August 14, 2019
New Efficiencies in Life Insurance
by Tony Laudato
A misconception is that digital distribution brings channel conflict, but that assumes the same audience is being targeted. This isn’t the case.
A tiger never changes its stripes. But is this true of life insurance companies? They’re good at selling through distribution, but there is a large pool of younger generations that must not be overlooked. This is where digital distribution comes in — digitizing the whole process end-to-end, from improving the sales process through to identifying new target audiences. But how can this actually work in practice? And what are the barriers for life insurance firms?
Digital distribution is often conceived of too narrowly – something akin to “we’ll market via social media,” with little additional thought. In reality, the use of digital has multiple applications right through the whole sales process.
First, there is the question of funneling new customers into the sales process – getting people aware, interested and to the door. The insurance industry has a real opportunity here to supplement its traditional reliance on agents and intermediaries with direct-to-customer marketing through all manner of online engagement. But rather a one-off initiative, long-term success depends on creating a virtuous cycle. Any company that moves into digital sales and marketing will find itself with an influx of new data. This needs to be stored, analyzed and used in a sophisticated way to inform future marketing, in terms of whom to target, how and when. It needs to be a continuing process.
Second, there’s the sales process itself, which is still fairly archaic and often involves reams of paperwork with incomprehensible or irrelevant detail (from the customer’s point of view). Embracing digital distribution means giving new customers the ability to sign up to a policy in around five minutes maximum, via a simple, slick and intuitive mobile app that doesn’t overload the user with information.
Third – and most often overlooked – is the role digital can play in engaging, retaining and upselling to existing customers, those who are already through the door. One example of this is what we call reciprocal intelligence, whereby, instead of the data flow being entirely one way (from customer to company), the insurer gives something back. For instance, if a consumer is using wearable apps to monitor fitness levels for a policy, the insurer should provide information back — if the average resting heart rate has improved, or about the level of subsequent health risk that comes with certain lifestyles.
See also: Digital Innovation in Life Insurance
The main misconception with digital distribution is that it’s all about replacing traditional marketing. In reality, it’s an opportunity to supplement the more traditional approaches and start to tap into an entirely new set of customers. The more traditional, agency-based model does still works well at engaging and selling to the type of customer it has always favored – asset-rich households. However, this pool of revenue is shrinking, and younger, less financially secure generations are far less inclined to purchase insurance through traditional channels. It is in tapping this relatively untapped pool of customers – and thus growing the overall pool of potential revenue – that digital distribution will come into its own.
Another misconception is that digital distribution brings channel conflict. A few years ago, this was a dominating fear, and the main reason behind a lot of companies’ reluctance to adopt direct, digital models. But the fear was largely based on the misconception that both strategies would be targeting the same audience. This isn’t the case. On the contrary, embracing the digital side can make the traditional component more efficient and effective. The data and insights generated on the digital side can be used to inform and improve marketing and outreach on the traditional side in a way that was too expensive before. There’s more synergy than conflict.
Of course, there are challenges for life insurance carriers looking to digitize. First is the question of technology and infrastructure, of making the investment required to ensure the company has the means to execute these quite unfamiliar, data-heavy digital strategies – whether that be through replacing or upgrading in-house systems, or through partnering with technology firms.
There is also the question of talent and company culture. Fully embracing digital means processing large amounts of data, then knowing how to use it to maximum effect. This will require hiring people who are tech-savvy and know how to navigate, for instance, social media or data analytics. The skills and aptitudes involved are quite alien to many insurance firms and will involve hiring new types of employees at all levels. Any insurance firm that wants to do the work entirely in-house will have to, to some extent, become a tech firm – and that’s a big cultural leap. There’s also the inconvenient fact that insurance is not exactly the first sector that younger tech wizards think of when deciding on a career – firms will need to think about how to make themselves appealing to this kind of talent and bridge the gap.
There is also the matter of digital distribution affecting the carriers’ risk profile. The main hazard from a risk perspective is the loss of human judgment when bringing customers onboard. The digital approach is about automation and volume – what comes through the door is a set of data points. There isn’t an agent talking to customers, getting to know them in a more rounded way.
This is far from an insurmountable problem, but it does introduce the potential for new risks coming on board to not be screened as well as they would be via the traditional approach. It means learning new ways to screen for risks. The main things an insurer needs to understand about new customers are their financial status, their health and whether they truly need the product in question. This evaluation has to be done differently, rather than relying on the expert judgment of agents – any digital onboarding process needs to incorporate a way of both capturing and assessing information in a reliable fashion.
This further underlines the point that digital and traditional should be seen as complementary rather than mutually exclusive – ultimately a human element will always be needed to address this type of risk. The key is finding a way to integrate the two, to ensure there’s an aspect of human intelligence built in.
Life insurers are starting to embrace the shifting sands and are looking to digitize. Some firms want to build their own digital capabilities but recognize they don’t know where to start, and so they bring in a tech firm to advise. Other firms are partnering with tech firms to outsource the function. In these cases, the insurtech firm gets ‘bolted on’ to the insurance company, bringing its own talent and essentially acting as that company’s digital department.
See also: A Game Changer for Digital Innovation
The relationship between traditional insurers and smaller insurtech outfits has changed considerably over the last couple of years. Whereas many insurers initially thought they’d be competing directly against a new generation of disruptive fintech startups, a far more collaborative dynamic has now emerged. This makes a lot of sense – the two sectors bring very different yet complementary capabilities to the table, and have advantages with different markets and consumer audiences.
Life insurers’ traditional revenue pool does have some life in it yet. But firms that are not just looking to survive but to thrive, at the very least, need to understand their customers better, and be more up to speed with modern consumer behavior.
This doesn’t necessarily mean they have to go down the direct-to-customer route, but adaption is needed to unlock the efficiencies that digital can enable and to bring approaches in line with expectations consumers now have. Relying on traditional messages and systems limits the potential market, and will eventually be obsolete. Digital distribution is just one aspect of the modernization of the insurance industry that is, in the long run, inevitable. Those that don’t adapt will be left behind.