Fit for the Future: An Urgent Imperative for Board Leadership

It is a truism that the only constant in business is change. But that statement does not remotely do justice to the scale and scope of the multiple changes confronting business in the first half of the twenty-first century:

  • Rapid and far-reaching advances in technology are reshaping competition and the process of value creation in every business sector.
  • The struggle to deal with climate change is beginning to transform the economics of extractive industries and others.
  • Global supply chains are challenged by geopolitical and mercantile conflicts.
  • Investor scrutiny is more demanding than ever.
  • Society’s expectations of business are increasing as governments struggle to address mounting challenges—income inequality, threats to data privacy, crumbling infrastructure, global warming, and so forth.

Each of these changes in itself is seismic. But what makes the current epoch uniquely unpredictable and hard to navigate is the fact that these changes are happening concurrently, interacting with and amplifying each other, as illustrated in the figure below. As a result, companies may find it extremely difficult to anticipate the full impact or the second- or third-order effects of these disruptions in the next few years. This is especially true for boards of directors and their leaders, whose job it is to secure the long-term success of their companies. It is a challenge that is not going away any time soon—indeed, all indications are that it will become more acute.

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AN EXISTENTIAL THREAT

As last year’s Blue Ribbon Commission report on board oversight of disruptive risks pointed out, these trends

  • “have the potential to change industry structure or operating conditions,
  • make existing business models obsolete,
  • derail growth,
  • or otherwise pose a fundamental threat [or transformative opportunity] to the long-term strategy of the organization.”

But while the threats are clearly existential, it is far from clear that all companies and their boards are adequately equipped to respond, because many of the big issues facing business are in new or uncharted territories. Technology is one obvious disruptor which is reshaping industries and forcing companies to consider new forms of collaboration that would have been unimaginable a few years ago. For example, the car industry is having to retool its entire production system to meet rising projected demand for electric vehicles while forming partnerships and joint ventures with leading software providers to exploit the emerging markets for autonomous cars. The competitive battleground and source of value creation has shifted rapidly and radically from the vehicles’ hardware to the systems driving it. Another challenge is the complex issue of climate change, where companies are feeling their way toward a response to fundamental market shifts involving international politics, governmental regulation, and investor expectations while considering the economic impact of climate risk. Boards need to bolster their capacity to navigate this labyrinth. A third and rapidly-moving set of challenges is emerging from tectonic shifts in geopolitics and in particular from the rise of great-power rivalry, trade protectionism, and mercantilism—notably in the domain of technology, where the United States and China are engaged in what some see as a new arms race for control over the systems of the future.

Overarching all of these trends is another relatively new pressure: the pressure for companies to articulate and justify their broader purpose, in terms of how they address society’s unmet needs in an era of great social change, activism, and political uncertainty. This is certainly the message from some of the largest institutional investors. As Larry Fink, CEO of BlackRock, put it in his 2019 CEO letter to portfolio companies, “Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials—who today represent 35 percent of the workforce—express new expectations of the companies they work for, buy from, and invest in.”

CREATIVE DESTRUCTION ACCELERATES

One important inference from these trends is that the formula for past success matters even less to companies considering their future. Research conducted in 2018 for the Fortune Future 500 initiative (the public companies with the best long-term growth outlook) shows that for large companies, there is now less correlation than there was before between past and future financial and competitive performance over multiple years. This means that companies can no longer hope to prosper merely by sticking to their historical growth strategies and competitive advantages. Relying on past success can engender complacency—itself an existential threat.

It is certainly true that the process Joseph Schumpeter called “creative destruction” is accelerating, and in consequence corporate lifespans are shrinking. A 2018 Innosight study showed that, based on recent trends, nearly half of the corporate constituents of the S&P 500 could be expected to be replaced over the next 10 years. While companies in the S&P 500 had an average tenure of 33 years in 1964, tenures had narrowed to 24 years by 2016 and are forecasted to shrink to just 12 years by 2027. This accelerating churn is to be seen also among very young firms—for example, five-year survival rates for newly-listed firms have declined by nearly 30 percentile points (dropping from 92 percent to 63 percent) since the 1960s. In a parallel trend, the median CEO tenure for large-cap companies has been shrinking steadily over time—indeed, it dropped by one full year between 2013 and 2017. Median tenure is now five years.

Structural change and industry consolidation are also impacting the nature of competition, creating a “winnertakes-most” dynamic in an increasing number of business sectors. Recent research based on analysis of 5,750 of the world’s largest companies shows just how unevenly the fruits of success are now distributed in terms of economic profit (a measure of a company’s invested capital times its return above its weighted cost of capital). The top 10 percent of these companies captured fully 80 percent of positive economic profit between 1994 and 2016.

All of these implications are brought into sharper focus by the increasing shareholder scrutiny which companies are now under, not only from activist investors but also increasingly from institutional investors who wield their significant influence to demand change. Stephen Murray, the president and CEO of private equity firm CCMP Capital, goes so far as to say, “The whole activist industry exists because public boards are often seen as inadequately equipped to meet shareholder interests.” So the challenges for boards and management teams are stark—probably more so now than at any time since the birth of the modern corporation a little more than a century ago. They mean that some, though by no means all, of these individuals’ accumulated experience in strategy development and execution may be less relevant in the future than in the past. And they suggest that board leaders in particular need to adopt a new mind-set and consider a different modus operandi attuned to the demands of this rapidly-changing environment.

IMPLICATIONS FOR BOARDS

Three years ago, in its Report of the Blue Ribbon Commission on Building the Strategic-Asset Board, NACD first pointed out that a new leadership mandate for boards was emerging, driven by “an operating environment . . . that is characterized by increased complexity and uncertainty and includes new sources of risk and opportunity.” It highlighted the role of the board leader in driving a continuous improvement ethos to ensure that the board remains fit for its purpose. Yet performance expectations for boards continue to rise. In a 2019 NACD survey, 73 percent of directors reported that board leadership is more challenging now than it was three years ago, and 84 percent reported that performance expectations had gone up for all board members. Directors admit that they find it really challenging to keep up with change. In the same NACD survey, 36 percent of directors cited the struggle to stay abreast of the changing speed of business as one of the key impediments to the effectiveness of board leaders. Commissioners for this report echoed that concern and highlighted it as a challenge for the entire board. “Many directors don’t feel comfortable talking about emerging technologies, cybersecurity, and other complex topics,” said one Commissioner. “As a result, they tend to defer to others, which can become an abdication of their responsibility to be active board members.”

In the view of the Commission, this shifting business paradigm has profound and immediate implications for boards, and these implications will intensify dramatically over the next 5 to 10 years. They cover

  • board engagement with management,
  • board renewal,
  • operations,
  • transparency,
  • and accountability.

Some of these implications are not new—indeed, boards have been grappling with all of them with greater or lesser success for some time. But there is no doubt that all of them have recently become more acute, and now pose an urgent challenge to board leaders.

  1. IMPLICATION 1: Boards must engage more proactively, deeply, and frequently on entirely new and fast-changing drivers of strategy and risk.
  2. IMPLICATION 2: Boards must approach their own renewal through the lens of shifting strategic needs to ensure longterm competitive advantage.
  3. IMPLICATION 3: Boards must adopt a more dynamic operating model and structure.
  4. IMPLICATION 4: Boards must be much more transparent about how they govern.
  5. IMPLICATION 5: Boards must hold themselves more accountable for individual director and collective performance.

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SETTING EXPECTATIONS FOR THE NEW BOARD LEADER

The fundamental role of board leadership stays the same: building and maintaining high-performing boards that build long-term value. Here is how NACD has described board leaders and their role in its past Blue Ribbon Commission reports:

Board leaders are the linchpins on many key issues, including the board-CEO relationship, board dynamics and culture, setting the board agenda, information flows between the board and management, and stakeholder relations (especially board-shareholder engagement).

Many NACD principles and positions about what constitutes good board practice are contingent upon having a strong and effective leader in this role. Strong, qualified individuals in this role “[have] the ability to give the board a competitive advantage.”

As seen in the infographic that follows, based on 2019 NACD analysis of S&P 500 chairs and lead directors, board leaders today have extensive tenure on the boards they serve, bringing with them strong institutional memory, and they almost always have past experience in business leadership roles and a proven track record in strategy and execution.

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PRIORITY RESPONSIBILITIES FOR BOARD LEADERS OF TODAY
Lead the setting and monitoring of board performance goals that are regularly synchronized with the (shifting) business strategy.

  • Drive alignment and connectivity. This includes staying connected on material new initiatives and strengthening alignment in how committees and the full board engage on crucial, but now fast-changing, issues such as strategy, risk, disruption, talent, corporate culture, incentives, and technology.
  • Lead the setting of shared values and expectations for a well-functioning board, including the use of a fully candid board, committee, and individual-director performance evaluation.
  • Pay continuous attention to (a) what’s working and why, (b) what’s not working and why, and (c) how the board can use this knowledge to improve its effectiveness.
  • Spend considerable time in one-on-one discussions on key topics with other board members, the CEO, and the management team, with a focus on ensuring openness of discussion and constructive group dynamics.

DESIRED ATTRIBUTES FOR BOARD LEADERS OF TODAY
Fortitude and vigilance to ensure that changes in board processes and practices change behaviors over time

  • Adaptability—a willingness to recognize a board’s new needs and responsibilities and adjust board practices, processes, agenda setting, and structures accordingly
  • Superb communication skills, especially with regard to difficult communications, including sensitive messages to the CEO and to fellow directors
  • Aptitude for relationship building, not just with the board, the CEO, and the senior team, but also with key shareholders, stakeholders, and regulators
  • Inclusiveness—ensuring that the growing diversity of the boardroom is optimized, and enhancing collaboration that is inclusive of different, unconventional thinking
  • Humility—placing a high premium on listening and seeking to understand the (contrasting) views of others. The successful board leader presents himself/herself as “last among equals”

STRENGTHENING BOARD ENGAGEMENT

Board leaders will need to orchestrate more meaningful board engagement to help inform strategic choices and to understand the risks being taken in a much more uncertain and fast-changing environment. Earlier, we described the pressures for boards to become more actively engaged with their companies, without falling into the trap of micromanagement or losing the objectivity required to oversee the business. We suggest that this requires collaboration and candid dialogue between boards and management teams about respective roles and responsibilities.

  • Clarifying where the board would like to seek deeper involvement and why this creates better governance. Examples might be earlier and more in-depth understanding/verification of strategy development and underlying assumptions, preparations for responding to disruption, and plans for major corporate transformations.
  • Creating a shared picture of the present, and of the future, and of where the industry and the competition are headed, and of what that means for strategy.
  • Enhancing board focus on innovation and change. Here is another shift made imperative by the speed of business change. Where in the past a board’s typical posture may have been to act as a brake on management’s ambitions, an equally important goal should now be to work with management to ensure that they embrace innovation and can successfully drive change in the organization.
  • Assessing how well management is maintaining critical alignments among key determinants of performance (e.g., strategy, risk management, innovation, controls, incentives, culture, and talent). This becomes increasingly important as strategies are more frequently being recalibrated.
  • Establishing a framework for more frequent, focused management communication with the board between formal meetings. This can help streamline the meetings themselves, freeing up time to focus on the most critical strategic matters.

DRIVING STRATEGIC BOARD RENEWAL

In order to deliver more meaningful and deeper engagement on entirely new issues, the board leader and the chair of the nominating and governance committee should thoroughly assess whether the board has the right human capital to fulfill its mandate and deliver ongoing value. One of the key questions will be whether the board’s existing composition is aligned with the challenges likely to face the business in the future sketched out together with the management team, and if not, how it should best be renewed. One useful way of thinking about this task could be a “clean-sheet” approach to board diversity and composition, which NACD first recommended in its Blue Ribbon Commission report on building the strategic-asset board. In particular, nominating and governance committees should consider asking the following questions:

  • If we were to create a board from scratch today, what would it look like holistically, from the standpoint of skills, leadership styles, and backgrounds? What will we need in three, five, or more years?
  • Have we sufficiently mapped out our strategy and risks into the future to understand what profiles we need?
  • How should our board composition represent the characteristics of the company’s current and future customer base as well as its workforce?
  • If we are anticipating adding one or more new directors in the next couple of years, have we vetted our recruitment profile to ensure criteria are relevant and that they are not unnecessarily restricting access to appropriate candidates (e.g., requiring CEO or prior board experience)?

BUILDING AN INCLUSIVE BOARD CULTURE

Boards already know how to be purposeful in seeking out individuals who bring a variety of backgrounds, perspectives, and skills. Now they need to be just as purposeful in creating an environment that enables those diverse voices to be heard. The board leader has a critical role to play in activating diversity in the boardroom by recognizing that the aim is not “hiring for diversity and then managing for assimilation.” The goal of the board leader after bringing in new board members is not assimilation but rather enhancing collaboration that is inclusive of different, unconventional thinking. With higher levels of diversity in the boardroom—whether this is diversity in experience, skills, gender, race, ethnicity, or age—it’s critical for board leaders to create a culture that facilitates constructive and candid interactions between board members and that ensures that each director is heard from on important issues.

FOSTERING CONTINUOUS LEARNING

“Continuous lifelong learning’’ is such an oft-heard phrase that it’s close to becoming a cliché. But it’s nonetheless a worthwhile approach for boards and management teams to adopt—because when the pace of change is accelerating, “the fastest-growing companies and most resilient workers will be those who learn faster than their competition.”

This, too, will function most effectively as a collaborative effort between the board and the management team. It’s the role of management to help educate the board about the future and its impact on strategy. The board leader should help the C-suite understand the board’s expectations for the learning process, the time line, and the board’s information needs. At the same time, the board leader should set the expectation that directors not rely solely on management for all of the information they receive, but rather seek out other external sources proactively to deepen their understanding of the business. The agenda for potential learning is vast and constantly growing. “Some learning opportunities may be specific to individual directors; others may be common to all members of a committee or to the entire board (e.g., raising the board’s collective knowledge about cyber threats). Individual, committee, or board-level learning agendas might include

  • industry-specific topics;
  • emerging economic and technology trends;
  • governance matters;
  • regulatory developments;
  • shareholder/stakeholder issues;
  • and/or team dynamics and decision making.”

Commissioners offered a number of observations about the pursuit of structured board learning:

  • First, that it is not just a matter for board leaders and committee chairs—it is a collective task for the whole board to stay “constantly curious.” This can be assisted through experiential learning, where the board visits company sites or meets local managers.
  • Second, there is a constant need to focus collective learning on new technologies—not just the features of emerging technologies but also the reasons why they are so disruptive and how competitors have succeeded in commercializing them.
  • Third, longer-serving directors will benefit from periodically refreshing their knowledge of the basics—for example, by joining new director orientation in order to understand how management’s presentation of the issues may have changed.
  • Finally, the learning imperative applies equally to management. To this end, selected executives should be encouraged to take board positions with companies that are not competitors.

BUILDING AGILITY INTO BOARD OPERATIONS AND STRUCTURE

As stated earlier, the dynamic external environment requires boards to be more careful than before about how they allocate their time, but also more flexible in responding to events. The starting point is effective agenda setting for board meetings.

Agendas

The Commissioners offered a number of specific ideas for enhancing board meeting effectiveness:

  1. First, think holistically about the entire cycle of meetings throughout the year and not just about the agenda for individual meetings. The objective is to ensure the highest return on the time that the board spends together and with management—including what happens outside, around, and in between the actual board meetings.
  2. Second, make a deliberate effort to ensure that board meetings are not predominantly focused on the past and on compliance—on the rear-view mirror, so to speak. Create “white space” time for open conversation and time to delve into identified issues of importance. Foster dialogue and minimize time spent on formal presentations.
  3. Third, take a strategic and almost mathematical approach to time allocation. One Commissioner described how the board tracks how it is spending its time in meetings, then asks board members their opinions about how the board should be spending time, and periodically optimizes the mix.
  4. Fourth, try to maximize one-on-one time with the CEO and the board. It is important to spend time with the CEO without other managers present. An hour and sometimes more at the start of every meeting, and then again at the end, coupled with a CEO/director-only dinner, is an effective way “to get everything that needs airing out on the table.”

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Click here to access NACD’s entire report

Accelerated evolution – M&A, transformation and innovation in the insurance industry

Strong appetite for deal activity

Today’s insurers know that maintaining the ‘status quo’ is not a recipe for sustainable growth. They feel the pressure of disruption in the market from

  • new competitors,
  • new technologies,
  • new customer demands
  • and new sources of capital.

They feel the pain of

  • continued low interest rates,
  • volatility in underwriting losses
  • and pressure on profitability,

as investment portfolio yields continue to decline.

Organic growth has been challenging across most of the mature insurance markets. Consider this: Since the start of this decade to 2016, global gross domestic product (GDP) increased by more than 20 percent. Yet the global premium market grew by just 9 percent over the same period. Insurers recognize that things must change if they want to maintain or grow their market share.

“In an era of anticipated disruption of legacy business and operating models, global insurance executives realize that their strategy cannot be about pursuing growth for growth’s sake. When it comes to growth strategy, more of the same is not necessarily the best answer. What may have been a core business in the past may not be in the future,” notes Ram Menon, KPMG’s Global Insurance Deal Advisory Leader.

Today’s insurance leaders are taking a more strategic view of the value of M&A. According to a recent global survey of 115 insurance CEOs conducted by KPMG International, more than 60 percent of insurers now see disruption as more of an opportunity for growth than a threat. And they are using their capital and their M&A capabilities to maximize those opportunities — often by strategically deploying capital towards emerging technology as a competitive advantage to

  • engage customers,
  • generate cash flows
  • and enhance enterprise value.

The good news is that — for the most part — capital and surplus levels are at record highs across life, non-life and reinsurance markets. And most insurers plan to tap into that capital to make deals. In fact, our survey suggests that close to three-quarters of insurers expect to conduct an acquisition and two-thirds expect to seek partnership opportunities over the next 3 years. Eighty-one percent say they will conduct up to three acquisitions or partnerships in the same period. More than 70 percent said they are hoping their deals will help transform their organization in some way. As a top priority,

  • 37 percent hope to transform their business models,
  • 24 percent want to transform their operating models,
  • and 10 percent are looking to acquire new innovation capabilities and emerging technologies

through their acquisitions.

“Insurers increasingly recognize their days of operating business-as-usual numbered. And it’s not small changes market going to be undoing — big ones,” says Thomas Gross with KPMG Germany. Auto insurers, for example, looking at rapid adoption of mobility models and wondering how they add value when car manufacturers or leasers own relationship customer.”

On their path to transformation, insurance companies expect to strategically deploy capital against a range of specific inorganic growth opportunities:

  • transforming their business models for sustainable growth;
  • modernizing their operating models for profitable growth;
  • enhancing customer engagement;
  • and gaining access to innovation and emerging technologies.

“The top factor that will drive insurance acquisitions will be the need for emerging technologies. Insurance companies are all looking at how to put their operations on digital platforms in order to save time and resources both for the company and the customers,” notes the Head of Finance at a China-based property and casualty (P&C) insurer. At the same time, a significant number of insurers also hope to rebalance their portfolio of businesses. Many plan to evaluate whether they should fix or exit businesses that are struggling to achieve returns in excess of their longterm capital rates. This should allow them to remain focused on transforming businesses they consider core for the future while freeing up additional capital for reinvestment into new lines of business and technology capabilities.

As the director of finance at a UK-based non-life insurer notes, “Units that are consistently performing poorly will be segregated to further analyze their positions and whether or not they still fit in the company’s planned structure. We discourage force-fitting any product or company unless it has great potential for generating revenue. If it does not, we look for suitable buyers for the business.”

Our data indicates, insurance executives expect to exit non-core businesses, enter new markets and gain access to new technology infrastructure and operating capabilities via M&A and partnerships, as a way to further diversify their global risks and earnings profile.

Looking beyond the borders

Our survey suggests that the majority of insurers will be involved in some sort of non-domestic deal: 68 percent say they expect to conduct a cross-border acquisition, partnership or divestiture over the next 3 years. Just 32 percent say their top priority will be on domestic activity.

“Over a period of 3 years, we expect to see a lot of M&A transactions overseas. We are looking to expand into regions that are new for us and with acquisitions, you can get going without having to set up a base from scratch or encounter a lot of unforeseen risks,” notes the senior VP for M&A at a global insurance brokerage firm. Perhaps not surprisingly, our data suggests that insurers expect to see the most activity in North America — the US in particular. Given that the US is still the largest insurance market in the world with around 30 percent of the global premium market share, many insurers see the US as a source of steady market growth and relative premium stability.

“The volume of M&A in North America will increase the most in the coming years. With the new tax reforms, insurance companies will pay lower taxes — these new regulations will provide insurers opportunities to grow. Companies from other markets will also want to take advantage of the lower tax rate and will look for ways to expand into the US market,” suggested the CFO at a Bermuda-based reinsurer. Changes to US tax laws will certainly create significant disruption and opportunity for insurers both onshore and offshore. “The reduction in the corporate tax rate to 21 percent makes US assets much more compelling,” notes Philip Jacobs, leader of the Insurance Tax practice with KPMG in the US. “The lower US tax rate has also eliminated some of the offshore tax advantage; the large Bermuda players may still be operating with relatively low effective rates, but the tax differential between operating in the US versus Bermuda has narrowed.”

Latin America, however, expects relatively lower levels of deal activity. “It’s a sellers’ market in Latin America,” notes David Bunce, Senior Client Partner with KPMG in Brazil. “Lots of international insurers want to get into certain Latin American markets, but nobody is really ready to sell.”

At the other end of the spectrum — and the other side of the world — Asia-Pacific is widely viewed as a region of massive growth potential and innovation. China has already become the world’s second largest insurance market (with around 10 percent of
global premium market share) and premiums have more than doubled since 2010. Singapore and Hong Kong have long been key centers of insurance innovation growth.

Asia-Pacific was identified as the geographic region where insurers would most likely seek partnership opportunities. “As insurers seek to expand outside of their traditional distribution networks in Asia, digital partnerships are emerging as a fairly quick way to tap into new customer segments without significant upfront capital investment,” adds Joan Wong with KPMG China. “A digital partnership could unlock significant new growth, which would tip the balance for those making a ‘go or grow’ decision about their businesses.”

The director of investment at a Korea-based international insurer agrees. “Asia has become one of the biggest markets for insurers, and the region’s growing population along with changes in capital regulations will give insurers the backing they need to grow. In China alone we have seen a major increase in the number of companies seeking out new ventures in the insurance sector.”

While the majority of our respondents say they are looking across their borders for growth, those in Asia-Pacific are much more likely to be focused on domestic acquisitions instead. “Most of the markets in Asia are still fairly domestically oriented and there is still significant fragmentation and inefficiency that could be eliminated,” adds Stephen Bates with KPMG in Singapore. “Given the growth potential across the region, it’s not surprising that Asian insurers are thinking about taking advantage of opportunities at home before investing further into foreign markets.”

Somewhat tellingly, insurers expect most of the divestiture activity to originate from Western Europe. As the head of finance and investments at a large French insurer argues, “The persistent compression in global interest rates continues to be a challenge for the insurance industry, and many companies in Europe are aiming to divest in part to cope with this. When you add in the factors of changing regulation and customer demographics, it means that insurance business models have evolved and companies are reshaping themselves accordingly.”

“Insurers in Europe are very interested in diversifying their risk and see adjacent markets as an opportunity to do just that,” notes Giuseppe Rossano Latorre, Head of Corporate Finance at KPMG in Italy. “There are a number of life insurers that are looking at the asset management business, for example, as a potential growth opportunity in the future.”

Our data indicates that in the Life sector, acquisitions will likely focus on finding lower-risk, higher-growth, higher-return assets, particularly around capital-light retirement, investment management and group benefits businesses. However, greater levels of activity should be expected in the Nonlife sector, driven by a growing appetite for more profitable specialty risks and commercial risks, with a preference for commercial risk in the small- and medium-sized enterprise (SME) sector.

What this survey makes clear is that global insurance companies recognize they now have a window of opportunity to strategically allocate their capital across the globe towards achieving and accelerating their transformation strategy.

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Click here to access KPMG’s detailed study

The automation journey: types and benefits

Intelligent automation is set to transform our lives. For business services, it promises huge gains, including lower costs along with better market insight into customer experiences.

As a result, many organizations are already using basic robotic process automation (RPA) to carry out simple, rules-based tasks to become more productive.

To realize intelligent automation benefits faster, many organizations want to accelerate the automation journey. In our experience, seeking this goal requires planning that should follow four principles:

  1. Business led; technology enabled
  2. Start small, execute well and scale up rapidly
  3. Develop an internal automation capability to sustain progress
  4. Use RPA to achieve greater productivity and as a stepping stone for enhanced process and cognitive automation that can lead to transformational change

The next step is to introduce more sophisticated intelligent automation classes that have the potential to lead to transformational change.
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Rethinking Automation Myths

Misconceptions about intelligent automation can delay the automation journey or dilute potential benefits. Following are five common myths along with our views on the truth.

  • “ Implementing a bot will significantly improve productivity.” – Yes, but boosting productivity is often more complex than expected. For example, implementing a new process and managing change simultaneously can dilute savings.
  • “We need to transform our processes before adding RPA. »– Ideally yes, but you can incorporate process transformation into your RPA journey, either before or after automation. RPA is another lever that can be combined with more traditional transformation tools.
  • “We can deploy our first bot quickly.” – The pilot can take longer than expected. This is because you need to build the right infrastructure, capabilities and sponsorship. The cost per bot will decrease significantly as you scale up and accelerate your execution speed.
  • “We need to build lots of bots.” – Don’t get mesmerized by volume. Utilization per bot is a better measure for understanding automation effectiveness and efficiency.
  • “We can move straight to cognitive solutions.” – Evaluate your needs and capabilities. While some organizations begin with small cognitive pilots, RPA can also be a stepping stone in your automation journey.

See the bigger picture – Implementing intelligent automation is more than just technological change. It affects components across your operating model.

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Click here to access KPMG’s discussion paper

 

Moving from best to better and better – Business practice redesign is an untapped opportunity

Under mounting performance pressure, many corporate leaders are looking to business process reengineering to improve performance, and in many ways that makes sense after all, processes give shape to an organization and are often useful for coordinating routine flows across large organizations. The routine work of a company should be done as efficiently as possible, which increasingly means incorporating automation.

But organizations may be missing a much greater opportunity to improve performance.

Here’s the thing: Much of the work of many organizations today—at least the work that typically offers the potential for differentiation—is no longer routine or even predictable. When conditions and requirements shift constantly, processes fail. While process optimization can still certainly help

  • reduce costs
  • and streamline operations,

leaders should consider a different kind of organizational rethinking for significant performance improvement. And in an environment of accelerating technological advances and rapid and unpredictable change, constant performance improvement is a must. Competition can come from anywhere—doing well relative to the competitors on your radar isn’t enough. Many barriers to competition are falling, and many boundaries, between industries and between markets, are blurring.

  • Consumers have more access to information and alternatives than ever, along with a coincident increase in expectations.
  • Workers have more access to information and alternatives—and increased expectations.

At the same time, many employees, in all kinds of environments, face increasing pressure to reach higher levels of individual performance. The useful life of many skills is in decline, creating a constant pressure to learn fast and reskill.

Many companies have struggled to effectively respond to these pressures since long before the Internet of Things and cognitive technologies added new layers of complexity. The average return on assets for US companies has declined for the past several decades, and companies find themselves displaced from market leadership positions more often than they used to. While the price-performance improvement in the digital infrastructure has increased exponentially, most companies are still capturing only a small fraction of the value that ought to be available through the technologies built on this infrastructure. Existing approaches to performance improvement appear to be falling short.

It begs the question: In a world of digital transformation and constant change, what does performance improvement mean? Many companies suffer from at least one of three broad problems that can misdirect their focus:

  1. Thinking of performance improvement too modestly. Leaders often think of performance advances as discrete, one-time jumps from A to B, or even a series of jumps to C and D. The initiatives that typically generate these bumps are similarly construed as pre-defined, one-time changes rather than as unbounded efforts that have the potential to generate more and more improvement. As we discuss in more detail, not only do most companies need to continually improve their performance— those that don’t start accelerating may fall further and further behind and become increasingly marginalized. Accelerating improvement, then, should be a goal of operations, not just one-off initiatives.
  2. Thinking of performance improvement too narrowly, focused only on costs. Process dominated much of performance improvement efforts for the past several decades, focusing largely on the denominator of the financial ratio of revenues to costs. But costs can be cut only so far, and technology-based process efficiencies can be quickly competed away, especially at a time when the changing environment and shifting customer expectations are making many standardized processes quickly obsolete. Further reductions can become harder to achieve and have less impact. The relevant performance might be more about an organization’s ability to create significant new value. Workers across an organization regularly encounter new needs, new tools for meeting needs, and opportunities to identify new ways of delivering more value and impact in multiple dimensions, including helping other parts of the organization generate more value. The potential for value creation isn’t confined to certain roles or functions, and is bounded primarily by an organization’s ability to create new knowledge and creatively address new problems. Focusing on new value creation may be the key to getting on a trajectory of accelerating performance improvement. Doing so would require an organization to move beyond efficiency and standardization and begin focusing on cultivating the behaviors—such as experimentation and reflection to make sense of what has been learned—associated with new value creation.
  3. Thinking of performance improvement at the wrong level. Most organizations manage performance where they measure it—which is to say where they have data: broadly, for the department and organization, and narrowly, for the individual. Both levels can miss where work, especially value-creating work, increasingly gets done: in groups. As a result, organizations can miss the opportunity to shape how work actually gets done. Focusing on performance where it matters most to the organization’s work might be a key to having a significant impact on the performance that matters.

The imperative to act seems simple: Today’s environment seems to offer no reprieve, no stabilization that gives us a chance to catch our breath and say, “OK, now we’ve got it figured out.” The methods and processes that led organizations to great success in the past seem to no longer be working. For sustained performance improvement, companies may need to change their focus and look in new directions.

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Click here to access Deloitte’s detailed study

By investing heavily in start-ups and technology, (re)insurance companies appear to have assumed a semblance of control over the InsurTech revolution

Who Benefits from Modularization?

With technology moving forward at an unprecedented pace, incumbents are increasingly electing to outsource functions to highly specialized new entrants, renting evolving modules of technology that can be tailored to suit their individual needs. Though this approach may be more cost effective, it further fuels the question of whether incumbents will allow value in the industry to shift towards new entrants. In time, market participants will come to understand which module in the chain generates the most value. It is plausible that automation in distribution will shift value towards efficiency of internal processes that support cutting-edge modeling and underwriting engines.

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The State of InsurTech

InsurTech funding volume increased 36% year-over-year in 2017, demonstrating that technology driven innovation remains a core focus area for (re)insurance companies and investors heading into 2018. However, perhaps contrary to many of the opinions championed in editorial and press coverage of the InsurTech sector, further analysis of the growing number of start-ups successfully attracting capital from (re)insurers and financial investors reveals that the majority of InsurTech ventures are not focused on exiling incumbents by disrupting the pressured insurance value chain. According to research from McKinsey & Company,

  • 61% of InsurTech companies aim to enable the value chain,
  • 30% are attempting to disintermediate incumbents from customers
  • 9% are targeting full scale value chain disruption.

Has the hype surrounding InsurTech fostered unjustified fear from overly defensive incumbents?

We have taken this analysis a step further by tracking funding volume from strategic (re)insurers versus financial investors for InsurTechs focused on enabling the value chain relative to their counterparts attempting to disintermediate customers from incumbents or disrupt the value chain altogether and found that 65% of strategic (re)insurer InsurTech investments have been concentrated in companies enabling the value chain, with only 35% of incumbent investments going to start-ups with more disruptive business models. What does it mean? While recognizing the subjective nature of surmising an early stage company’s ultimate industry application at maturity from its initial focus, we attribute this phenomenon to the tendency of incumbents to, consciously or subconsciously, encourage development of less perceptibly threatening innovation while avoiding more radical, potentially intimidating technologies and applications.

Recognizing that this behavior may allow incumbents to preserve a palatable status quo, it should be considered in the context in which individual investments are evaluated – on the basis of expected benefits relative to potential risk. We have listed several benefits that InsurTechs offer to incumbents :

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Segmenting the InsurTech Universe

As InsurTech start-ups continue to emerge across the various components of the insurance value chain and business lines, incumbents and investors are evaluating opportunities to deploy these applications in the insurance industry today and in the future. To simplify the process of identifying useful and potentially transformational technologies and applications, we have endeavored to segment the increasingly broad universe of InsurTech companies by their core function into four categories:

  1. Product & Distribution
  2. Business Process Enhancement
  3. Data & Analytics
  4. Claims Management

This exercise is complicated by the tendency of companies to operate across multiple functions, so significant professional judgment was used in determining the assignment for each company. A summary of the criteria used to determine placement is listed below. On the following pages, we have included market maps to provide a high level perspective of the number of players in each category, as well as a competitive assessment of each subsector and our expectations for each market going forward. Selected companies in each category, ranked by the amount of funding they have raised to date, are listed, followed by more detailed overviews and Q&A with selected representative companies from each subsector.

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Click here to access WTW’s detailed birefing

The Global Risks Report 2018

Last year’s Global Risks Report was published at a time of heightened global uncertainty and strengthening popular discontent with the existing political and economic order. The report called for “fundamental reforms to market capitalism” and a rebuilding of solidarity within and between countries.

One year on, a global economic recovery is under way, offering new opportunities for progress that should not be squandered: the urgency of facing up to systemic challenges has, if anything, intensified amid proliferating indications of uncertainty, instability and fragility. Humanity has become remarkably adept at understanding how to mitigate conventional risks that can be relatively easily isolated and managed with standard riskmanagement approaches. But we are much less competent when it comes to dealing with complex risks in the interconnected systems that underpin our world, such as organizations, economies, societies and the environment. There are signs of strain in many of these systems: our accelerating pace of change is testing the absorptive capacities of institutions, communities and individuals. When risk cascades through a complex system, the danger is not of incremental damage but of “runaway collapse” or an abrupt transition to a new, suboptimal status quo.

In our annual Global Risks Perception Survey, environmental risks have grown in prominence in recent years. This trend has continued this year, with all five risks in the environmental category being ranked higher than average for both likelihood and impact over a 10-year horizon. This follows a year characterized by high-impact hurricanes, extreme temperatures and the first rise in CO2 emissions for four years. We have been pushing our planet to the brink and the damage is becoming increasingly clear. Biodiversity is being lost at mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an increasingly pressing threat to human health. A trend towards nation-state unilateralism may make it more difficult to sustain the long-term, multilateral responses that are required to counter global warming and the degradation of the global environment.

Cybersecurity risks are also growing, both in their prevalence and in their disruptive potential. Attacks against businesses have almost doubled in five years, and incidents that would once have been considered extraordinary are becoming more and more commonplace. The financial impact of cybersecurity breaches is rising, and some of the largest costs in 2017 related to ransomware attacks, which accounted for 64% of all malicious emails. Notable examples included the WannaCry attack—which affected 300,000 computers across 150 countries—and NotPetya, which caused quarterly losses of US$300 million for a number of affected businesses. Another growing trend is the use of cyberattacks to target critical infrastructure and strategic industrial sectors, raising fears that, in a worst-case scenario, attackers could trigger a breakdown in the systems that keep societies functioning.

Headline economic indicators suggest the world is finally getting back on track after the global crisis that erupted 10 years ago, but this upbeat picture masks continuing underlying concerns. The global economy faces a mix of long-standing vulnerabilities and newer threats that have emerged or evolved in the years since the crisis. The familiar risks include potentially unsustainable asset prices, with the world now eight years into a bull run; elevated indebtedness, particularly in China; and continuing strains in the global financial system. Among the newer challenges are limited policy firepower in the event of a new crisis; disruptions caused by intensifying patterns of automation and digitalization; and a build-up of mercantilist and protectionist pressures against a backdrop of rising nationalist and populist politics.

The world has moved into a new and unsettling geopolitical phase. Multilateral rules-based approaches have been fraying. Re-establishing the state as the primary locus of power and legitimacy has become an increasingly attractive strategy for many countries, but one that leaves many smaller states squeezed as the geopolitical sands shift. There is currently no sign that norms and institutions exist towards which the world’s major powers might converge. This creates new risks and uncertainties: rising military tensions, economic and commercial disruptions, and destabilizing feedback loops between changing global conditions and countries’ domestic political conditions. International relations now play out in increasingly diverse ways. Beyond conventional military buildups, these include new cyber sources of hard and soft power, reconfigured trade and investment links, proxy conflicts, changing alliance dynamics, and potential flashpoints related to the global commons. Assessing and mitigating risks across all these theatres of potential conflict will require careful horizon scanning and crisis anticipation by both state and nonstate actors.

This year’s Global Risks Report introduces three new series:

  1. Future Shocks,
  2. Hindsight,
  3. Risk Reassessment.

Our aim is to broaden the report’s analytical reach: each of these elements provides a new lens through which to view the increasingly complex world of global risks.

Future Shocks is a warning against complacency and a reminder that risks can crystallize with disorientating speed. In a world of complex and interconnected systems, feedback loops, threshold effects and cascading disruptions can lead to sudden and dramatic breakdowns. We present 10 such potential breakdowns—from democratic collapses to spiralling cyber conflicts—not as predictions, but as food for thought: what are the shocks that could fundamentally upend your world?

In Hindsight we look back at risks we have analysed in previous editions of the Global Risks Report, tracing the evolution of the risks themselves and the global responses to them. Revisiting our past reports in this way allows us to gauge risk-mitigation efforts and highlight lingering risks that might warrant increased attention. This year we focus on antimicrobial resistance, youth unemployment, and “digital wildfires”, which is how we referred in 2013 to phenomena that bear a close resemblance to what is now known as “fake news”.

In Risk Reassessment, selected risk experts share their insights about the implications for decisionmakers in businesses, governments and civil society of developments in our understanding of risk. In this year’s report, Roland Kupers writes about fostering resilience in complex systems, while Michele Wucker calls for organizations to pay more attention to cognitive bias in their risk management processes.

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Click here to access WEF – Marsh’s detailed Global Risk Report 2018

Technology Driven Value Generation in Insurance

The evolution of financial technology (FinTech) is reshaping the broader financial services industry. Technology is now disrupting the traditionally more conservative insurance industry, as the rise of InsurTech revolutionises how we think about insurance distribution.

Moreover, insurance companies are improving their operating models, upgrading their propositions, and developing innovative new products to reshape the insurance industry as a whole.

Five key technologies are driving the change today:

  1. Cloud computing
  2. The Internet of Things (including telematics)
  3. Big data
  4. Artificial intelligence
  5. Blockchain

This report examines these technologies’ potential to create value in the insurance industry. It also examines how technology providers could create new income streams and take advantage of economies of scale by offering their technological backbones to participants in the insurance industry and beyond.

Cloud computing refers to storing, managing, and processing data via a network of remote servers, instead of locally on a server or personal computer. Key enablers of cloud computing include the availability of high-capacity networks and service-oriented architecture. The three core characteristics of a cloud service are:

  • Virtualisation: The service is based on hardware that has been virtualised
  • Scalability: The service can scale on demand, with additional capacity brought online within minutes
  • Demand-driven: The client pays for the services as and when they are needed

cloud

Telematics is the most common form of the broader Internet of Things (IoT). The IoT refers to the combination of physical devices, vehicles, buildings and other items embedded with electronics, software, sensors, actuators, and network connectivity that enable these physical objects to collect and exchange data.

The IoT has evolved from the convergence of

  • wireless technologies,
  • micro-electromechanical systems,
  • and the Internet.

This convergence has helped remove the walls between operational technology and information technology, allowing unstructured, machine-generated data to be analysed for insights that will drive improvements.

IoT

Big data refers to data sets that are so large or complex that traditional data processing application software is insufficient to deal with them. A definition refers to the “five V” key challenges for big data in insurance:

  • Volume: As sensors cost less, the amount of information gathered will soon be measured
    in exabytes
  • Velocity: The speed at which data is collected, analysed, and presented to users
  • Variety: Data can take many forms, such as structured, unstructured, text or multimedia. It can come from internal and external systems and sources, including a variety
    of devices
  • Value: Information provided by data about aspects of the insurance business, such as customers and risks
  • Veracity: Insurance companies ensure the accuracy of their plethora of data

Modern analytical methods are required to process these sets of information. The term “big data has evolved to describe the quantity of information analysed to create better outcomes, business improvements, and opportunities that leverage all available data. As a result, big data is not limited to the challenges thrown up by the five Vs. Today there are two key aspects to big data:

  1. Data: This is more-widely available than ever because of the use of apps, social media, and the Internet of Things
  2. Analytics: Advanced analytic tools mean there are fewer restrictions to working with big data

BigData

The understanding of Artificial Intelligence AI has evolved over time. In the beginning, AI was perceived as machines mimicking the cognitive functions that humans associate with other human minds, such as learning and problem solving. Today, we rather refer to the ability of machines to mimic human activity in a broad range of circumstances. In a nutshell, artificial intelligence is the broader concept of machines being able to carry out tasks in a way that we would consider smart or human.

Therefore, AI combines the reasoning already provided by big data capabilities such as machine learning with two additional capabilities:

  1. Imitation of human cognitive functions beyond simple reasoning, such as natural language processing and emotion sensing
  2. Orchestration of these cognitive components with data and reasoning

A third layer is pre-packaging generic orchestration capabilities for specific applications. The most prominent such application today are bots. At a minimum, bots orchestrate natural language processing, linguistic technology, and machine learning to create systems which mimic interactions with human beings in certain domains. This is done in such a way that the customer does not realise that the counterpart is not human.

Blockchain is a distributed ledger technology used to store static records and dynamic transaction data distributed across a network of synchronised, replicated databases. It establishes trust between parties without the use of a central intermediary, removing frictional costs and inefficiency.

From a technical perspective, blockchain is a distributed database that maintains a continuously growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block. Blockchains have been designed to make it inherently difficult to modify their data: Once recorded, the data in a block cannot be altered retroactively. In addition to recording transactions, blockchains can also contain a coded set of instructions that will self-execute under a pre-specified set of conditions. These automated workflows, known as smart contracts, create trust between a set of parties, as they rely on pre-agreed data sources and and require not third-party to execute them.

Blockchain technology in its purest form has four key characteristics:

  1. Decentralisation: No single individual participant can control the ledger. The ledger
    lives on all computers in the network
  2. Transparency: Information can be viewed by all participants on the network, not just
    those involved in the transaction
  3. Immutability: Modifying a past record would require simultaneously modifying every
    other block in the chain, making the ledger virtually incorruptible
  4. Singularity: The blockchain provides a single version of a state of affairs, which is
    updated simultaneously across the network

Blockchain

Oliver Wyman, ZhongAn Insurance and ZhongAn Technology – a wholly owned subsidiary of ZhongAn insurance and China’s first online-only insurer – are jointly publishing this report to analyse the insurance technology market and answer the following questions:

  • Which technologies are shaping the future of the insurance industry? (Chapter 2)
  • What are the applications of these technologies in the insurance industry? (Chapter 3)
  • What is the potential value these applications could generate? (Chapter 3)
  • How can an insurer with strong technology capabilities monetise its technologies?
    (Chapter 4)
  • Who is benefiting from the value generated by these applications? (Chapter 5)

 

Click here to access Oliver Wyman’s detailed report