Bill Gates famously said that we always overestimate the amount of change that will occur in the next two years and underestimate the change that will occur in the next 10. Looking back 10 years, we find a world devoid of iPads, iPhones, mobile apps, big data technologies, the Internet of Things, viable driverless cars or even social media beyond a niche early adopter group. We also find a world without direct online sales of commercial insurance, without persistent low interest rates, without widespread use of catastrophe bonds and without VCs who could spell “insurance.”
But while most insurers believe that massive changes may occur in the next decade, few believe that the next two years will be substantially different from the last two when it comes to the need for significant product changes, the impact of predictive analytics or the threats of new digital distributors. Insurers devote less than one cent of each premium dollar today to transforming their technology capabilities to thrive in the next decade.
Insurers Making Technological Progress
Although technology spending is essentially flat, and less than a quarter of it is spent on transformational initiatives, on average, insurers are making progress. Use of predictive analytics is growing, and 18% of insurers believe it will have a materially positive effect on their business this year. Big data technology is expanding, as well, even though it continues to be directed not at big data sets but at solving enterprise data problems. And 10% to 20% are already embracing machine learning to improve their rating algorithms. Other AI usage is still in the potential stage, with insurers exploring the possibilities of leveraging machine vision for property underwriting and claims, and natural language processing for customer service.
Digital investments continue, even if there is still little agreement about what constitutes a “digital strategy” for insurers. Portals are enhanced, and mobile is deployed as carriers seek to better engage their customers, distributors and other stakeholders.
Core system replacements are still painful and expensive but necessary to enhance the speed of product launches, improve digital service and data accessibility and reduce technical risk. Insurers have a new willingness to consider cloud-based core systems, with 20% already having deployed some core capabilities in a cloud environment and the same number planning pilot programs this year. The maturity of cloud providers and the growing awareness of their own limitations are mitigating carriers’ security concerns.
Security, meanwhile, continues to consume 10% of IT budgets, with no end in sight, and additional regulatory requirements add compliance pressure to certify procedures and formalize CISO roles.
A boom in analytics and digital across multiple industries is making it harder for insurers to find and retain IT talent, which is driving new strategies, from partnering with colleges and universities to develop new sources of talent to improving ease of employee return, to reacquire experienced staff.
With flat resources and burgeoning needs, 40% of insurers are improving governance to make sure resources are allocated effectively and aligned with strategy.
Laying Bare the Underlying Structure of the Insurance Industry
Meanwhile, improved technology lays bare the underlying structure of the insurance industry. It’s not only distributors standing between insureds and primary insurers that are intermediaries facing the threat of disintermediation—it’s every link in the value chain between people or organizations with risk and pools of capital willing to take on that risk for a profit. This means primaries and reinsurers, as well. Alternative distribution, distributor-developed programs, reinsurer-funded insurtech startups and catastrophe bonds and other risk derivatives all threaten the traditional insurance value chain. All of these stem from the technology-enabled democratization of the ability to analyze, package and transfer risk.
At the same time, technology offers the opportunity to ask new questions about the structure of insurance offerings. Is there any reason why minimum required coverage should be sold in all cases bundled with additional coverages, advice, service and risk management? Insurers are finding that some market segments prefer only one or two of these, while there are additional opportunities to monetize some of these offerings separately.
Many insurers are unsettled by the emergence of well-funded insurtechs, whether they are new competitors or providing enhanced capabilities to existing competitors. Despite the billions invested, insurtechs will not put major insurers out of business or radically transform the market in the next two years. Many will not even be in business in two years.
The Imperative to Learn from Insurtech
However, insurtechs will raise the bar on customer experience and process efficiency, as well as on the use of analytics to drive product and processes. They will show insurers how to expand the market by profitably serving underserved segments, and demonstrate how to incorporate emerging technology into key business processes. Insurers that do not learn from insurtech will lose out to those that do.
In part driven by the example of insurtechs, insurers are expanding their own formal innovation programs. These may take the form of a small group of educators and evangelists within the company, a dedicated R&D organization with a fully equipped lab and a protected budget or direct investing in startups.
See also: Insurtech: Unstoppable Momentum
Two Ingredients of Successful Innovation
Whatever innovation path insurers take, the primary determinant of success is the CEO’s and business unit leaders’ commitment to operationalize innovations, and their tolerance for the risk of failure. Without these two ingredients, insurers may perform “innovation theater” but are unlikely to benefit from any discoveries, and are unlikely to be prepared when the next decade of change sneaks up on them.