How digital transformation is reshaping the insurance industry
Recently we examined some of the ways in which digital transformation has revolutionized the way the banking industry is doing business today. Like banking and finance, the insurance industry is also undergoing massive shifts in the way business is done as a result of technological advancements, changing customer expectations, competition from digital-native insurtech startups, and the covid-19 pandemic.
Traditional insurance companies are recognizing this threat and are making investment in digital transformation a top priority. A recent industry survey by insurance software provider, EIS, found that 59% of companies planned to increase their budgets for this purpose in 2021.
What are some of the ways in which digital transformation is reshaping the insurance industry?
Mobile technology changing customer expectations
As customers become more accustomed to the instant gratification made possible through always-connected mobile devices, it poses new challenges for established industries like insurance when it comes to meeting these expectations. It is now easier than ever for customers to switch insurance, and they are also more educated on their options. A PWC study revealed that more than 70% of customers seeking non-life insurance coverage research via digital methods such as social media and expect any purchase to be quick and simple. Traditional insurers unable or unwilling to create compelling mobile-first offerings to customers risk losing business, and the insurers themselves recognize this. According to the earlier cited EIS survey, only 26% believe they are actually doing a good job of meeting their customers' needs.
Partnering with insurtech companies to leverage newer technologies
As the saying goes, If you can't beat them, join them. While a number of insurtech startups are seeking to directly compete with traditional insurers for customers, many are instead opting to seek mutually profitable partnerships. A 2018 McKinsey study revealed that as many as 63% of commercial insurtech companies are building business models around improving the capabilities of traditional insurers. These partnerships are enabling insurers the ability to leverage advanced AI technologies, offer mobile-first business models and cognitive robotic process automation, and more without the need to build them in-house.
IoT and Telematics
There has been more acceptance of usage-based insurance models amongst consumers in recent years, particularly in auto insurance. The data used to make the rate adjustments comes from connected devices installed in a customer's vehicle, or via the sensor capabilities of their mobile phones. With fewer people driving in 2020 because of the pandemic and the ability to work from home, claims were down as much as 40 percent compared to the previous year according to the Insurance Information Institute. In the same report, the Institute estimated that as much as USD$14B would be returned to customers, and that telematics information was a significant reason these refunds were able to be paid so quickly.
IoT isn't just impacting auto insurance either. Smart home technology providers such as Neos in the UK are partnering with traditional insurers in the home and contents insurance space. By utilizing smart home technology as a way to prevent problems such as water and fire damage, and theft, they can help provide customers discounted insurance. Having the equipment installed also helps to validate claims and makes the process faster for both the insurer and the customer.
Traditional insurance companies have a technological disadvantage compared to digital-native insurtechs because of the burden of running on legacy systems. While these systems may have served the companies well in the past, they now lack the ability to compete in the current market. Many companies still rely on traditional mainframe systems. However, they are not suitable for utilizing new technologies such as real-time analytics and artificial intelligence initiatives powered by vast volumes of data. For these reasons, they need to embrace cloud computing.
Insurtech Magazine reports that 70% of traditional insurance companies are realizing the importance of moving much of their processes to the cloud to enable them to take advantage of these new technologies that are critical for future business growth.
What role has Covid-19 played in digital transformation in the insurance industry?
It is impossible to look at digital transformation in any industry over the past two years without talking about the role of the pandemic as a catalyst for rapid change. While digital transformation has been underway in the insurance industry for a while now, Covid-19 accelerated timelines significantly. According to a 2020 KPMG survey of insurance industry CEOs, eighty-five percent of them acknowledged that Covid has sped up plans for digital transformation within their companies.
Prior to 2020, many insurance agents selling life insurance policies reported in a McKinsey study that they did as much as 90% of their sales in person. With a need for social distancing, these in-person sales meetings with customers were cut back significantly – only five months later the number of in-person meetings was less than 5 percent. This only highlights the need for insurers to move to an online sales distribution model, much like the growing use of telemedicine in the healthcare industry.
Other changes being made include the switch to paperless processes and a move to relying on digital health and prescription records to remove the need for in-person medical examinations when underwriting life insurance policies in some cases.
Digital transformation is not an optional process for the insurance industry. Companies that are unwilling or slow to adapt risk being made obsolete by insurtech startups. Customers are accustomed to, and expect digital processes for managing products and services. Those insurers that invest in the right technologies and partnerships will no doubt continue to enjoy a significant share of this lucrative market.