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Go Digital… but Don’t Change Who You Are

My business school professors managed to hammer a single idea into my head about corporate strategy, and that is that there are only two ways to build a sustainable competitive advantage. You can be better, or you can be cheaper. That’s it. A company can approach these strategies from many different directions, but, at the core, these are the options. To create a long-term advantage over the competition, a company has to build a coherent strategy and create an organizational structure dedicated to that strategy. A company that plans to beat the competition with technology must invest in R&D, and a company pursuing a low-price strategy shouldn’t spend millions on lobby artwork. Existing companies are not blank slates.

This is especially true in the insurance industry, which largely consists of established companies with established ways of doing business. Those established methods are sometimes focused on price, sometimes on product, but all have a coherent strategy and organization. Startup culture looks at insurance and sees lumbering dinosaurs. In some cases, this view may be accurate, but it’s important to remember that dinosaurs ruled the earth for 180 million years because they were very good at being dinosaurs. Insurers today are very good at being the kind of insurers they are.

See also: Insurers Must Adapt to Digital Demands  

For these reasons, I believe that some insurers have been looking at digital disruption in the wrong way. In some areas, digital has the potential to transform the insurance market, but, in much of the market, digital is more of an environmental transformation rather than a world-shattering meteor.

This question about the ultimate impact of the digital and technology revolution on the insurance market is the single most important one facing insurers today. Each insurer must look at his or her market, products and organization and decide if digital is a meteor or a slow warming. If this change is a meteor, it may be time to look at acquisition strategies. If this change is environmental, then the considerations are different. No digital strategy is going to fundamentally change an insurer’s nature. Most insurers need to use technology and digital strategies to reinforce their current strengths, not attempt to be something that they are not. An insurer’s already-determined strategy and focus should set the stage for who they are digitally, not the other way around. Using this approach, let’s consider some traditional insurer structures and strategies, and ways that digital can fit into what these companies are already doing.

Focus on Price

The first and most obvious insurance strategy is a focus on price. A low-price strategy is common in personal lines, because most automobile and homeowner’s insurance does not differ widely between companies. Innovation in personal lines tends to be more focused on creative distribution and service delivery, rather than on innovation in the insurance product itself. There is potential for disruption on the product side, most notably in the areas of autonomous cars, telematics and “pay as you go” products. However, a company that is focused on price rather than product innovation has some interesting digital strategies to pursue. Automation and efficiency are traditional rewards of technology investments, and in this situation each insurer must decide which technologies have the highest potential return. Blockchain is a common topic of conversation, but realistically how useful is an unbreakable public ledger of transactions to a company that sells automobile policies? Cognitive computing, on the other hand, could fundamentally transform the cost structure of such a company by automating the routine administrative tasks that occupy so much of insurers’ cost structures. What does an insurance company that fully embraced cognitive computing look like? No one really knows, but my best guess is that it would not much resemble the companies of today.

Focus on Customer Experience

The second common insurance strategy in personal lines is a focus on customer experience. The idea behind this strategy is that if products do not differ between competitors, then service can be a key differentiator. This customer-focused strategy is not a new idea in insurance, but traditional distribution channels create major challenges. Direct writers sell over the web or through the phone, both of which are traditionally low-touch, low-experience channels. The major alternative distribution channel is through independent agents. In this second channel, insurers have outsourced much of the customer experience to these agencies, over whom the companies have limited control. In either case, if an insurer is focused on improving customer experience, then that insurer must have a strategy that both maximizes customer touchpoints and ensures that each of those touchpoints is positive. Technology has a major role to play in this strategy.

For agency writers, building a new distribution channel is not feasible, and the digital strategy has two parts. One, enable agents with technology to provide customers the digital experiences those customers want. Two, build direct contact with those customers through mobile and web. For direct writers, technology provides the only contact channel, so these companies must focus on improving what they are already doing. In either case, technology investments in customer communications are critical, because most insurance customers do not have routine contact with their insurer. Insurers must maximize the value of these outbound communications, because these communications may be the only available touchpoints.

See also: Insurers Must Finalize Digital Strategies  

These two approaches are far from the only viable ones available to insurers. Insurers focused on product or underwriting excellence will take advantage of the revolution in data analytics to create new kinds of insurance products and price those products more precisely. Insurers focused on distribution innovation will use digital technologies to deliver their insurance through new channels to new customers in new markets.

Not Whether, but Where

In all cases, insurers that are not facing complete market disruption should adapt their current structures to this new environment, rather than attempting to become something that they are not. To build an effective digital strategy, all insurers must evaluate their market, their organization and their goals to decide where to invest in digital, and how best to profit from those investments.

Do You Really Have a Digital Strategy?

Almost all insurers have started digital projects, many have digital teams, but only a few have a true digital insurance strategy.

To develop a coherent strategy for digital insurance, first an insurer must decide what the term means. There is a distinction between insurance digitalization and true digital business. Digitalization consists of taking existing processes, procedures and services and using technology to improve efficiency and effectiveness. Fundamentally, digitalization takes what an insurer is doing already, and applies digital. In this circumstance, there is no real transformation of the business. Digitalization is critical in a price-sensitive, highly competitive industry, but it is not enough to distinguish an insurer from the competition. In the context of insurance, true digital business requires the application of technology to offer new business value or move the insurer to a new position in the market. In many markets, the form this new digital business will assume has yet to be determined.

See also: Maturing Use of Mobile in Insurance  

Many different methods exist to evaluate digital business maturity. I prefer a five-level model, based on methodologies used by industry analysts and other experts.

  1. The first level is digitalization, taking existing processes and applying technology. Many insurers began this process in the late 1990s or early 2000s, and, unfortunately, many have stayed there. Insurers initially saw large efficiency benefits in moving internal processes away from paper over to digital, but those returns rapidly drop off after an insurer migrates the highest-priority processes. An example of this stage is offering PDF copies of insurance documents on a customer portal.
  2. The second level is to create new digital experiences, using the capabilities of digital platforms. An example is creating mobile applications for agents to improve interactions with the company, using geolocation to offer nearby preferred vendors and other options.
  3. Level three is offering new insurance programs that would not be possible without digital technologies. One example is a company creating a travel insurance product in partnershipl with a travel mobile application and offering that product at the time a customer purchases a flight.
  4. Level four is an evolution of stage three, and consists of embedding digital throughout the enterprise. An insurer thinks of all aspects of the business in terms of digital, even in departments such as compliance and daily operations. An insurer knows that it has progressed to this stage when even traditional analog functions such as the mailroom evaluate all processes with digital transformation in mind.
  5. At level five, an insurer has repositioned to a new competitive space inside the insurance market. We are only now beginning to see a few stage five insurers, and these insurers are often born digital. An example is new peer-to-peer insurance models that have begun to gain acceptance in recent years, like crop insurance in Africa. This insurance is paid for by a surcharge on farming inputs such as fertilizer and seeds. Claims are automatically initiated when weather stations recognize severe weather events. This is a form of protection that could only exist in a digital world.

See also: 5 Accelerating Trends in Digital Marketing  

The first step toward transforming into a digital insurer requires evaluating where your company is on this continuum, and where you need to be in the next three to five years. What amount of disruption can your business model sustain? What steps can you take now to build the skills and culture you need to compete in the face of this disruption?

Crop insurance in Africa may be a small part of the overall insurance market, but consider what could happen if a major agricultural market such as the U.S. began this same transition. All insurers today have digital processes and procedures, but relatively few have progressed past levels two or three on this digital continuum. Eventually all insurers will be digital insurers, but this transformation will move in fits and starts, with the leaders gradually pulling out ahead of the laggards and gaining a lasting competitive advantage.

Compliance Challenge in Communications

The phone rings in a company’s human resources department. The caller explains he is from the IRS and is conducting an audit of the company’s use of consultants. The company may have wrongly classified employees as consultants. If the company did misclassify, huge fines will be coming. To clear up this misunderstanding, the caller from the IRS needs historical W-2 data from all employees. An HR employee knows the company did nothing wrong, so he exports digital copies of all W-2 documents and sends them to the specified email address.

By this point, alert readers should be horrified at both this obvious scam and the poor HR employee who will shortly be unemployed. Most people are familiar with the concept of phishing, which is targeting a specific person and using social tactics to elicit private information. From the clinical perspective of this article, it is easy to dismiss this approach as useful only against the unsophisticated. It would be much harder to dismiss if your phone rang from a Washington, D.C., number and the caller already had your company’s tax identification information.

See also: Payoff From Great Customer Experience?  

In other scenarios, there is no ill intent, only poor oversight. A health insurance company is preparing explanations of benefits (EOB) mailings, which include sensitive and private information about healthcare services. This company generates millions of EOBs each month and saves a copy in each member’s account on the company’s website. A batch process reads the member account number from the EOB and places the document into the correct website location. Recent regulatory changes forced the IT department to perform a series of last-minute adjustments to these documents, and the process updated the format of the account numbers. No one told the batch team, and the process that posts these documents was not updated. Millions of EOBs are posted to the wrong account, revealing everything from drug test results to cancer treatments.

In both nightmare situations, digital communications have exposed a company to huge fines as well as public embarrassment and customer attrition. These dangers are not new. Traditional paper communications could have had the same effect. What is different in a digital environment is the speed with which a small mistake can reach millions of customers. With digital communications, no one can rush down to the mailroom and stop a stack of envelopes from going out. Automated processes massively increase efficiency, but these same processes, by their very nature, lack human oversight. This transition from traditional forms of communication to digital communication is critical for customer experience, but companies must update processes and procedures along with technology to avoid these dangerous situations.

What can a company do to modernize communications processes while also remaining compliant with regulations? There are two considerations: prevention and recovery. Prevention is the more important approach. Recovery requires recognizing that, eventually, someone will make a mistake — and a proactive company will have the technology in place to minimize the impact of that mistake.

See also: The Human Resources View Of Health Care Benefits Needs To Change  

Prevention is not an exciting topic. Communications and customer experience professionals generally do not enjoy working with compliance departments. Compliance reviews can slow projects and sometimes prevent exciting new communications from even being launched. Because of this aversion, what often happens is that, at the end of a project, someone will remember to call compliance for a last-minute review. Compliance is upset because its schedule is disrupted; those responsible for customer experience are anxious because their project is delayed; and IT is angry because its work might have been wasted. The key to avoiding this situation is internal communication. Compliance should be an integral part of any new communications project, especially one that involves new technology or new delivery channels. Reviewing compliance challenges early keeps projects on schedule, and integrating compliance knowledge into communication design reduces the chances of an expensive mistake.

Recovery is also an important consideration. In the first scenario above, every employee, current and past, was affected. Contacting current employees is easy; contacting former employees is not. Even with addresses on file, does the company have the technology in place to generate the appropriate notifications and follow-ups? Manual processes are slow and labor-intensive. Proof of notification is also critical to show that the company did everything in its power to inform the affected people. Creating this automated notification and auditing system after a breach has taken place is generally not feasible.

Digital communications bring huge benefits to organizations, but they also bring new data privacy challenges. Any company that is in the midst of a digital transformation cannot afford to ignore these concerns. By focusing on prevention and recovery before a breach occurs, organizations can minimize the financial and legal effects and reputational risk. Spending the time and money now can prevent a much larger problem later.