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7 Imperatives for Moving Into the Cloud

For property and casualty insurance carriers, growth is hard-fought in an environment of compressed margins, regulatory scrutiny, increased competition and customer expectations for anywhere/anytime service. Add unsteady economic conditions, low interest rates that decrease investment income and catastrophic losses from significant events such as Hurricane Sandy into the mix, and insurers are finding that their tried-and-true business methodologies that worked well pre-2008 are in desperate need of a facelift. Growth is especially challenging for insurance carriers with inflexible legacy technology systems, as well as small and mid-size carriers that lack the resources to make the product and operational changes they need to remain relevant and profitable.

Insurance carriers must navigate an environment that rewards nimbleness and flexibility, but to do so requires that insurers modernize their current systems and processes. Consider the example of bringing a new product to market. At most insurers, the process may take six months or more, with a price tag reaching seven figures. By the time the product is ready to launch, the dynamics in the market have shifted, or perhaps a new regulation has been legislated. The insurer has two equally unappealing choices: Launch the product as is and never realize a return on investment, or delay launch and retool the product, increasing the R&D price tag and losing potential revenue and market share.

There is a better way: Updating legacy systems with flexible and scalable Software as a Service (SaaS) computing capabilities allows P&C insurers to rapidly capitalize on opportunities and support growth. This article presents seven imperatives for the P&C insurance industry based on industry research and analysis, and outlines how a SaaS implementation can address each imperative.

IMPERATIVE 1: INCREASE SPEED-TO-MARKET 

In an Accenture survey of insurance industry professionals, more than seven of 10 (72%) respondents indicated that it takes their organization six months or more to launch a major product. In today’s constantly changing environment, six months is a long time indeed, and it’s likely that the market looks different than when product development began. However, insurers that are able to rapidly offer innovative products and services through multiple channels can take advantage of shifts in the market and exploit the slowness of competitors. Today, “slow and steady” doesn’t win the race.

Compared with legacy system-based product development, which requires coding, scripting and testing, a SaaS infrastructure by design incorporates more nimble and configurable software, significantly reducing development time and eliminating the cost of hiring a vendor or consultant to make coding changes. In addition, SaaS provides rapid provisioning of live and test environments to further increase speed-to-market. Lastly, SaaS requires minimal investment in hardware, software and personnel. Insurers can use a pre-configured infrastructure to reduce development costs by more than 80% over comparable legacy systems, according to Donald Harrell, senior vice president of marine, exploration and production for Liberty International Underwriters. This, in turn, reduces the risk for product launches.

IMPERATIVE 2: QUICKLY RESPOND TO MARKET AND COMPETITIVE CHANGES

Those insurers not able to turn on a dime may be in trouble because so many of their competitors are preparing to invest in technologies and processes that will help them design, underwrite and distribute products and services more quickly. More than 80% of insurance CEOs are planning to increase investment in technology, and more than 60% plan to develop their capacity for innovation. Innovation must continue after product launch, and SaaS allows insurers to retool products as market drivers dictate.

The ability to revamp an existing product is particularly attractive to small or mid-size insurers launching products to a relatively small target market. With SaaS, insurers are able to bring niche products to market that would otherwise not deliver enough ROI to justify the investment. Likewise, if a product is not profitable, an insurer can make changes and quickly reconfigure the product rather than being forced to offer an unprofitable or marginally profitable product because it’s too costly to make changes.

Insurers can also more effectively price products. SaaS is charged on a subscription or consumption basis, so costs are more closely aligned with the revenue being generated by the new product.

IMPERATIVE 3: REDUCE COSTS TO MAINTAIN PROFITABILITY

As the U.S. economy slowly improves, P&C profitability is starting to improve as well. However, there is little cause for celebration. Fitch Ratings warns insurers that the current pricing cycle may be running out of steam, forcing insurers to cut expense levels to maintain profitability. Now is the time for insurers to put in place cost-saving strategies. With a SaaS infrastructure, insurers can innovate and offer new products and services without incurring capital expenses.

Rather than implement an expensive technology infrastructure, SaaS allows insurers to leverage preconfigured infrastructure and reduce IT resource requirements, staffing and professional services fees. In fact, SaaS up-front costs are typically less than 20% of the development costs of legacy systems. SaaS pricing models have also matured, giving insurers access to a variety of bundled and unbundled pricing options.

IMPERATIVE 4: AUTOMATE AND STREAMLINE UNDERWRITING

A survey of insurance professionals by FirstBest Systems found that 82% of respondents believe that their insurer’s underwriters spend less than half of their time actually underwriting, with the majority of underwriter time spent on data collection and administrative tasks. Insurers understand that giving underwriters the automation tools they need to do their jobs effectively is key to improved underwriting, but many believe that the technology is problematic, with 81% citing lack of data integration as limiting underwriting productivity. In contrast to legacy underwriting systems, SaaS allows insurers to easily incorporate rules to automate the underwriting process and increase underwriting ratios and revenues.

SaaS also allows for streamlined data integration as opposed to off-the-shelf packages that often need extensive modification, thus eliminating a major stumbling block to optimal productivity for underwriters.

IMPERATIVE 5: SUPPORT NEW DELIVERY CHANNELS

Mobile technology continues to be top-of-mind for many carriers, with more than 60% planning to add new mobile capabilities for policyholders and agents. Notes Novarica partner Matthew Josefowicz, “As the use of smartphones and especially tablets displaces the use of desktops and laptops in more areas of personal and professional life, support for these platforms is becoming critical to insurers’ abilities to communicate electronically across the value chain.” The problem for carriers is that legacy systems were not designed to run on mobile devices. However, SaaS, with its more modern coding, is able to provide both a better user interface and operational efficiency for smartphones and tablets. SaaS allows insurers to distribute products through a variety of new channels (e.g., banks, car dealerships) that would not be possible with legacy systems.

Creating and recreating websites and portals quickly and inexpensively means that insurers can more readily compete with “disrupters” that use a direct-to-consumer model. Insurers can design multiple portals for different geographies, languages and associations in near-real time. Deloitte reiterates the importance of mobile and other delivery channels for insurers: “No one can afford to take their distribution systems for granted. More insurers are likely to grow bolder in exploring alternative channels to capture greater market share, catering to the needs and preferences of different segments while cutting frictional costs.”

IMPERATIVE 6: COLLABORATE WITH THIRD PARTIES

Insurers are increasingly relying on third parties for a variety of integration services, including regulatory compliance, sophisticated data analysis, geo-location capabilities for risk assessments and risk ratings for more accurate underwriting and risk pricing. Integration between carrier legacy systems and third-party providers is typically problematic because of proprietary file formats and other issues that make it difficult to share data. In contrast, SaaS provides links to existing interfaces for access to third-party databases. Integration reduces costly, error-prone and time-consuming manual intervention.

IMPERATIVE 7: IMPROVE THE CUSTOMER EXPERIENCE

The majority of insurers (91%) believe that future growth depends on providing a special customer experience, according to Accenture’s survey. However, getting the relevant and up-to-date data they need to give customers a personalized experience is a critical challenge for 95% of respondents.

In the same survey, only 50% of insurers say that their carrier leverages data about customer lifestyles to determine the products and services most likely to meet customer expectations; 70% rate themselves as “average” or “weak” in their ability to tailor products and services to customers’ needs. A similar number (64%) give themselves low ratings for their ability to provide innovative products and services. Poor service — or even average service — is no longer acceptable. Consumers are accustomed to personalized experiences such as shopping on Amazon or booking airline tickets on a travel site, and expect a similar type of experience from their insurer.

Thomas Meyer, managing director of Accenture’s insurance practice, says, “To pursue profitable growth, insurers need to achieve the kind of differentiation that allows organizations like Apple to charge a premium while building customer loyalty. As Apple has shown, the answer is consumer-driven innovation that creates an exceptional user experience.” SasS enables insurers to access the data points they require to differentiate their products throughout the customer experience. In a market commoditized by regulations and related factors, insurers that can leverage SaaS to deliver a straightforward, simple process to customers will give themselves a competitive advantage.

 CONCLUSION

In an accelerated market where change is the new constant, P&C insurance carriers cannot afford to continue to do business as usual. Imperatives such as speed-to market, responsiveness to customer demands, new delivery channels, cost reduction and improved underwriting make it necessary for insurers to explore new methods of providing products and services to customers. SaaS, with its flexibility, scalability and low cost, is a technology imperative if carriers hope to grow and remain competitive.

For the full white paper Oceanwide, click here.

Can Amazon Dominate in Insurance, Too?

In January 2013, LIMRA reported that 90% of industry executives it had surveyed believe that insurance companies will continue to form strategic alliances with “non-traditional organizations” to expand distribution. The example cited was MetLife’s trial alliance with 200 Wal-Mart stores. Then Accenture’s “Customer-Driven Innovation Survey” found that more than two-thirds of customers would consider purchasing home, auto and life insurance from businesses other than insurers—23% were open to purchasing from online service providers like Amazon or Google (which acquired auto insurance aggregator BeatThatQuote.com way back in 2011 in the UK).Amazon has proven leadership as an e-commerce distributor, while Google is seen primarily as an information organization, so I would like to elaborate exclusively on the compelling reasons for insurers and Amazon to create a distribution model to match ever-evolving customer demands.

Customer demands

Every information source and every analyst report on insurance in the recent past points to changes in customer’s preferences. Generation X, Generation Y and Millennials prefer doing business with companies that provide:

  • Convenience of on-demand buying and self-service, predominantly through digital channels such as web and mobile.
  • Personalization of product and service delivery, including helping the customer choose the right product.
  • Building trust through transparency in pricing, simplified products and clear articulation of benefits.

So, insurers must innovate in personalizing products, providing transparency in the value of products and services and demonstrating excellence in on-demand distribution. Innovation must also touch “moments of truth” such as claims and policy changes. It is also critical that the distribution lifecycle should be an iterative process to consistently review the value of benefits and help customers fine tune the products and services they purchase.

Insurers are lagging

Insurers have been consistently lagging in product innovation and trying to catch up through distribution. In P&C, all the personal product lines are commoditized. In life insurance, term-based products are commoditized. It is true some product personalization has been in the market for some time, such as pay-as-you-driving with telematics in auto insurance (led by Progressive, which saw a boost in profitability). Yet personalization has not reached its potential because of multiple inhibiting factors both internal (lack of aggregated information on risk, etc.) and external (privacy concern, etc.). The lack of product innovation shifts the responsibility of differentiation to distribution.

Manufacturing and retail have been pioneers in showing how boring commodity products can be differentiated through aspects of distribution such as packaging and channel selection.  A recent example is Coca Cola, which has been managing differentiation based on targeted customer segment and channel (Wal-Mart vs. Walgreens vs. Costco, etc.) and has moved one step closer to the customer by signing a 10-year agreement with Green Mountain Coffee Roasters to bring vending machines into kitchens.

In the past, insurance has learned from retail about channels. GEICO, which was known for selling online, has set up brick-and-mortar agency centers by responding to the fact that customers want to shop online but buy from agents. Allstate, where agents lead distribution, not only built online sales support but went one step further, acquiring Esurance to become a multi-channel insurer.

Now, with retail defining and moving toward omni-channel selling, through what is known as “device-independent e-commerce,” it is time for insurers to piggyback on Amazon, which is on the leading-edge of the emerging distribution model.

Amazon ready to sell insurance

Currently, Amazon merely sells books on insurance, has a limited selection of extended warranties for electronics and provides sponsored links for insurers. But to start selling insurance much more seriously would be easy for Amazon. It could expand its extended warranties and offer valuable personal property (VPP) insurance, as it sells the products that are insurable under VPP. It would also be logical for Amazon to extend and be an aggregator for auto, renters, homeowners and life insurance.

The critical question is: “Will customers want to buy from Amazon when there are other aggregators available?” For customers, having reusable information reduces effort, so VPP insurance would be a natural for Amazon. It gets more complex (and interesting) when analyzing the success factors involved in selling complex products such as auto, renters, homeowners and life insurance.

Few insurers can share data and process across products. Still fewer can share across channels. Aggregators are set up as silos. But Amazon’s shopping cart can provide ease of buying, plus reusability of data across channels (web and mobile) and products. The shopping cart actually can resolve the commodity dilemma of insurers through bundling. It can take the customers’ experience to the next level.

Amazon’s analytics-driven capabilities, such as detailed product features and comparisons (price to value of benefits), product reviews, questions and answers, “customers who bought this also bought,” “customers who viewed this also viewed” and offers for the week can be customized for insurance to offer suitable product advice to customers. Insurers do not have such an integrated view because of internal challenges in the effective use of data.

Amazon’s comparisons on features and pricing could improve transparency for customers. The reviews, Q&A and “similar customers” features would provide advice. “Weekly offers” would help customers continually review and tweak their insurance coverage. Hence, Amazon could become the channel of choice for all consumer insurance needs.

Sacred relationship, and not the competition, is the way to go

While Amazon could become consumers’ “trusted advisor,” Amazon also provides a jump start to insurance companies that want to build on the ready availability of its technology infrastructure, reducing their investment and time to market. Amazon might cooperate with innovative insurers to be an aggregator because that would provide immediate and direct profits from its platform.

Amazon would also generate synergies among its various product lines—for instance, when someone starts buying baby products, Amazon might offer life insurance. For existing homeowners policyholders, it could offer products, such as power generators, to help them get prepared and avoid loss during natural disasters such as hurricanes and ice storms. The customer’s engagement with Amazon would increase, leading to greater share of wallet through cross-selling and up-selling opportunities.

So, an insurer that provides coverage through Amazon would be creating a win-win-win—for Amazon, for customers and, of course, for itself.