • Technology-driven utility players (B2B) that offer a distinctive proposition for selected parts of the insurance value chain, e.g., offering technology to improve the end-to-end claims process

However, despite multiple initial successes, the market share of insurtechs is still limited from a number perspective: In terms of sales, insurtechs do roughly 10% of the direct market, which is only ~1-2% of the overall P&C insurance market – a lot of further room to grow.

Funding and valuations peaked and now stabilize

Last year was a record year with € 3 billion in European Insurtech Funding. This more than doubled compared to 2020. In 2022 the expectation is that it might be slightly below last year.

McKinsey sees an increasing polarization, as there was bigger, more mature funding instead of a big increase in smaller rounds (see Exhibit 2).

Exhibit 2

Last year, comparing the revenues or premiums to valuation, you saw multiples of 10, 20 even 30 compared to traditional insurance companies. This year’s valuations went down quite substantially, but the multiple is still higher than traditional insurance companies. What happened? Valuation levels were high, maybe too high as people were too optimistic when COVID hit. Now interest rates went up, which hits a growth company economically hard. Insurtechs are also not scaling as fast as promised and several balance-sheet models could not show tech-company-like outperformance. And also, political and economic unrest has a negative impact on valuations.

Even though this also sounds quite negative, McKinsey is still positive about the mid- and long-term outlook.

Opportunities are big – also in the rain

Christian compared the future of insurtech with fintech going back a few years in time as fintechs are a bit ahead of the broader insurtech space. Fintechs are now accounting for more than 20% of the market capitalization of traditional banks as the latest McKinsey analyses have revealed. If you take all the non-traditional players and the banking industry together, it’s actually more than 50% of the total value.

Translating this to the insurtech space (see exhibit 3), it would imply a value of more than € 200 billion at the end of this decade. With €40 billion in value today, it means a lot more value needs to be created. This of course also requires more investments. McKinsey estimated this would be around €5 billion per year over time to get to this potential. Which is more than the € 3 billion funding we saw last year.

Exhibit 3

He shared the investor perspective on what creates true value in insurtech and what successful insurtech models have in common, e.g., real customer ownership while being able to acquire customers at reasonable economics, delivering 10x improvements rather than incremental digitization of products and journeys, and a true performance culture) and also emphasized the short-term outlook.

For now, decisive action is needed to also survive this short market downturn, especially stronger steering on profitability and liquidity management. However, there are also many opportunities in this environment: Several of today’s digital leaders such as Amazon, Uber, Instagram and many others have actually emerged in times like these.

As one of Christian’s favorite Formula 1 drivers (Ayrton Senna) once put it: “You cannot overtake fifteen cars when it’s sunny weather, but you can when it is raining.”

It’s a bit rainy outside. So, let’s try to accelerate and overtake.

Learn more here:

Watch their keynote presentation at DIA Amsterdam 2022.

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