As businesses in all sectors grapple with how to digitalise to meet increasing competition, the insurance industry remains one of the least transformed – but the signs are already there that it needs to adapt or die. Kathy Gibson asks why … and how
The insurance industry operates with a business model that hasn’t changed much – if at all – for the last 400 years. But in the current economic climate the industry is facing increasing economic pressures.
Juergen Weiss, managing vice-president of Gartner focusing on insurance industry research, explains that the traditional value proposition is that the insurance company is the expert in assessing risk, and the customer buys into what is essentially a membership at the cost of a regular premium.
“There has never really been any competition within the industry,” he points out. “In the short-term insurance industry we’ve had price wars, but that’s a zero-amount game, and overall it’s been a fairly stable environment. This is also down to the fact that there is a high level of concentration in the insurance industry, and most markets are in the hands of a top five or 10 players.
“So you have a kind or oligopoly – a couple of market leaders and little appetite for change.”
However, the world has changed, Weiss says. “In the past was difficult to enter the market. For a start, you needed a distribution network. Insurance is still sold primarily through intermediaries and you would need to build this channel. You also needed re-insurance capacity, underwriters, and claims adjusters who can assess risks and claims. So the cost of entry into the market was really high.
“Regulations were another stumbling block preventing just anyone from opening up in insurance.”
Another factor holding the insurance industry back from transforming is – ironically – technology.
Weiss points out that most of the insurance giants are still running their core insurance processes like policy administration and billing on old mainframe or minicomputer systems developed in the 1960s or 1970s.
“And these systems were designed to have a product-centric view – they are not customer-centric.”
So even if insurance companies offer multiple types of insurance and products, the different business units are still treated as silos.
The distribution networks add a layer of complexity, with insurance companies typically dealing with a mixture of independent and tied agents. “So the insurance company doesn’t own the customer, and only has a small view of the customer reality.
“This adds to making customer-centricity a challenge.”
When it comes to developing new ideas and introducing new technology into the industry, the fact that insurance is not an attractive employer plays a role. “So the industry doesn’t attract the best talent. And the average age of insurance industry employees is above 50. This doesn’t necessarily mean that they are not innovative, but there are a lot of new technologies emerging and few skills out there.”
Having described how the insurance industry has traditionally operated, and why this has limited its ability to transform, Weiss notes that there are changes taking place across the board that will influence insurance.
Industry fluidity means that the barriers between industries are becoming more blurred. Cross-industry alliances are happening, and industries are expanding their value chains into the domain of other industries.
“For instance, we are increasingly seeing retailers offering financial services; technology providers are moving into the financial world or becoming retailers.
“We are seeing industries spilling over into other industries.”
With industry fluidity taking place all around us, the customer is become much more important, Weiss says. “As the industry becomes much more competitive, all the major insurers are looking to customer-centricity in their offerings.”
The problem for companies is that it’s so much easier now for customers to change their suppliers – and there is more competition.
“The barriers are going down everywhere,” he says. “E-commerce Internet trends have lowered market entry barriers, and new entrants don’t have to build the distribution networks or comply with regulations because they are partnering with banks and online distributors.”
There is also a growing tendency for products and services to become more pervasive, Weiss says. “If you bought insurance a couple of years ago, you would have bought into an incident-driven and product-driven service model – and if you bought the wrong cover you won’t be paid out.
“Today, the consumer is more important. He is more willing to change his service provider and he has different expectation. He expects a more holistic value proposition because he is used to getting a pervasive service model in other areas of his life.
“So the insurance companies are trying to create a value proposition that is based on the customer, not on the product.
“And this becomes a very competitive environment for insurance companies.”
He points to life insurance as an example, where the consumer has different needs at different stage of his life, and the insurance should be able to adapt.
The industry is also seeing a shift from consumers buying a traditional product to them using insurance as a service. “We are seeing a greater number of usage-based insurance products, where the policy adapts to your behaviour,” Weiss says. “Examples include paying per kilometre that you drive; or paying less if your behaviour is less risky. Paying for what you consume is a model that is popping up in many industries, and in insurance it’s changing the value proposition and led to the entry of new competitors.”
Some new business models that Weiss has seen around the world include funeral insurance as an add-on to the telecommunications company’s mobile bill; freemium offers where consumers get some services for free while paying for others; group buying where more people in the group get better rates.
All of which presents existing insurance companies with some daunting challenges.
Weiss recommends that companies offering traditional insurance products today take some time for self-reflection, to figure out where they are what their level of digital maturity is compared to peers.
“Once you’ve done that you need to figure out what your competitive differentiators are. If you are creating a digital vision for the organisation, there are so many different flavours and varieties of solutions, that you need to know where your strengths are.
“These strengths could be that you service your customers the best; you could be product experts; or the most cost-effective operation. You might want to build the best value network or a holistic value proposition. There are a number of potential target models.
“Or there could be areas where you particularly want to compete, areas that you are strong in. So identify what your areas of innovation and differentiation are.
“Play to your strengths and aim to either eliminate or mitigate your weaknesses.”
Technology is going to play a critical role in any new developments, and legacy systems could be barriers to innovation. “So start developing bimodal IT capabilities, running IT at two different speeds,” says Weiss. “On the one hand you have traditional IT and traditional development, which is important because it’s what the business is running on.
“The other is a much more agile approach to innovation and may include innovation labs, think tanks, crowdsourcing or open APIs to invite contributions from the development community. This second mode is much faster and more agile.”
While working on the IT systems, it’s a good idea to consolidate and simplify, Weiss adds. “One of the challenges in the industry is not only that the systems are old, but that there are so many of them. One insurer in Johannesburg has 25 policy administration systems, and they want to reduce this to four.”
Consolidation and simplification from a product and process point of view is also mandatory for companies that want to change, Weiss says.
“One Dutch client went to a software as a service (SaaS) model and reduced the number of products from 100 to four. Another client has the vision of creating a bill of materials, with common components that can be re-used and localised for different markets.”
Insurance companies traditionally do everything themselves, and this should also change, he adds. “In typical insurance companies the degree of vertical integration is still very high. They own the product and the distribution, as well as the service, so there is an opportunity lower the degree of vertical integration. You could become an expert in some things, and buy services from someone else. That’s one of the reasons that start-ups are so much more agile; because they don’t have network and they may even not have technology. Instead they focus on their strengths and capabilities and as a result their go to market is much faster.”
Analytics has a big role to play in helping the insurance industry to transform, Weiss says. “But typically insurance companies have a lot of data, but not much information. They don’t even need to collect more data, but could be a lot more efficient if they leverage what they already have. Better data analysis and analytical capabilities will help them to tailor a better value proposition.”
Going one step further, using analytics could help insurance companies to start correcting or changing behaviours based on real information.