Survival of the Fittest in the Digital Age

As technology causes premium to contract, the most visionary insurers will change their focus from insuring risks and processing claims to obviating risk and instantly mitigating losses. Reflecting on my experience working with insurers and the IT and service providers who support them, I recall that about 15 years ago insurance business leaders suddenly needed to understand a number of new technologies to be able compete. Before that moment, the words “innovation” and “insurance” had rarely been used in the same sentence. The insurance industry was thought of as ultra-conservative and risk-averse—it seemed to move in slow motion while other industries were accelerating. ROI was a far more important metric than CSI or retention rates. Old habits die hard—but die they eventually will. The shift from an analog to a digital business world was challenging for all business sectors, but for the insurance industry it was particularly so, and likely the most disruptive change that the industry had encountered since the advent of the computer. The business of insurance is, at its core, about gathering, managing and storing a tremendous volume of information and using it to make calculations and predictions necessary for the creation of protection products. In an analog world, these functions were performed on paper—mountains of paper. Digital processes enabled these processes to be simplified and made faster and easier. However, the insurance industry, being conservative by nature—and subject to regulation—also kept the paper versions, creating even more complexity and making the management burden even greater. See also: Innovation Imperatives in the Digital Age   Transactional processing represented another challenging shift. In the analog era, people and labor were employed for every process from selling policies to developing rate quotes to managing claims to producing correspondence. With the onset of automation, the focus quickly shifted to eliminating human labor and reducing cost. For business leaders, their focus changed almost overnight from the management of large numbers of people and facilities to an understanding and effective deployment of new processing technologies. As if these shifts were not demanding enough, what followed was exponentially more challenging: Driven by the more technology-forward banking segment of the financial services sector, insurance experienced a seemingly never-ending stream of new technologies that disrupted every corner of the business. This next wave of technologies transforming the business of insurance appeared like a tsunami. The Transformation of Operational Process and Business Models Today, technology-driven disruption is accelerating, and the industry has entered a new phase: the transformation of underlying operational processes and business models. The initial impact was felt in distribution channels but more recently has begun to seep into the very infrastructure of the business—product development, pricing, rating, underwriting, loss reporting and claims management. The claim department consumes approximately 80 cents of every premium dollar earned, so it offers the greatest single departmental opportunity for earnings improvement. It is also customer-facing and represents the additional opportunity to improve overall customer satisfaction, retention and brand improvement. See also: How to Move to the Post-Digital Age?   Industry transformation still has a distance to go, and the next iteration of the business may cause even more fundamental upheaval in the C-suite. The explosion of “connected” things—cars, people, buildings, factories and the continuous streaming of data flowing from them—will drive two major shifts. First, traditional insurance product premiums will begin to contract in tandem with a reduction in the demand for insurance as the risk of losses is avoided. Second, the most visionary insurers will (and already have begun to) reinvent their basic business model from insuring risks and processing claims to obviating risk and instantly mitigating losses. The Darwinian dictum of “survival of the fittest” has never been more apt. This article was first published at Insurance Innovation Reporter.