Digital trends are dissolving the traditional boundaries and the long-held competitive advantages of insurance companies. Pillars of the insurance industry such as underwriting, risk management, expense control and product distribution are being disrupted. We believe there are five levels of disruption that will affect the insurance market and force insurance carriers to redesign their business models:
Level #1: Digitizing Operations
Automation has driven process efficiencies for many years. However, there were limitations and impact was slow due to high implementation cost, system risk, and other factors. RPA provides a relatively better mechanism through its efficient deployment, ability to treat core technology as a blackbox, and higher returns at lower cost and risk. While the initial years saw more impact in higher volume transactions, typically in personal lines, RPA is now gaining ground in more complex operations like commercial lines through cognitive and AI combinations. The primary driver is cost, but it also has a significant impact on customer outcomes through enhanced quality and speed.
Automation can reduce the cost of a claims journey by as much as 30% — McKinsey
A large incumbent could more than double profits over five years by digitizing existing business — McKinsey
Example EXL’s Claims FNOL automation was developed leveraging our suite of in-house and partner automation solutions enabling automated workflow, intelligent extraction of information from multiple input sources, judgment based processing and cognition embedded decision making for transforming client’s end-to-end claims process. This resulted in 20-30% reduction in cost to serve with 30-35% efficiency improvement, 15-20% fraud detection, 5-10% on spot settlement and 2-5% increased utilization of claims adjuster and special investigation unit.
Level#2: Digital Customer Engagement
Traditionally, insurance has been agent-driven, and even as the direct channels have grown, many of them use non-digital modes of engagement. Other financial services industries like banks have taken the lead in redefining customer engagement using digital with reduced friction, cost and more importantly catering to the millennial population. Most insurance companies are grappling with this issue and making investments to tap digital channels that help attract and retain customers. Digital engagement applies to new business through digital marketing, online customer journeys, digital underwriting and binding, as well as policy administration and claims through self-service. These digital channels are only effective when the backend is digitized, which requires digitization of operations.
Our study suggests that the life insurance ‘winners’ of tomorrow will likely be those organizations that blend an advice-driven approach with a digitally enhanced engagement strategy to help meet evolving consumer expectations.
I believe consumer will win and that the desire for low-cost, transparent, high-quality digital services will have to be met.
— Matthew Donaldson, CEO, BGL Group (Comparethemarket)
Example EXL’s LifePRO® digital suite supports direct-to-customer life insurance operations to provide an innovative digital customer journey and automated underwriting solution that disrupts many of the conventional ideas on purchasing and servicing life insurance. This enables insurers to grow their business rapidly and develop new propositions, with our platform as a key differentiator. The high level of user control enables greater speed to market while launching innovative products.
Level #3: Digital Data Flows:
Advances in artificial intelligence and the Internet of Things (IoT) have opened up new markets and new opportunities. Telematics, home sensors, drone surveys and other innovations can provide insurers with critical data they can leverage using analytics to help make better decision in areas including underwriting, pricing and claims adjudication. Digital data flows help insurers manage their customers as individuals rather than groups – an expectation of today’s digital customers. This also allows for tremendous speed in decision making and provides a more accurate and personalized offering to the customer.
With 6.4 billion devices already connected and 5.5 million new devices added every day, the IoT’s real-time data collection and sharing power will create significant, new opportunities in finer product segmentation, more specialized pools of risk and predictive modeling to better assess risk, improve loss control and accelerate premium growth.
Example Fueled by telematics, usage-based insurance (UBI) and pay-as-you-drive (PAYD) programs will continue to evolve. UBI and PAYD plans allow policyholders and stakeholders to track driving habits and share this information with their insurance provider. Insurance adjusters then use the data to more accurately link premiums to fleet performance and driver behaviour. Telematics will be useful for drivers in this regard. It’s predicted that by the end of next year, 80 percent of vehicles sold in the United States will include embedded telematics.
Level #4: Digital Capitalize Enabled Safer World
Over time, digital technologies like connected homes, sensors, and driverless cars will reduce human error and provide better responses to hazards, improving safety. While the need for insurance will not go away, it will impact its pricing and scale. However, this safer world will create the need for more innovative products and protection services. Risks arising from cyber security will fuel the need for risk coverage from corporations and individuals. Risk coverage fundamentals will shift as risk coverage requirements shift.
Insurers of the future will play more of a risk avoidance role and less of a risk mitigation one.
— Andrew Rose, CEO of US insurance comparison website Compare.com
Example Tesla has been selling car insurance with its vehicles in Asia as part of its vision to one day include insurance in the final price of its vehicles. The move is meant to account for the fact that Autopilot makes Tesla cars much safer than traditional ones on the road today. Tesla argue that insurance premiums should be adjusted to account for its cars being safer - the National Highway Traffic Administration found that crash rates for Tesla vehicles have plummeted 40% since Autopilot was first installed in 2015.
— Business Insider
Level #5: Digital Disintermediation
This type of disruption changes the way business is done. Spotify and Uber exemplify this. Spotify doesn’t just provide music streaming, it’s made music consumption a collaborative activity. The same goes for Uber; they haven’t made taxis more efficient, they have changed the model for travelling in non-self-owned vehicles. A simplistic (perhaps too simplistic but fundamentally correct) way of describing an insurance carrier is being an intermediary between risk-cover seekers and those with capital to deploy. Similarly, brokers act as an intermediary for customer engagement. The intermediary is an aggregator, algorithm and customer engagement model. Digital technologies have the ability to do all three. There are insurtech companies, though at an early stage of their evolution, who offer these three functionalities through online customer journeys, comparison platforms, chatbots, automated underwriting and claim adjudication, pricing algorithms and peer-to-peer networks for capital deployment. While they currently serve a narrow and low-end risk segment with an occasional need for exception processing, they have clearly demonstrated that aggregation algorithms and customer engagement can be an end-to-end digital offering.
Leading companies are using data and analytics not only to improve their core operations but to launch entirely new business models
Example A host of direct-to-consumer digital insurance brokers or companies (MGAs) are entering the market with the intent of disintermediating existing channels and delivering instant policies to small commercial insureds. Examples of some of these are Next Insurance, Embroker, Coverwallet, Trym Friendinsurance has created a peer-to-peer insurance model which is connecting groups of customers and facilitating a yearly cashback when they and their connections remain claims-free.
– Insurance Thought Leadership.
It’s a matter of when, exactly how and not if, digital disruption will change the traditional model of insurance. To stay competitive in the medium to long term, traditional insurers will need to reinvent themselves with digital at their core.
A fit-for-future insurance company will need to implement the disruptions in the market and proactively change their business model to remain profitable. We believe these disruptions are real opportunities to radically evolve the traditional pillars of insurance and leap into the future.