To assess the digital maturity of businesses, and hence their ability to thrive in a digital world, McKinsey has devised a simple metric, the Digital Quotient®. The DQ evaluates 18 management practices connected to four areas—digital strategy, capabilities, culture, and organization—that correlate most strongly with growth and total returns to shareholders.
Its application reveals that, relative to sectors such as telecoms, travel, and retail, the insurance industry remains in the early stages of digital transformation. Indeed, among the nine industries measured, insurance ranked seventh, scoring an average of 31 points out of 100 (Exhibit 1).
McKinsey research shows that this lag is due largely to a weak digital culture. Of the five attributes important to a digital culture—an appetite for risk, a test-and-learn approach to product and service development, agility, willingness to collaborate internally, and willingness to collaborate externally—US P&C insurers struggle most with the first three (Exhibit 2).
The stark performance differential matters. Top P&C insurers, those that score 50 and higher, are increasing revenue 1.5 times as fast as the rest of the field and operating with a combined ratio that is eight percentage points lower. Our research examined what insurers are doing differently in the four management practice areas to outperform their peers (Exhibit 3).
Strategy. Top-performing P&C insurers scored on average 73 for the effectiveness of their digital strategy, compared to an average of 40 across all companies. This strong performance was driven by three enablers: a bold long-term vision based on a clear and shared articulation of customer priorities, strong support from senior leaders, and a firm set of targets for growth, market share, customer satisfaction, and return on equity.
Capabilities. The best performers were particularly strong on connectivity between channels and digital content creation, earning an average score of 43 for their digital capabilities compared to an average cross-industry score of 29. They generate 47 percent of all sales over digital channels, compared to 11 percent for the average insurer. They also make it easy for customers to file first notice of loss claims online, receiving 15 percent more such notifications over digital channels than the average insurer.
Culture. A handful of cultural attributes separate outperformers from the rest of the pack. They have a greater risk appetite for digital initiatives, embrace a test-and-learn mindset, enforce cross-disciplinary collaboration, and look outward for inspiration.
Organization. High-quality governance and employee practices, and the effective alignment of roles and responsibilities, are especially correlated with market success. But even top- quartile companies that institute dynamic measurement and talent development practices can struggle to adapt the way they work. Insurers on average record poor to middling performance in fostering a digital organization, with an average score of 22 compared to an average of 37 for all industries.