How Not to Transform P&C Core Systems

The insurance industry continues to invest heavily in transforming their legacy policy, billing and claims applications. But are carriers actually realizing what was promised to the business? Core transformation can be so much more than a legacy technology replacement. In our experience, many projects fail to fully realize their potential benefits due to three common oversights:

• Digitization without differentiation – Projects that simply upgrade their core systems but fail to change the customer engagement.
• Limited focus on information data – Too much focus on transactional data elements and not using a comprehensive informational data approach.
• Failure to foster innovation – Modernizing applications but failing to leverage these tools to support continuous improvement and innovation.

In fact, 67% of insurance respondents to PwC’s 2017 CEO survey see digitalization and innovation as very important to their organizations. Specific to the insurance industry, CEOs noted that the area they would most like to strengthen to capitalize on growth opportunities is digital and technological capabilities, followed by customer experience (reflecting the connections between the two). Insurers are looking for more than just modernization of core systems. They expect a successful digital, analytics and organizational transformation that can enable them to unlock the full potential that a core transformation has provided to them. Carriers should be asking themselves the following questions to determine if they’re achieving the full benefits of expanding beyond core. Is the organization:

• Leveraging the new platform to change the customer engagement model?
• Leveraging analytics-based insights with a clear vision and plan to translate that into value based capabilities?
• Promoting continuing innovation – both internally and to customers?

Key opportunities beyond core

• Digital differentiation: Putting the customer at the center of the business is a driving success factor for any core transformation effort. With the maturation of customer portals and digital platforms, insurers can now focus on customizing the digital layer while retaining the back-end core systems as out of the box as possible.
• Data and analytics: As the volume of data has grown, insurers have implemented new big data technologies and reporting structures. The challenge remains to translate data into insight, and we have seen an emerging trend of establishing a chief digital officer and corresponding analytics business units that can span across the various data silos and business units.
• Innovation: Within the context of innovation, a significant majority of carriers dedicate 1% to 5% of their IT budgets to research and development (R&D). We believe carriers should pursue a two-pronged approach to innovation that leverages both internally generated innovation as well as strategic partnering with emerging insurtech companies.
• Insurtech: Carriers should think beyond their internal businesses to identify and collaborate with an increasingly robust insurtech community of startups. This will allow carriers to implement innovative technologies through a combination of partnering strategies.

See also: Insurtech in P&C: It’s Not About the Tech   Digital differentiation We have seen a significant maturation of portal and digital platform offerings in the market in the past two years. This shifts the balance for carriers that now have the ability to leverage commercially available offerings that previously required custom builds in-house or through extension of the core policy, billing and claims products. What this means for carriers is that digital strategy can now complement the core transformation journey. Carriers are now pursuing a “digital first” strategy that places the customer value proposition first when prioritizing project work. In this model, the core application’s UI / UX is kept nearly out of the box, with the focus of UI / UX customization performed on the digital layer. We believe this approach results in the best of both worlds, resulting in a highly conforming set of core systems and a carrier-unique digital experience delivered through the custom digital layer. To achieve these goals, projects should:

• Leverage commercially available digital products as the foundation for your digital layer;
• Implement APIs between the back-end core applications and the digital layer;
• Leverage the enterprise digital layer for all external-facing interactions, including intermediaries and customers.

Insurers are placing greater emphasis on their digital offerings as a key customer differentiator, shifting customization from the core applications to the digital layer. Data and analytics Big data implementations have hit a critical mass, with nearly all carriers either pursuing a data lake-style implementation or planning one. Carriers that have implemented big data implementations have benefited from faster enterprise-level deployments, but at a cost of retraining the data and analytics business units. In some cases, these projects have shifted the reporting development to the respective business units, which must up-skill to support this previously IT-led work. We have also observed a growing trend of the chief digital officer (CDO) and the creation of a specific analytics business unit within organizations. This reflects the belief that data is no longer the domain of individual siloed business units, and carriers must now use data cross-business to achieve true customer insights. Finally, carriers are now looking at new monetization opportunities as a result of their data stewardship. For example, one international carrier is now investigating how to monetize their supply chain data for automobile repair networks. Other possibilities include data provider relationships with original equipment manufacturers and even competitors who may use the carrier’s repair cost history to better price risks in the local market. Trends in data and analytics include the introduction of new big data tools and techniques, new business units to leverage data across the enterprise and a renewed focus on monetization of insurers' data. Innovation We make a distinction between “invention,” which represents the creation of a capability versus “innovation,” which is the application of that invention to the marketplace. For insurers, invention is rare and generally coincides with a change to both the technology and regulatory landscape (e.g., credit scoring). Insurers should focus on innovation and how to leverage emerging technologies and evolving customer expectations into your business. Insurers that lead in innovation exhibit the following traits:

• A mechanism to capture innovative ideas across the enterprise (e.g. innovation workshops, targeted interviews from front-line employees, etc.);
• A project funding and prioritization structure that links new ideas to internal capital budgeting and executive priorities;
• A willingness to fail early and often. For example, Google X (Google’s innovation arm) gives employees incentives to end a project early if it makes sense to do so.

The good news is an emerging insurtech ecosystem is growing, which allows insurers access to a pool of experimental projects and partners. Insurers should look to implement a two-pronged innovation model that includes internally derived innovation as well as a partnership model with leading insurtech vendors. Insurtech The exponential growth of insurtech funding and company formation reflects the belief that the insurance space is ready for transformation. Because the insurtech ecosystem is still evolving, it will remain unclear who will ultimately become leaders within the space. As a result, insurers should look to a combination of partnering models to hedge against an uncertain future. Some models we have observed include:

• Joint venture – The insurer and insurtech company form an exclusive joint venture. The insurer provides seed capital and is able to influence the insurtech more greatly than in other models.
• Strategic partnership – The insurer takes a leadership role in partnering with the insurtech, usually at favorable economic terms with the goal of growing the partnership over a longer period.
• Acquisition – The insurer makes a strategic acquisition. This is a less common model due to the capital required and concern about the effect a merger may have on the acquired company
• Service provider – The insurtech is considered a provider and works on a pre-defined contract term. This model may be pursued for smaller proofs-of-concept or for new products the insurer is experimenting with

Regardless of the partnering model, we have seen both life and P&C carriers successfully work with emerging insurtech companies to roll out innovative products and features. In the life space, the use of health-tracker-style devices, apps and policy discounts have helped move insurers to a health-monitoring and lifestyle adviser. See also: P&C: Back-End Systems Unite!   Insurers should look to leverage insurtech opportunities to continue to broaden their customer value proposition, both through increased customer touch points and risk management features. Implications

• Digital experiences, not the back-end core application, are the true customer differentiator. As a result, insurers should look to establish a customizable digital platform that interacts with a nearly out-of-the-box set of back-end core applications.
• Data and analytics will both increase in volume and frequency, requiring carriers to look across individual business units and data silos to form truly actionable customer insights.
• Innovation will originate internally within the company, but also from an emerging insurtech ecosystem of companies.
• Insurtech is still evolving ,and picking winners will be difficult. Insurers should look to a combination of partnering models to ensure the best trade-off of engagement and risk.