Executives in the insurance sector have somewhat turned into magpies of late. It’s very easy to be seduced by the new and shiny, and digital transformation is certainly both of those things. It’s good to be able to say to your Board, “look, we’ve got a bit of Blockchain over here and some scattering of AI over here”. But all that glitters and all that.
The truth is the industry has rather grandiosely been calling these changes ‘Digital Transformation’ when what has changed so far has done little more than scratch the surface. There have been improvements, certainly. As a channel to market, digital has undoubtedly helped with product distribution and customer self-service to a degree across both B2B and B2C.
Data analytics is improving underwriting decisions, creating more accurate pricing, and helping carriers decide which policies are ‘in-appetite’, particularly across time-consuming commercial policies.
And AI-enhanced decision-making has accelerated claims handling, with techniques such as image and text recognition helping carriers ingest data quickly and accurately.
Some minor changes have been made in operational improvements through the deployment of RPA. However, using RPA to simply automate what was already a lousy process previously managed by people is not digital process transformation. It’s digital lipstick on an analogue pig!
But none of these is impacting the more fundamental challenges the sector faces.
Time for strategic choices
The current hardening market may encourage Insurance Executives to take their eye off the ball. A hard market comes with the prospect of higher premiums, tighter policy wordings, a reduced risk appetite, better top-line underwriting results, and increased profits. In the traditional speciality P&C (Re)Insurer and Broker market, the operation of the middle and back offices has always been inefficient. However, the impact on the bottom line has never been material enough to drive significant process change. Better underwriting results mask operational inefficiency and make true transformation even less likely. But ironically, it could be the best time to bite the bullet.
During his 1962 State of the Union Address, John F. Kennedy declared: “The best time to repair the roof is when the sun is shining”, and there is an opportunity now to make truly transformational changes to how the industry operates. But who is bold and visionary enough to rise to the challenge?
Why has the industry been so slow to adopt true digital transformation?
There are two core reasons.
Lack of any truly disruptive new entrants to the market (please don’t get me started on Lemonade- it’s a marketing arm for a reinsurance company to gain direct distribution). The nature of the complexity of the product offering, the elongated distribution chain, and the “double assurance” of the Brokers’ PI if the claim is denied (this is often undervalued), means that insurance has been stubbornly resistant to genuine disruption. There is no real “burning platform” for change that keeps executives up at night, apart from Lloyd’s worrying about potential declining market share; hence Blueprint 2.
The tangled integrated process chain between the broker, insurer and reinsurer means it’s challenging for a single party to make meaningful process change without others making change at the same time. This often falls into the “too hard” box. Even excellent initiatives like the Ruschlikon e-accounting process have made very little headway in driving significant scale process change, and only account for a tiny % of business transacted. Contract and Financial certainty remain elusive.
So, if there is no outside threat to the industry, and everyone else is as operationally inefficient as each other, who cares about digitally transforming the end-to-end process? The fight remains in distribution and underwriting results. Ops and Finance take a back seat.
So, what will drive change?
Digital will only be truly transformative if it is part and parcel of a fundamental shake-up of how insurers and brokers do business. The core engine and operating infrastructure of the insurance and broker company remain unchanged from a 30-year-old model. This is not a death-knell for digital transformation, but insurers should stop being blinded by its twinkly outer shells and start delving deep into the inner workings if it’s going to make any real impact. They need to move back from the front-end distribution channels and start working on middle and back-office operations. More complex, less immediately glamorous and, ultimately, more expensive to implement – yes - but streamlining here is where a transformational impact can really be felt.
There will come a time where the demands and innovation of digital distribution – parametric insurance, micro insurance, pay-by-the-hour insurance - and faster claims resolution will outstrip the capabilities of legacy systems of records and payment systems. However, there is only so long you can support a digital front end to your business without having an enterprise-strength digital financial and operational infrastructure to service these requirements.
There is a combination of technologies that can boost insurer output – and profitability:
Digital contracts at the beginning of the process to capture the policy and financial consequences of the contract.
Natural language processing (NLP) to understand the volumes of documentation that need to be examined (already driving significant change in the legal sector).
Workflow management that allocates potential business to the right expert underwriter.
Data analytics that matches risk profiles to insurer appetite.
Finance and payment orchestration to automate the flows of monies both internally and between trading partners.
Working in tandem, these technologies don’t just speed up the underwriting of standard, in-appetite risks; they help identify new lines of business. This allows the insurer to effectively seek out growth, driving competitiveness and increasing margin – even in a hardened market.
Covid-19 undoubtedly accelerated changes in the insurance sector as far as increasing levels of digital distribution, customer self-service and cost efficiencies. But even a pandemic isn’t a significant enough existential threat to properly shake the foundations. Instead, what is required is someone big enough and bold enough to launch something truly disruptive in the Insurance industry. Is there anyone out there with the vision and means to do this?
There is an opportunity for digital transformation to improve the top and bottom line of insurance businesses significantly, but it won’t succeed if it continues at today’s superficial level.