Drivers of Digital Transformation in the Insurance Industry
The digital transformation of insurance started with the introduction of IT systems and mainframes in the second half of the twentieth century. So why has it become such a hot topic over the last few years and what drives this trend? Why did insurance board the digital transformation journey later than other industries? What is now the main focus of the industry?
As true as the industry never stopped its digital transformation, it is the acceleration of the pace at which society became more digital that left insurance behind. As the web evolved from version 1.0 – characterized by data and search engines – to version 2.0 – where a portable internet fuelled social networks and made data sharing and digital interactions the norm – insurance stood still for a long time. What explains that, although other brick-and-mortar businesses made their products and services more readily and conveniently available to consumers online, the financial service industry took longer?
The first factor is the nature of the business which elevates high entry barriers for newcomers. Compared to others, the financial services industry requires more capital, is more regulated, and necessitates more significant IT investments to run. Secondly, the complexity, architecture, and age of the installed IT infrastructure of incumbents in a given (geographical) market are similar, as is the perceived difficulty to transform it. A third reason that slowed down the industry’s perceived need to adapt is less standardized and more complicated products that consumers have more difficulty comparing and replacing. Finally, having few touchpoints with their clients, incumbent insurers did not feel the urgency to digitize or turn client interactions more convenient.
The progressive and more frequent appearance of tech companies with solutions covering all stages of the insurance value chain made this status quo change. Looking to fill the gap left open by traditional players who did not have a satisfying value proposition for modern consumers looking for convenience and new products, neo insurers and insurtech – the likes of Lemonade, Getsafe, Bought By Many, Wakam or Wefox – surged using the available new technology and are grew strongly.
To face off this growing competition with risk subscription capabilities, incumbents started acquiring and partnering with innovative start-ups that offered the technology and know-how they lacked to provide clients with the user experience they had come to expect from insurers too.
Nonetheless, transforming dated technologies has its limits and makes it difficult to attend modern days customers’ expectations. Accessing third-party information providers or leading-edge Insurtech technologies turns into a headache with legacy systems The effort spent in terms of time, personnel, and money, to maintain and develop dated systems that utilize outdated languages, databases, and architectures have steeply increased for many companies.
While some of this effort – also called technical debt – is inevitable, it moves from an important topic to an urgent one when it adversely impacts the balance sheet. When systems are closed, unable to connect to innovative technology and insurers build under-efficient patches giving the impression of business as usual, technical turns legacy systems into the main factor limiting the speed and capability of incumbents’ digital transformation.
Quote from Manikandan Natarajan:
‘Another way to look at it [technical debt] is the difference between an insurer with a high-performing tech stack and another with what has thus far been perceived as an ‘average’ performing tech stack. If you are spending 70% on business as usual (BAU), 20% on innovation, and 10% on other incidentals, then you are part of the ‘average’ Insurers. Compare this with High Performing Insurers who spend 40% on BAU and 50% on innovation.‘
As Cognizant refers, there is an increased understanding among insurers that the foundational components of yesterday’s Policy Admin System – architecture, tech stack and functionality – contribute to reduced flexibility, scalability, and digital readiness.
To counter this limitation and successfully move on their necessary digital transformation journey, carriers with legacy systems are now focusing on choosing an adequate modern IT solution for their company.
Engaging in the process of modernizing and adopting a new insurance platform though is a rare moment in the life of an organization. Chances are that few or any of the people in a given carrier have done it before, in their current company, or ever. How to proceed and select the new core system that will eventually impact and condition the company’s success in the short and medium term may seem daunting. It shouldn’t be!
Modern times call for modern solutions and a novel approach to core system selection. Incumbents need open and flexible platforms with the necessary capabilities to cater to customers’ expectations of today and tomorrow. Immediacy being the rule, the clock is ticking fast. Insurers need to align the quality of their service offer fast or risk losing clients to their more digital counterparts. Agile methodologies combined with the modularity of modern insurance platforms have rendered long traditional selection and implementation processes obsolete.