The U.S. insurance landscape: The good, the bad and the ugly
On the upside: Most U.S. insurers are turning a profit. On the downside: Too many are reliant on dated technology.
The insurance industry plays a critical role in safeguarding individuals and businesses against financial risks. Since the turn of the century, rapidly advancing technology has catalyzed permanent changes within the industry and, as a result, has left insurers seeking to manage change on all sides.
With this in mind, earlier this year, AutoRek published its 2023 Insurance Industry Outlook, which sought to examine the good, the bad and the ugly issues facing the industry.
The good news for U.S. insurers is that they report healthier margins than their UK counterparts. Almost three-quarters (72%) of U.S. firms are profitable, compared to just over half in the UK (54%). Over one-quarter (28%) of firms in the US are highly profitable.
However, while U.S. firms might be winning the race when it comes to profitability, that doesn’t mean the road ahead is smooth. There are plenty of ugly bumps and an unhealthy reliance on outdated technology.
Looking back
Over the last two years, the main focus for U.S. insurers has been customer experience, acquisition and retention, as well as back and middle-office optimization.
As with most customer-based industries, the rapid change in customer expectations has been difficult for insurers. The arrival of the SoftBank-backed insurtech Lemonade eight years ago — along with the rise of Amazon — completely overhauled how customers “shop” for insurance and the level of service they expect from their insurance provider. This sparked a riptide of change across the industry and took customer service expectations to levels not previously seen or imagined.
As part of this, firms have recognized the importance of a more personalized, seamless and digitally-driven service and, where possible, have sought to provide this to policyholders.
While firms have been focusing on implementing technology to support customer expectations, they have also been seeking to optimize back and middle-office functions. In fact, U.S. firms were just slightly more likely to favor back-office optimization over customer retention, with 29% focusing on this challenge compared to 26% focusing on customer retention and acquisition.
The ugly: Daily challenges
While the outlook is promising for insurance organizations, they still face daily challenges when it comes to managing their operational processes.
Availability of skilled staff, process complexity, and speed of manual processes are the top three challenges for firms. Lack of automation is only slightly behind in fourth place. It is unsurprising, however, to see availability of staff and process complexity as the two most widespread issues for teams. In fact, they are challenges that go hand in hand: Highly complex processes are a staple of the insurance industry, meaning that skilled and specialized staff are essential to keep business-as-usual services running.
Lack of available talent not only impacts operational processes, it also prevents insurers from being able to futureproof themselves and ensure that they continue to grow, a problem that is compounded during periods of economic uncertainty.
Added to the daily challenges is the fact that more than a third of insurance operations still rely on spreadsheets for reconciliations processes. This means that the process is not only more time-intensive; they’re also far more at risk of error.
The bad: Legacy tech
The overwhelming majority (82%) of firms acknowledge that legacy technology has a negative impact on their operations. U.S. firms were also far more likely to rely on legacy technology than their counterparts across the pond, with only 69% of UK firms stating that it had a negative impact on daily operations.
While many have gone to great lengths to integrate more sophisticated technology over the last two years, responses still show the scope available to replace and refresh outdated systems. More often than not, insurers remain tied to legacy technology because of the potential risks of data migration projects. It’s true that transferring from one system to another carries substantial risk if not performed correctly, but relying on legacy technology carries its own risks. It means firms are unable to process the high number of transactions required in today’s market at the necessary pace.
Fortunately, firms are seeking to modernize systems, with automation budgets continuing to rise in the year ahead. By increasing budgets for automation, firms will be less reliant on inefficient legacy systems. They will also free skilled staff from manual processes and shift their focus to areas that require more human expertise.
What’s next?
For the next two years, the key strategic priority for firms is ensuring overall operational resilience. This is followed by continuing to focus on optimizing back and middle-office processes, as customer experience, retention and acquisition falls to third place.
The focus on operational resilience may well have been driven by the recent challenges experienced by the COVID-19 pandemic, which proved significantly challenging for those with a large offshore presence and lack of technology. By ensuring more robust operations, firms will be better able to react to future market disruption, which is a welcome move given the challenging economic climate.
In a similar vein, amid an uncertain market, the focus on optimizing back and middle-office processes is also particularly promising.
When there are significant economic pressures, and therefore fewer opportunities for customer growth, firms should take this chance to review their back and middle-office processes and assess where they can develop efficiencies. Investing in automated technologies offers the chance to streamline processes, alleviating many of these challenges and relieving pressure on the bottom line.
While there is good news, bad news, and some ugly challenges facing the insurance industry, the outlook is predominantly positive. Most promising is the fact that firms are increasing their investment in technology, particularly automation. This will allow them to alleviate the challenges they are facing today and better position themselves for the future.
Piers Williams is the Global Insurance Manager at AutoRek, a platform for insurance financial controls and regulatory data management.
These opinions are the author’s own.
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