Transformation is pending for insurance digitalization

The P&C Insurance Industry has yet to materially make the shift from analog to digital.

Documentation is essential for underwriting, claims, pricing, rate filing and most other insurance functions. (Credit: Rawpixel.com/Shutterstock.com)

To be clear, this article is not meant to insult the insurance industry; there is already more than enough of that.

In fact, we love the insurance industry. It has provided us with lucrative employment over our careers, allowed us to grow and learn, enabled us to forge many valued relationships and above all, actively assist the industry to serve customers and communities in times of need and stress. Its products and services are critical in managing risk for everyone and it is a pillar of all economic systems.

What we do hope to accomplish with this article is to spotlight the insurance industry’s glaring digital gap, especially in contrast to other industries. Often closely compared to financial services, specifically banking, insurance seems far behind.

We consider what it may take to focus on and accelerate the shift from its legacy, analog-intense infrastructure to the digital world in which other segments successfully operate. Not only would such a shift improve business and operational results and elevate worker skillsets but it will help make insurance more visible to consumers, most of whom now live in a digital, virtual world.

Mountains of paperwork

When we entered the insurance industry decades ago, it was replete with manual, paper and specialized process. Insurance offices looked like cavernous warehouses with banks of filing cabinets overflowing with alphabetically organized file folders.

Offsite storage was even more imposing. Afterall, documentation is essential for underwriting, claims, pricing, rate filing and most other insurance functions. There has been much progress, albeit at the insurance industry’s methodic pace, mainly streamlining the outer edges or the proverbial “low hanging fruit”.

However, the core or legacy process itself still remains very much the same. Translation: The process of underwriting and servicing insurance was designed for internal decisioning and associated activities, not for policyholder self-services interaction conducive to digitize. Yet, industries like banking and airlines had the very same inherent challenges in their evolution as just two examples where there are many end to end digital successes.

In defense of the insurance industry, there are several factors that have impeded progress.  These include the siloed nature of internal operations and data management, a patchwork of numerous non-integrated technologies acquired over time, the influence of legal and regulatory compliance across numerous jurisdictions and the never-ending struggle to secure funding for multiple priority projects to fix all of these.

Although so-called legacy core system transformations were intended to supersede the tangled knots of various add-on technologies, most carriers find themselves in a never-ending quest to modernize and consolidate.

Despite these massive obstacles there are noted in-market digitized capabilities; automated bill pay, policy changes, claim reporting are a few examples. Third party, API integrations have sprung up everywhere and are just one way forward. Adoption, use and scaling are another story and again, vastly different from other digital first modern experiences.

Digitalization propels business

Enhanced digital capabilities offer numerous distinct opportunities. Early efforts with use cases automating standardized tasks such as data collection and analysis for underwriting, processing of low-severity, high-frequency claims, and deployment of bots for post-sales customer engagement have yielded savings.

Most Insurers target a 3% to 8% improvement in loss ratios and savings of up to 10% to 20% in other parts of the value chain, which include (ranked by potential):

Insurtech adoption

Some might argue that there has already been a great deal of support by carriers in the broad array of new and emerging digital solutions with use cases across the enterprise. While relatively true that there is good “engagement” with insurtechs, the sales, testing, piloting, and adoption cycle times for these projects are widely protracted and slow to reach scale.

And even the largest, well established information providers have experienced painfully slow and tentative adoption of their new offerings in which they are investing heavily. All parties will need to become more creative to overcome these lengthy cycles if they are to accelerate digitalization.

Pandemic impact

Many would have thought that the pandemic induced, involuntary, overnight shift to Work-From-Home and corresponding spike in the adoption of digital communication platforms would have accelerated and encouraged greater enterprise digitization.

In fact, this did happen giving a boost to remote and virtual inspection and services. But in a short time, the industry pulled back from many of its digitization initiatives as it scrambled to restore profitability and stabilize cash flow in the turmoil caused by post-pandemic broken supply chains and soaring inflation.  Digital and innovation teams have been further consolidated as practical necessity and previous digital revolution visions have largely plateaued.

Investing in the industry value chain

More than a third of insurtech investments has been in distribution technology. The main areas of digital investment are ranked as follows:

Incremental transformation

Digital transformation remains high on the industry’s agenda. The initial focus of investment was on digital distribution channels, but attention has since moved to other parts of the insurance value chain, including in pricing, products and underwriting processes.

The ongoing expansion of digital ecosystems present business interruption and cyber risk pool opportunities. For example, Swiss Re estimates that the global cyber insurance market has grown by 60% over the last two years, and forecasts a more than 50% gain over the next five years.

“For society, digitalization is a force for giving more people access to insurance and thereby closing protection gaps. For insurers, gains from better underwriting, risk mitigation and risk measurement from digitalization of insurance improve the quality and efficiency of their work, Jerome Haegel said, group chief economist at Swiss Re.

Mitigating risks

New technologies also can be used to improve risk mitigation under the emergence of predict & prevent. The increased use of data and data analytics, in particular sensor technologies and the networking of factories, buildings, machines, and other physical objects can better detect and reduce the frequency and severity of accidents.

Climate related exposure is getting tremendous attention for obvious reasons, as is auto driving behavior.  However, connecting risk detection with crucial policyholder engagement relies heavily upon digital means. Otherwise, the ability to take action or change behavior to avoid and mitigate is unrealized. For instance, studies of auto telematics demonstrate huge improvement in driver safety when there is also active app engagement pairing the data with the driver.

What lies ahead

Digitalization of the insurance industry is still in its early stages; transformation is still pending. To secure positive return on investment insurers will need to re-engineer workflow processes and invest in data engineering capabilities to maximize the enterprise-wide potential of digital data and algorithms, and adapt to regulatory requirements with respect to data privacy and analytics.

Whereas this transformation effort was until now considered strategically important by most carriers, it is becoming an existential priority. Especially in reducing losses and controlling expenses.

While the insurance industry is more immune to change than most industries for a range of reasons, ultimately it will only take a few successful competitors to begin taking meaningful market share by changing the associated economics of insurance. Insurers who fail to act with urgency will be replaced by more nimble and visionary competitors from both within and outside of the industry.

Stephen Applebaum is managing partner of Insurance Solutions Group and is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem.

Alan Demers is founder of InsurTech Consulting, with 30 years of P&C insurance claims experience, providing consultative services focused on innovating claims.

Opinions expressed here are the authors’ own.

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