Digitalization for Insurers
Digitalization has long since reached the insurance industry. Virtually all insurers have initiated digitalization programs and are providing funding in the high millions to carry out these programs. But if we look more closely at these actions, we see that most of them are no more than traditional cost-cutting initiatives limited to little more than process optimization and restructuring. Quite often, IT transformation programs that were already planned and urgently needed because of obsolete IT systems are being proudly sold with the label “Digitalization”.
Despite an ongoing phase of low interest rates, heightened cost pressures, increasing regulatory requirements, and aggressive insurtechs, the business model of the traditional insurance companies continues to be relatively profitable thanks to intensive restructuring actions. So at first glance it will not surprise anyone that insurance companies are in reality approaching digitalization with great caution, even though the insurance management boards are more than happy to sell their transformation activities to the outside world as part of a digitalization program while they seek to give the impression that digitalization has a high priority.
But in the middle to long run, this caution is a risk for insurers because digitalization that is content with cutting costs and improving operational excellence clearly falls well short; the optimization of processes is only one area where digitalization has an impact. The consequences of digitalization for the insurance industry are far more sweeping. Basically, the challenges of digitalization for the insurance industry can be classified in four areas.
1. Customer interface and customer experience for insurers
Online retailers and digital service providers are setting new standards in customer communications, concomitantly raising the expectations of policyholders regarding the interaction with their insurers. Consumers who have grown accustomed to viewing products transparently on a clearly structured website at Amazon, Zalando, and all the rest, to placing an order with just a few clicks, and to having the products delivered to their door within 24 hours will not find it acceptable that an insurance call center does not know in the evening that callers spoke to a broker about obtaining an insurance policy in the afternoon and now have to explain everything all over again. Insurers must therefore secure cross-channel customer communications and a seamless customer journey across all media.
This is equally true of the integration of external distribution partners in the processing of business incidents and, increasingly, of the linking with providers for assistance services. This is where the BiPRO standard and API concepts make an open insurance approach possible. Prerequisite, however, is that the insurers’ business and IT architecture has been set up on a component basis and that services can be provided flexibly. More customer touchpoints, however, also make it possible to collect additional customer data that can be used in combination with existing data material for individualized marketing and pricing appropriate to the risks. But if data analytics is to be used successfully, the data quality must be of sufficiently high quality; in addition, the data protection regulations must be taken into consideration.
2. Business models and insurers’ products
The classic business model of an insurer covers any damage or loss that occurs and prevents ruin or high costs for the policyholder. But IoT technologies such as smart home, telematics, e-health, and Industry 4.0 are steadily improving the precision of risk assessments and can prevent loss or damage from ever occurring in the first place. Digitalization is thus forcing insurers to rethink their business model from the ground up and to develop from claim adjusters to claim preventers and therefore to offer services rather than products.
Yet insurers cannot offer all services on their own; they are dependent on collaboration with other service providers and insurtechs. They have no choice but to build up digital ecosystems or become integrated into existing ecosystems so that they can offer the insurance services they provide within the framework of crossover service models — e.g. on-demand travel insurance on a mobility platform.
Even if intelligent systems will in the future serve more and more to prevent claims before they happen and the premiums for traditional insurance policies can decline because the claim amounts are falling, there are, on the other hand, opportunities for new insurance products. Although on-demand insurance policies are not fundamentally new — travel health insurance has been around for a long time — the willingness of customers to conclude on-demand insurance policies (such as theft coverage for a mountain bike during a weekend trekking tour) is on the rise. As transaction costs fall thanks to digitalization, micro-policies can broaden their scope and be offered profitably in developing countries. Moreover, new risks that would not exist at all without digitalization such as cover for cyber-security must be insured.
3. Operational excellence for insurers
Artificial intelligence will help insurers to cut costs through automation and to optimize the processing of business incidents. For instance, documents received by input management can be classified by using RPA solutions. Fraud can be more easily detected in claims management and the amount of the claim can be estimated without requiring an adjuster. Perhaps it will even be possible to pay out the benefits directly in the case of smaller claims. This will be an additional improvement to the customer experience because the claims adjustment process will be accelerated.
However, modern insurance processes can often be implemented only with modern IT systems. But plenty of insurers are still using old legacy applications and are facing a major IT transformation: for one, they must develop software that looks ahead to the future or introduce standard software from the market, and for another, they must come up with a suitable cloud strategy that will enable them to obtain infrastructure services that are low-cost and flexible.
But the outsourcing of data as part of an infrastructure outsourcing is not the only challenge confronting insurers with respect to security and compliance. Even before data analytics and AI can be used, there must be clarification of what customer data insurers are allowed to use for what analyses. Various customer apps and portals need secure identity and access mechanisms. And regulatory authorities are making increasingly strict demands on insurers in the form of the VAIT [Insurance Supervisory Requirements for IT] along with existing regulations such as KRITIS [Critical Infrastructure] and the IT-Grundschutz from the Federal Office for Information Security.
4. Digital mindset and digital culture at insurance companies
The digitalization challenges in the first three topic areas cannot be mastered, however, unless the employees of insurance companies are willing to accept cultural changes. The introduction of New Work and agility can contribute to this acceptance and will provide for more flexible and efficient collaboration, especially between business and IT departments, and even agile organizational forms such as SAFe or the realization of DevOps concepts will become possible.
Digitalization also demands a turning away from hierarchical top-down communications and a move in the direction of participative discussion and collaboration with the sharing, linking, and commenting of contents that are familiar to employees from their use of social networks and that they now expect. A culture of open discussion is also a good basis for the systematization of innovation management. Setting up creative innovation labs and collaborations with insurtechs can also contribute to this. A sustained culture of innovation can be realized, however, only if the methods and concepts from the innovation units successively seed the organization as a whole.
Conclusion: Digitalization is far more than process optimization
Most insurance companies have recognized in the meantime that digitalization will have a fundamental impact on the insurance industry extending all the way to the business model. But many insurers still shy away from a rigorous approach to its realization. Perhaps the fact that the current business model is still viable plays a role here, and many of the current executive officers generally have a difficult time with the topic of digitalization because of a lack of know-how and interest. There is an inherent risk here that other players or competitors will at some point overtake their own insurers. In this respect, insurance companies should concern themselves with the topic of digitalization as a whole as quickly as possible.