05 Jun 2019

Expert Insight - By Dipak Sahoo, Regional Head of IT, Generali Asia

Insurance is something of a curious industry. Its traditional business model has been surprisingly resilient against the rising tide of digital technology. And the industry as a whole has been noticeably patient regards the adoption of such technology. As other industries have rushed to embrace a digital-first strategy, insurance hasn’t felt the same existential need to do so. But that is changing, and fast.

Digital transformation in insurance is underway

In a 2013 Ernst and Young survey, 80% of global respondents indicated they were either only dabbling in digital technology or “still learning to use digital capabilities for a competitive advantage.[1]”  But fast forward to today, and in a 2019 insurance CEO survey from PwC, a similar 80% indicated they had either already adopted artificial intelligence capability into their business models, or had plans to do so in the near future[2]. 

These data points reveal an important trend, namely, that digitalization is well underway in insurance.  It is underway in large, multinational corporations – according to a 2017 Accenture report, 86% of insurers “believe they must innovate at an increasingly rapid pace simply to retain a competitive edge.[3]”  And it is front and centre in the business models of insurtech start-ups, which have been the targets of increasing levels of funding – from US$140mm in 2011 to US$2.7bn in 2015[4].  So, the question has evolved from if or when digital technology will be adopted, to how industry players are to do so effectively.

How to approach a digital transformation

Let’s take incumbent insurers. What is their approach to digital technology? There are three important dimensions to cover:

1. Their approach is largely holistic. While at first it was incremental – focusing on leveraging API networks – now the focus is on full-scale transformations, covering policy distribution, underwriting and pricing, and claims. The value of a transformative approach lies in being future-ready.  According to McKinsey, insurers who move “swiftly and decisively” in this regard will be those that “flourish” down the line[5]
2. Customers are at the centre of decision-making. While insurance has always been, at bottom, about people, consumer trends are driving the digital transformation agenda. According to PwC, policy holders are looking for “choice, flexibility, simplicity, and personalisation in what they purchase, the channels they use, and how they interact with carriers.[6]”  In other words, they want an excellent customer experience, delivered seamlessly through digital technology. 
3. Collaboration with insurtech start-ups. According to Accenture, a growing number of insurers are funding, incubating, and investing in insurtech[7]. This is prudent strategy because such start-ups are capable of delivering value to incumbent players across data analytics, intelligent automation, and connected insurance (the Internet of Things for insurance). Constrained by their size and legacy technology, traditional insurers no longer see insurtechs as potential disruptors, rather as partners to create a mutually beneficial outcome.

The importance of understanding the digital landscape

So, being digital friendly is important for insurers. But being on top of digital trends and how such trends are affecting the market for insurance products is of equal importance. Here is a short-list of developments to keep a pulse on:

1. Self-driving cars - according to Jörg Mußhoff, senior partner at McKinsey, the advent of self-driving cars could spell a dramatic reduction in motor premiums[8]. They could also fundamentally change the motor insurance business including the ecosystem of industries supporting it.
2. Cyberisks – these include personal and corporate data liability, data security liability, outsourcing liability, cyber extortion and more. And the market for such insurance is growing – from US$2.5bn in 2017 to a projected US$7.5bn by 2020[9].
3. The sharing economy – trends like homesharing, coworking spaces, and ridesharing are revealing new risks that insurance companies are working to address. As a result, we are seeing insurers partnering with sharing economy companies like Singapore’s Grab and US-based Airbnb, to innovate effective policies to adequately cover users.
4. Personalisation - with the amount of personal data available today, insurance risk assessment, product proposition and risk management could move away from an aggregated to a personalised model.

The horizon for insurance in the digital age

Borrowing a phrase used by Jörg Mußhoff, insurance has entered a phase of “digital realism.” That is, a time when digital technology can be used to deliver real value. And I think he is right. However, the ability for insurers to deliver such value hinges on their emerging business models being and remaining customer centric, operationally collaborative across industries, and forward-thinking about what is coming next. 

 

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References

[1] Ernst and Young (2019). Digital Transformation in Insurance. [online] Available at: https://www.ey.com/Publication/vwLUAssets/ey-digital-transformation-in-insurance/$FILE/ey-digital-transformation-in-insurance.pdf [Accessed 10 May 2019].

[2] O’Hearn, S. and Mukhopadhyay, A. (2019). Insurance trends 2019: Digital transformation shifts from threat to opportunity. [online] Pwc.ch. Available at: https://www.pwc.ch/en/publications/2019/PwC_2019_CEO_InsuranceReport_Final.pdf [Accessed 10 May 2019].

[3] Jubraj, R., Watson, S. and Tottman, S. (2019). The Rise of Insurtech. [online] Accenture.com. Available at: https://www.accenture.com/t00010101T000000__w__/gb-en/_acnmedia/PDF-50/Accenture-Insurtech-PoV.pdf [Accessed 10 May 2019].

[4] Catlin, T., Lorenz, J., Münstermann, B., Braad, P. and Ricciardi, V. (2019). Insurtech--the threat that inspires. [online] McKinsey & Company. Available at: https://www.mckinsey.com/industries/financial-services/our-insights/insurtech-the-threat-that-inspires [Accessed 10 May 2019].

[5] McKinsey & Company (2019). Digital disruption in insurance: Cutting through the noise.[online] Available at: https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Time%20for%20insurance%20companies%20to%20face%20digital%20reality/Digital-disruption-in-Insurance.ashx [Accessed 10 May 2019].

[6] O’Hearn, S. and Mukhopadhyay, A. (2019). Insurance trends 2019: Digital transformation shifts from threat to opportunity. [online] Pwc.ch. Available at: https://www.pwc.ch/en/publications/2019/PwC_2019_CEO_InsuranceReport_Final.pdf [Accessed 10 May 2019].

[7] Jubraj, R., Watson, S. and Tottman, S. (2019). The Rise of Insurtech. [online] Accenture.com. Available at: https://www.accenture.com/t00010101T000000__w__/gb-en/_acnmedia/PDF-50/Accenture-Insurtech-PoV.pdf [Accessed 10 May 2019].

[8] Peverelli, R. and de Feniks, R. (2019). Leaving the ‘Valley of Uncertainty’ - and what’s next | Digital Insurance Agenda | The must-see Insurtech event. [online] Digitalinsuranceagenda.com. Available at: http://www.digitalinsuranceagenda.com/329/leaving-the-valley-of-uncertainty---and-whats-next/ [Accessed 10 May 2019].

[9] O'Hearn, S., Mitzner, K. and Delbridge, P. (2019). Insurance 2020 & beyond: Reaping the dividends of cyber resilience. [online] PwC. Available at: https://www.pwc.com/gx/en/industries/financial-services/publications/insurance-2020-cyber.html [Accessed 10 May 2019].