The Insurance Industry's Digital Transformation: Navigating through the Fog while balancing Innovation and Tradition
The insurance industry is known for being complex, conservative, and slow to change or embrace new technology compared to other industries. This is changing quickly, carriers are adapting contemporary technology, embracing new ways of working, and transforming the experiences they deliver. It started with the need to improve net promotor score (NPS) and keep up with the digital experiences their customers were getting used to. InsurTech offerings skyrocketed, several commercial off the shelf (COTS) products gained rapid success on the P&C side, insurers formed venture partnerships, and started bundling products with digital and embedded offerings. Real transformation though is more than just skin deep; the underlying layers must change for enabling product innovation, leverage new business models, and delivering real business outcomes
Navigating Macro Volatility: The Innovation Imperative
Insurers are grappling with macroeconomic volatility: rising inflation, increased severity, and frequency of natural catastrophe (Nat Cat) incidents (including the cost of claims further impacted by global supply chain issues), and expanded longevity expectations, all coupled with the surging cost of technology transformation amidst limited improvement in NPS. Some insurers are referencing the current state as a ‘cost of living crisis’ which can impact new policy sales, enhanced or additional product ‘add ons’ and even lower renewals all while the cost of claims is rising. At the same time, reinsurance players have increased premiums due to the hardening market: inflation, increased exposure from natural catastrophes, and cyber incidents. Large-scale incidents like natural catastrophe losses and lingering pandemic losses stemming from COVID-19 have also left many insurers seeking to retain risk and/or search for alternate capital solutions (e.g., insurance-linked securities).
The world continues to add new and dynamic threats to mix in the form of risk of recession and geopolitical tensions, however, one thing is clear: carriers aren't slowing down the transformation journey. As such, the need to constantly innovate has never been greater yet the focus is on how to make an impact as innovation fatigue and POC inertia has seen limited traction by large carriers.
Focus on the ability to reduce the variability of costs, deliver successful traction of new products for consumer engagement, and improve efficiencies is immediate. All insurers are focused on transforming to remain competitive and relevant in the market, especially amidst evolving customer expectations while appealing to a new demographic and a more tech-savvy market. The fast-paced Insurtech players have added solutions for insurance and reinsurance carriers alike focused on delivering transformation to address the ever-increasing expectation of the digital customer.
Striking the Right Balance for Innovation
Insurtech’s originally thought of entering the insurance market as disruptors of the larger insurance players by improving efficiencies, reducing costs, and adapting to emerging technologies; these players have gone further to introduce disruptions to even the business models of the insurance companies. However, most insurtechs that acted as full-stack insurance companies have not been able to profitably demonstrate core insurance metrics like loss ratios, and with the cost of capital so high; being a full-stack disruptor still proves quite difficult. Insurtechs often pivot into solving for components of the insurance value chain offering innovative solutions in partnerships, and ecosystems (including white labeling) across various areas like customer experience, and high digitization by using technologies like Internet of Things, artificial intelligence, blockchain, and big data. There are many challenges they’re facing: driving profitability, going beyond the MVP, implementing new and more comprehensive product designs, go-to-market challenges, regulatory, and capital constraints. Insurtechs, while plentiful, are struggling to build enough ARR to demonstrate product-market-fit. Many might be available for sale and consolidation if things do not change quickly as they cannot currently afford the long sales cycles, proofs of concept (POCs), and expectations they are facing to win the market as a carrier choice.
On the other hand, many Insurers have a hard time selecting the right insurtech partners. The market is voluminous; every offering is somewhat similar, with loads of redundancy across solutions yet components of all might be needed to truly solve the insurer problem. Often the selection is based on one or two vendors from customer value creation (CVC) or stakeholder lens that end up in POC for 1, 2, or 3 years. At this point, the project is often stalled, and innovation fatigue becomes apparent. The choice becomes to start over or call-in consultants to help make sense of the ever-growing landscape. What is needed is the ability to compose and decompose the solution from a functional and technical lens. Additionally, being able to compose and recompose the price to suit the ‘just needed’ capabilities (which few insurtechs will allow). Insurtech’s often address the simplest Insurance products first, while Insurers have often grown through acquisition with a vast and complex book of products and technologies. Implementation is often the toughest challenge. While emerging players are great at leveraging technology, the nuances of regulated, global entities with a spaghetti of technology estate and a generational gap in culture and ways of working create tougher implementations and abandoned initiatives. I believe digital transformation is less about digital, or tools/technology and more about culture, behavior, ways of working, and business model transformation.
Many of the larger or technology-forward carriers are often good at this though, larger budgets, stronger brands, and deeper talent allow them to be more successful. But for many, attracting and retaining talent and integrating the teams to deliver modern software is a challenge. Technology is evolving at a rapid pace, keeping up with the latest tools, making the right architectural choices, managing, and securing a hybrid estate, and leveraging the hyperscaler for the right use cases to deliver the outcomes that the business can appreciate are the top priorities.
The Power of Partnership: Orchestrating and Co-creating Innovation in Insurance
The well-implemented two-pronged solution for some time has been a partnership between the Insurance carriers and the insurtechs. However, the canvas is much broader. Organizations should consider orchestrating complementary solutions, products, internal teams, and service providers and act as the glue that binds them together. Embracing the overall ecosystem of players, the best talent, service providers, product companies, Insurtech’s, platforms, and rethinking how we can compose our approach as building blocks that deliver experiences. As an industry, we work towards one common purpose, to deliver better outcomes for our customers, associates, and the business. It’s time to embrace change, collaborate, and play to our strengths.
