Why modernize? – Pressure from the market

‘From maintaining relevance in the face of InsurTech disruptors to addressing the needs of today’s more demanding consumer, insurers looking to avoid disruption and stay competitive should be fast-tracking the adoption of flexible, scalable, and customer-centric next-generation solutions for their core systems’

– Sibylle Fischer [i], Director Strategic Venturing / Startup Scouting at Baloise Group

‘Insurers across the region must differentiate through innovative products such as parametric and usage-based insurance, enhance their customer-centricity, explore alternate distribution channels, increase their operational agility and seek ways to adapt to business changes. As insurers navigate these disruptions, many have realized that their existing policy administration system (PAS) or core system does not have the capability required to keep pace.’

– Extract from Cognizant 20-20 Insights [ii]

Core systems have been running insurance companies smoothly for a long time, processing transactions and ensuring all is recorded. These monolithic systems, usually proprietary platforms running on mid-range and mainframe computers were developed and deployed years or even decades ago and have been updated and extended to reflect changing needs. Nonetheless, transforming dated technologies has its limits and attends difficultly to modern days customers’ expectations nor provides easy access to third-party information providers or leading-edge Insurtech technologies. The effort spent in terms of time, personnel, and money, to maintain and develop dated systems that utilize legacy languages, databases, and architectures, has become unsustainable for many companies.

An investigation by Deloitte and LIMRA identified the top 5 factors driving the Core System Transformation strategy of insurers to be [iii] – in decreasing order of importance:

1. Product strategy and objectives — speed to market, distribution driven

2. Technological relevance/risk—required to access enabling technologies

3. Service enablement—digitizing services (enhanced user experience)

4. Growth (policy/contract volumes, new markets, new distribution model, new geographies)

5. Expense reduction

Completing the view above and underlying in many aspects is the necessity for carriers to have a system that is open, flexible and facilitates innovation. In this blog we look at some of the forces that pressure insurers to modernize legacy administration systems to keep pace with the market.

Customer expectations

As we explained in Customer experience in the driver’s seat of insurance transformation technology has entered our lives and is shaping our expectations. In an ever more connected world, the rise of the big tech platform accustomed us to seamless interactions and responsive operations. Tech giants such as Facebook, Linkedin, Instagram, Google, and Amazon are dictating the way forward. The COVID-19 pandemic forced a remote way of living upon us and made society realize the convenience of buying and transacting digitally. Post-pandemic policyholders are now, more than ever, looking for a frictionless digital experience throughout the insurance process too.

A widening gap between customers’ needs and expectations is creating a business opportunity for grabs that is catered by more agile technological startups that are appearing. As the Voice of the Customer Survey of May 2021 [iv] showed, willingness to explore coverage from new players, such as BigTechs rose 11% between 2020 and 2021. In reaction forward looking Insurers have been collaborating, partnering or acquiring InsurTechs that have the expertise and technology to better engage customers via Convenience and Reach.

As Capgemini & EFMA put it [v], insurers are now considering technology solutions to hedge against further disruption by enriching their engagement channels, creating WOW-factor impact, and delivering stellar customer CARE.

New trends in products and business models

‘The industry must extend beyond core products and services to retain customer base. The traditional protective products sales approach is nowhere near enough for the insurer of the future. Growth will come from new service-based models, innovative products, and a greater focus on prevention.’ 

– Katrien Buys [vi], Director Strategy, Innovation & Sustainability, Grupo Ageas Portugal

Problems related to customer loyalty and business profitability, and an incomplete response from the industry to the customer’s need for protection, have led insurers to look beyond insurance [vii]. In a world where, in the eyes of the consumer, insurance products seemed very similar and the price the only differentiating factor, innovative insurers adopt a strategy going beyond insurance to differentiate their offer, reduces risk and multiply customer touch points, making him more loyal and profitable. Beyond insurance offers contribute to satisfying better the client’s desire for security against a certain risk, which includes providing access to services such as prevention and early detection of an event to minimize its negative impact. Bringing together all the entities that offer products and services to satisfy the need for consumer protection benefits everyone and leads to the creation of ecosystems – see below figure from Bain & Company [viii]

Insurers are not the only ones to have thought of ecosystems to complement their product and service offer to clients. Many other industries such as banking, travel & hospitality, mobility and health, just to mention a few, are following the same movement and setting up digital platforms and marketplaces to make services available to clients and orchestrate the system. It is thus natural that insurers have here too an opportunity to embed and sell their products.

Novelties on the product side have also emerged with the development of our connected world. IoT and telematics have established a more direct and immediate correlation with the insured object. An increasing number of consumers are finding it normal to pay an insurance premium based on its use. Covers must be turned on and off (on demand), as and when needed for objects or covers such as travel, mobile digital equipment, drones, or personal accident. A premium must vary, if, where and how one drives (UBI – usage based), and the conditions of life and health policies should take into consideration how healthy a life one leads.

As much as connectivity renders it possible to link premium to usage, digital triggers, smart contracts and parametric turn automatic the activation and settlement of a claim. Finally, and just to mention a few of the external factors pressuring insurers to equip themselves with a modern core, one must mention Artificial Intelligence (AI), Machine Learning (ML) and Robotic Process Automation (RPA) as technologies that leverage many of the elements mentioned above to optimize processes throughout the insurance value chain.

Today’s consumer has come to expect a similar customer experience as the one he has been offered by the GAFAMs and other front-runner industries. IoT and connected devices have opened new opportunities for product development. Technological newcomers have appeared with offers to upgrade incumbents’ insurance offer or replace it (neo-insurers).

In reaction, to adapt products and processes insurers have been patching their (sometimes decade-old) existing systems, which over the years have become unstable and very expensive to maintain. Nonetheless, legacy systems have their limitations. To respond efficiently to the market and provide customers with the products and experience they are looking for while optimizing processes and costs internally, insurers need to select and adopt modern insurance platforms.

‘Customer Needs Won’t Wait; Core System Modernization Won’t Either – More than ever before, insurance businesses depend on modernized core systems as a result of shifting customer needs in a changing market… While modernizing core application systems isn’t easy, insurance executives must understand that the time is now’ [ix]

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Sources:

[i] In: What’s Next for Innovation in Core Insurance

[ii] In: How APAC Insurers can modernize with Next-Gen Digital Policy Administration Systems, Cognizant 20-20 Insights, Jan 2020, p.2

[iii] In: Legacy systems and modernization, Deloitte & LIMRA, 2017, p.3

[iv] In: Capgemini, World Insurance Report 2021, Voice of the Customer Survey, May 12, 2021

[v] In: World InsurTech Report 2021, Capgemini & EFMA, p.6-7

[vi] In: World Insurance Report 2021, Capgemini & EFMA, p.30

[vii] In: The Digital Insurer, Beyond Insurance – the new strategy for incumbents?

[viii] In: Bain & Company, Customer Behavior and Loyalty in Insurance: Global Edition 2017

[ix] In: Core System Modernization: Time For A New Roadmap, Forrester commissioned by Red Hat, May 2020, p.2