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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 in order to be able compete and succeed. 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 data and information and using it to make calculations and predictions necessary for the creation 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.
Transactional processing represented another challenging industry 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: spawned 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 and 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.
Industry transformation still has a distance to go and the next iteration of the business of insurance may cause even more fundamental upheaval in the C-suite than already endured. 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 are avoided. But 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.
Nice Article Stephen
I love your insights, Stephen, and agree that the evolution to a healthier insurance enterprise most likely began in claims as the primary cost center and as a result, reactive, and will play out in risk mitigation, which, with CRM, will play out as a primary opportunity to be proactive. Both will require proper cleansing and analysis of those data stores you talk about. It’s the vision and insight around “what to do with the data” that will matter. I’ll add that the customer (personal and commercial lines) will indeed dictate most of this (as is evidenced by distribution management taking center stage during the first tech wave). Thankfully, in spite of potential product premium contraction, there will always be something new and different to insure, which will sustain demand.