The fundamental flaw in insurance technology
Discover two ways to achieve the goal of establishing a world-class insurance infrastructure platform.
Some people like to refer to insurance as a “fast follower.” This criticism is not without significant merit. Nowhere is this more noticeable than in the technology infrastructure that exists within insurers.
The manufacturing industry developed enterprise resource planning (ERP) platforms back in the 1960s to assist with supply chain management. These ERP systems were the industry’s response to trying to build a unified platform. When you compare insurance enterprise software providers with some of these well-established players, they include:
When you add up the total revenue for Guidewire, Sapiens, DuckCreek and Majesco, it only equates 30% of the next closest competitor. This shows just how massive the investment in “in house” technology has been. Manufacturing companies learned this lesson long ago. Most consider themselves manufacturing companies and do not want to be considered technology companies.
A second interesting fact is that IBM employs two times more employees than Microsoft, and with only 50% of its revenue. When you look at their bloated employee count (as compared to revenue), you can only determine that what IBM really sells is professional services. Otherwise it wouldn’t need a massive number of its employees.
A parallel can be directly drawn to insurance carriers in that personnel investment has largely outweighed many other areas of investment. Historically, insurance is a promise that was primarily communicated via a professional services-type process. Insurance sells the expertise of its salespeople, underwriters, brokers and claims staff.
The fundamental flaw in insurance technology is this: Due to both the capital and human resource limitations of the infrastructure platforms mentioned above, it is impossible for them to completely satisfy the extent of infrastructure needs for the major insurance carriers, many of which are Fortune 500 companies. If it takes SAP $32 billion in revenue and 100,000 employees to support its ERP systems, among its other operations all over the world, how can any of the bottom four competitors hope to even come close?
There are two ways to achieve the end goal, which is to provide a world-class infrastructure platform for insurers. One way would be for any of the bottom four companies to be acquired by any of the top 6 competitors. That would significantly enhance the research and development (R&D) investment, intimate access to other major technologies, such as Power BI or Power Automate, and other. Microsoft bought four different ERP platforms in the last 20 years, including Axapta, Solomon, Great Plains and Navision. One can only assume, due to the lack of merger/acquisition activity with these companies, that they have yet to reach the level of importance where one of the Top 5 companies takes notice.
The second way this could be achieved is what we are already starting to see with the InsurTech community. In manufacturing, there exists thousands of software companies that have developed applications that provide specific functionality for specific problems. Every manufacturer recognizes that their ERP system “out of the box” typically solves about 80% of their processing needs. In order to achieve efficiencies and cost reductions, the “secret sauce” is in the final 20%. They find specific independent software vendors (ISV) that provide enhanced functionality for a particular problem. One easy example is document management. Almost no ERP system has a robust document management system as part of its core offering. Several ISV’s have developed incredibly sophisticated document management systems that integrate to the core platform. For insurance, the InsurTech community is the next-generation of ISV’s.
If you think about other professional services companies that have undergone significant digital transformation, large accounting firms have been significantly impacted. When you think about the amount of time that accountants spend inside of spreadsheets, you can rapidly surmise that much of that manual work can be automated. A vast majority of audit reconciliation work can be automated via software solutions. A single software program, utilized for several hundred clients, has replaced thousands of accounting staff members. However, it has also grown the need for data scientists, data analysts, and other skill sets.
When you think about an insurance carrier, we have teams of people, and sometimes entire departments for each of the following:
- Claim operations;
- Data & analytics;
- Claims IT;
- Adjuster licensing/compliance;
- Training and development; and
- Vendor management.
What happens as you implement software solutions that not only do parts of those same jobs faster, with fewer errors, but also provide significant data insights because the software is able to review all the data?
As Bryan Falchuk, author of The Future of Insurance states: “If I’m a claims manager, I might only see 10% of all the claims within my organization. I don’t get to see the other 90%. What am I missing by not seeing the entire population of claims? What patterns and trends do I not understand or even know exist?”
These solutions and the machine learning algorithms that can be applied are able to review 100% of those claims results and identify areas of opportunity. This will be a painful transition for insurance carriers. Significant organizational design changes are needed to realize the complete value potential of many of these emerging technologies. Therein also lies the opportunity. When you have software solutions that cross multiple departments, provide orchestration of several workflows, and either automatically optimize, or at least provide recommendations, insurers will take significant leaps forward.
Tim Christ is the vice president of Claimatic, a leading SaaS intelligent decisioning software that serves several P&C insurers. He has appeared on NBC news, is a frequent speaker at insurance events, is the author of two books on insurance, business and technology, and a frequent contributor to various insurance publications. He can be reached at (210) 632-4571 or tchrist@claimatic.com.
These opinions are the author’s own.
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