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Insurer IT Planning for 2018

I have tracked insurer IT budgeting and planning for more than a decade. During that time, there has been one major shift: Core systems replacement went mainstream as fear of inaction surpassed fear of change. Otherwise, I used to joke that I could republish a prior year’s study and no one would notice.

This year, however, we may be starting to see some real evolution in insurer IT spending and planning. Security issues and innovation are breaking into the list of top concerns and challenges as multi-year core systems projects started in previous years are being completed. While average spending patterns haven’t yet changed significantly, there is a shift in priorities and challenges — and an increased variability in the sample of the nearly 100 insurers who participated in Novarica’s 10th annual study.

Property/Casualty: Analytics and Speed to Market

For property/casualty insurers, business intelligence and analytics are the most frequently cited areas of need; more than half of P/C insurers put it in their top three needs (followed by distributor ease of doing business and speed to market for product changes). Note that if the responses for speed to market for product changes are combined with the responses for speed to market for true new products, that becomes the most common area of priority for P/C leaders.

Large P/C insurers are generally more optimistic about the capabilities of their key applications, except for CRM and portals. Core systems replacement activity is significantly lower this year than in previous years — partly because of variations in the sample, but also reflecting the effects of prior investments. Midsize P/C insurers are more conservative in their self-assessment than their larger peers, with more than 30% rating their own capabilities as “poor” or worse in customer portals, CRM, UW workbench, BI and predictive analytics. More than half are currently engaging in core policy administration system replacement or are planning to start a new replacement in 2018.

See also: My 4 Ps for Investing in InsurTech  

Life/Annuity: Digital

For life/annuity insurers, the most commonly demanded business capabilities are digital marketing and customer engagement, surpassing even the combination of speed-to-market for product changes and true new products. Other common high-priority areas for life insurers include optimizing internal workflow (also a digital capability) and reducing operating expenses.

In aggregate, large life/annuity insurers are most confident in their distribution and compensation management and CRM abilities and are least confident in their abilities in analytics, digital engagement, underwriter workflow and core policy administration. This correlates with significant replacement and enhancement activity in portals and core admin, as well as significant enhancement activity in analytics. Midsize life/annuity insurers judge their customer portal capabilities harshly, with half rating them “poor” or worse and 40% planning replacements for 2018. Additionally, 30% of the participants in this group are also engaged in core policy administration and claims replacement projects.

Innovation and Insurtech

While not as high priority as short-term needs, about 20% of respondents did note that the demand to support innovation and leverage insurtech was among their top three business priorities for the coming year. None had it as the business’s top priority, however. Tactical concerns continue to dominate.

Security

One significant change from last year is the increased citation of security as both a priority and a challenge, with 30-40% of insurers placing it in their top three compared to less than 20% in previous years. Although aggregate security spending levels haven’t changed significantly over the past year, remaining at close to 10% of total spending, security is consuming a much greater proportion of CIO mindshare than in previous years. One CIO said recently that the amount of time he spends on security issues has doubled every six months.

More than 60% of insurers are planning to expand their capabilities in key security areas, including device security, application security, intrusion detection and data encryption. Similar numbers are also improving their audits and procedures.

Insurers will need to continue to devote additional resources to security in 2018 and beyond. Unfortunately, taking those resources out of insurers’ traditional IT budgets of 3-4% of premiums would mean hamstringing their abilities to develop and deploy new capabilities.

Insurers that have not already done so are likely going to create a real IT security organization and budget in addition to, not replacing, their current IT spending if they want to continue to move forward safely.

See also: Security Training Gets Much-Needed Reboot  

General Outlook

Once again, the outlook for insurance IT in the coming year is very similar to the current year — with the notable exception of an increased focus on security.

Business leaders are demanding additional capabilities in analytics, digital and speed to market; IT organizations are responding with enhancements of existing systems and replacements of legacy. While replacement activity is still significant, it seems to be ebbing somewhat among property/casualty insurers as the investments of the past decade are going into production. But overall, spending levels will remain essentially consistent, with some insurers spending slightly more, some holding steady and a smaller number making cuts.

This consistency itself represents a risk. With security demands growing at the same time as business demands for digital and data capabilities, insurers are not going to be able to meet these concurrent demands within a traditional IT spending framework.

Insurers need rethink their approach to IT budgeting. Rather than asking how little they can spend on IT next year, insurers should be asking themselves two key questions: What is the real price of maintaining a robust security program, and how much can I afford to invest in technology to remain competitive now and in the future?

How Technology Drives a ‘New Normal’

Digital, data and core capabilities have changed dramatically over the last decade and continue to evolve rapidly. To help insurers track these capabilities and their progress, we created the Novarica New Normal 100 benchmark, which we’ve conducted for the last few years.

In this article, we’ll discuss the role of digital, data and core capabilities in key functional areas — product development, marketing, distribution, underwriting, customer engagement, billing, claims and finance/operations — and review our findings on the current state and near-term plans of insurers.

Product Development

Most insurers don’t think of digital as having a big impact on product development, but streamlining can have a real impact on speed to market. Considering digital distribution and underwriting during the product development process is also important.

Data and analytics have always been at the center of product development. As third-party data has become more abundant, and analytical tools and data management capabilities have become more advanced, product developers and actuaries can leverage new capabilities to optimize both pricing accuracy and ease of underwriting and distribution.

Products need to be instantiated into core processing systems to be offered and managed. Flexible core systems enable better product development and management.

See also: It’s Time to Accelerate Digital Change

The majority of P/C insurers report designing at least some products to be optimized for streamlined underwriting, omitting unnecessary questions and using pre-fill data. Use of machine learning in developing rating algorithms is still very uncommon, with fewer than 10% of insurers having any capabilities. However, more than 25% have current or planned pilots in this area.

Only about a third of life/annuity insurers have a digital workflow for product development. More than half are designing products to leverage the availability of pre-fill data. While only a third are currently using analytics to drive product design, an equal number are piloting that capability. A little more than a third have at least some centralized product modeling capabilities.

Marketing

With the exception of direct personal lines writers, few insurers have really advanced digital marketing capabilities—most of the attention in digital marketing is focused on distribution. Data and analytics are at the heart of marketing. Being able to profile target customers, model behavior and analyze effectiveness of marketing programs is important for engaging with potential customers. Insurers are even using existing data about prospects to “pre-underwrite” risk and offer price indications without engaging with customers. While this capability is not yet mature, a significant number of insurers report having some capabilities in this area.

Few P/C insurers see themselves having mature capabilities in any digital or data marketing area, but use of analytics and profiling is fairly widespread, with 30% of 50% of insurers reporting some capabilities. The most common area for planned pilots is customer profiling and modeling, with a quarter of insurers exploring this area further. Smaller insurers are less advanced in aggregate but have more current or planned pilots.

Among life/annuity insurers, household-level customer analysis is still unusual, but is a very common area of pilot activity. Customer profiling and behavior modeling is increasingly common, with more than a third of insurers reporting at least some capabilities.

Distribution

Distribution has been the focus of most insurers’ digital strategies, and there are many digital distribution capabilities that insurers should consider. This includes providing both information and transactional capabilities to distributors or end buyers via Web and mobile. Data capabilities in this area are a combination of interactive analytics to maximize the effectiveness of distribution channels and effective use of third-party data to streamline the buying experience. Core systems have a critical role to play in managing distribution forces and enabling rapid service to both distributors and customers.

Insurers have divergent digital capabilities to support their distributors. Fewer than half of P/C insurers have mobile new business, commissions or interactive sales materials. About half use pre-fill data to streamline application submission, and similar numbers offer quick quotes with minimal data entry. Use of analytics to drive next-best offer is rare, but about a third of larger insurers have current or planned pilots in this area.

Digital distribution maturity levels at life/annuity insurers are comparatively high. More than half of insurers report e-signature capabilities, mobile-optimized new business systems and interactive sales materials. Self-service licensing and appointments management is common at large insurers, but no midsize insurers report current capabilities. Insurers in both size classes report active pilots in this area.

Underwriting

While many insurers think of digital primarily in terms of external communications, both streamlining underwriter workflows and improving internal knowledge sharing depend on digital capabilities. Data and analytics capabilities are obviously important for underwriting, as well, and depend on core underwriting systems that support their workflows and models.

Data and analytics capabilities in underwriting are widespread, with more than two-thirds of large P/C insurers claiming some capabilities in nearly every area, including predictive scoring. But fewer than 10% claim mature functions. More than two-thirds of insurers report having paperless underwriting workflow capabilities, but fewer than half of those claim mature capabilities.

More than half of life/annuity insurers report at least some paperless underwriting workflows, and another quarter report current or planned pilots. Predictive scoring is also in use at more than a third of insurers, with more than 40% reporting pilot activity in this area.

Customer Engagement

Customer engagement is a major focus for insurers’ digital strategies. These cover engaging with customers via Web, mobile and social media or providing analytics-driven recommendations. Data and analytics-related capabilities in this area are closely related to those used in marketing. These involve both effective data consolidation and reporting as well as offline analytics to improve service levels and engagement.

Insurers continue to expand their digital customer engagement capabilities, but even basic functions like same-day email responses to customer inquiries are not universal. Only half of P/C insurers support self-service change requests or have mobile customer applications. Fewer than a quarter have online chat or co-browsing with clients, or offer policyholders a 360-degree view across different product sets.

Life/annuity insurers’ digital capabilities in customer engagement are uneven. Online chat is not widely deployed today, but more than half have current or planned pilots. While close to a quarter of insurers report mature customer mobile capabilities, more than one-third still do not have same-day e-mail response to inquiries. Online video and co-browsing with service representatives are still rare.

Analytics usage in customer engagement is also rare, with fewer than a quarter of life/annuity insurers reporting current capabilities in using analytics for retention modeling or service tiering.

Billing

Digital billing capabilities are all related to electronic communications and payments using current and emerging channels and payment mechanisms. Data capabilities are focused on analytics, both internal performance analytics and analytics to drive customer messaging, while insurers’ abilities to meet customer expectations in billing, which include consolidation and customization, are highly dependent on flexible core billing systems.

Electronic bill presentment and payment is widespread but still not universal, with only about 60% of P/C insurers supporting this capability. Credit card payments are also not universal. Using analytics to prevent premium leakage is in place at 30% to 40% of insurers, but more than a quarter of insurers are piloting this application of analytics.

Only about half of large life/annuity insurers report supporting electronic bill presentment and payment, and fewer than a third accept online or mobile credit card payments (although mail/phone card payments are more common). Analytics usage in billing is negligible, and large life/annuity insurers’ ability to customize billing schedules or present consolidated bills is very limited.

See also: Key Trends in Innovation (Parts 4, 5)  

Claims

Applying digital capabilities to claims means streamlining communications across the value chain from claimants and adjusters to third-party service providers. Claims data and analytics capabilities are primarily focused on building and applying predictive models across multiple areas. Most of the digital and data/analytics capabilities involved in claims depend on core underwriting systems that support their workflows and models.

Claims is the area with the highest pilot activity among large P/C insurers. More than a third are piloting just about every digital and data/analytics capability, especially predictive fraud scoring and severity scoring. Core capabilities like skills-based routing and triaged straight-through processing are common among P/C insurers but not universal, and maturity levels are still relatively low.

About a quarter of life/annuity insurers are using predictive modeling for fraud scoring, and there are a handful of pilot programs in using analytics in claims areas. Digital capabilities like role-based third-party access are extremely limited, and few large insurers have or are investing in paperless claims processes. Skills-based routing of claims is fairly common.

Finance/Operations

While most insurers think about data and digital capabilities primarily in outward-facing roles, and most recent core investments focus on products and speed to market, insurers are also deploying technology-enabled capabilities to manage their finance and operations more effectively.

Capabilities include internal self-service, more advanced reporting and more flexible and powerful core systems that enable faster responses and better internal service levels. About half of P/C insurers report at least some current capabilities in this area. Larger insurers are generally more advanced, and pilot activity is low across the board.

Digital and data capabilities in finance and operations are increasingly common at life/annuity insurers, but still not universal. Nearly a third of insurers still are unable to allocate monthly P&Ls by product or channel, and more than two-thirds lack enterprise-wide customer data analytics capabilities.

Concluding Thoughts

While keeping an eye on the technology developments of tomorrow, insurers need to consider the capabilities available today and the impact of delaying deployment of those capabilities. Our research paints a picture of a continuing digital divide between have and have-not insurers, as well as a data divide and a core capabilities divide. In a market where growth is hard to come by, insurers need to develop better digital capabilities to serve customers and streamline processes among all stakeholders, better data and analytics capabilities to model risk and customer behavior and better core capabilities to support more agile processes and a more agile product portfolio.

Insurance Technology Trends in ’17, Beyond

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.

See also: 10 Trends at Heart of Insurtech Revolution  

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.

Understanding Insurtech: the ABCs

Billions of dollars of investment are flowing into startups focusing on insurtech. From the viewpoint of investors, anything that has to do with using technology in the insurance industry can be labeled insurtech. For incumbent insurers, however, this broad term is unfortunately not very useful for coming to an understanding of the many start-ups focused on the sector. Novarica has proposed a framework called the “ABCs of InsurTech” to help insurers differentiate between Analytics Arms Dealers, Beneficial Bots, Creative Carriers and Digital Distributors.

The first two categories, which are focused on helping insurers transform and compete, are likely to have a greater impact on incumbent insurers in the short term than the direct competitors to existing carriers and distributors. But the latter two categories will offer useful examples of how to operate a digital insurer that will be copied by successful incumbents as they transform themselves.

See also: Top 10 Insurtech Trends for 2017  

Analytics Arms Dealers include start-ups like Carpe Data, Praedicat, and Tyche, focused on selling data and analytical capabilities to insurers to help them compete more effectively. These companies are not participating in the marketplace directly, but selling tools to those who do. The dramatic growth in the accessibility and sheer volume of third-party data, combined with the increased power of analytical tools and big data technologies, is changing the way insurers operate. The combination of predictive modeling combined with straight-through processing is making the business of insurance more effective and efficient in areas ranging from pricing, to underwriting, to claims. Analytics Arms Dealers represent an opportunity and a threat to incumbent insurers: an opportunity if an insurer is able to leverage new capabilities effectively before their peers, and a threat if they are not able to.

“Beneficial Bots” is a generic term that covers emerging technologies like drones, the Internet of Things, and blockchain, which have the potential to disrupt many industries, or at least transform operations within them. The term encompasses not only the technologies themselves, but the companies bringing them to the insurance industry, like Human Condition Safety, Meshify, and PrecisionHawk. Like Analytics Arms Dealers, Beneficial Bot providers are primarily selling tools to incumbent insurers, as opposed to competing with them directly. These emerging technologies have the potential to bring about dramatic changes in costs and capabilities, in the process forcing re-evaluation of business models and opening new potentials. Also like with Analytics Arms Dealers, insurers need to understand the potential value of these new capabilities better and leverage them faster and more effectively than their competitors.

Creative Carriers are start-ups that believe that by leveraging massive amounts of third-party data, powerful analytics, and digital communications, they can create a new way to create and sell insurance. In many cases, they are taking an “Outside In” approach by starting with the desired customer experience and building their operation backwards from there. Some Creative Carriers, like Trov and Slice Lab, are focused on offering innovative products. Others, like Lemonade or Oscar, are selling a traditional product through a more customer-centric sales and service experience. These companies, while unlikely to pose a direct threat to most incumbent insurers (due to a lack of resources and what will likely be an eventual realization that the business of insurance is more complicated than they imagine), can serve as useful examples for incumbents to follow in how they approach the customer experience. Some may be acquired by incumbent insurers, but even the ones that ultimately are unsuccessful may still provide the industry with valuable lessons on how to serve customers more effectively with new capabilities.

Digital Distributors are agencies, brokerages, or aggregators, with a good user interface and a digital-focused customer experience model. From the incumbent insurer point of view, Digital Distributors are hardly disruptive at all. They get the most press and a disproportionate amount of investment because they are the easiest to understand. Digital Distributors like CoverHound, PolicyGenius, and Zenefits may compete with existing channels, and may require insurers to streamline operations in order to access the markets they’ve aggregated. But they, like any other intermediary, are selling insurance underwritten by carriers. Working with a Digital Distributor is not really all that different from working with a traditional distributor. Over time, expect distributors to learn lessosn from Digital Distributors about customer convenience, digital marketing, and service, and those lessons will reshape the way most distributors operate. In that sense, Digital Distributors are similar to Creative Carriers. And while some may reach critical mass or thrive as independent concerns, most will either be acquired by traditional players or fail.

Insurers need to sift through the hype over InsureTech in order to make an informed decision about how, or whether, to engage with start-ups. Digital Distributors and Creative Carriers mostly offer distractions and confuse the market. Analytics Arms Dealers, on the other hand, can advance pricing, underwriting, and claims, while Beneficial Bots bring entirely new possibilities to the insurance business. Insurers looking to thrive in the future should consider what engaging with the right kind of InsureTech startups can do for them.

See also: Which Rules Should Insurtech Break?  

Of course, there will always be some risk involved when engaging with start-ups, most of which eventually fail. But if insurers apply an underwriting mindset to engaging with this world—in other words, realize that a small number of hits may pay for the losses—it may become a more attractive proposition. In any case, there are great opportunities to learn, and potentially even greater risks to remaining ignorant of new approaches and capabilities.

Future Has Arrived for Insurance

The good news from the PCI Tech Conference in 2015 is that futurists like Vivek Wadhwa give the insurance industry at least three to five years before it is disrupted beyond recognition by data, analytics, the Internet of Things, self-driving cars, 3D printing, hyper-aggressive technology companies and essentially free energy.

The bad news is, many large insurers are still planning five-year technology transformation initiatives to shed their legacy burdens and take advantage of today’s technology.

Insurer CIOs understand the challenge. They need to mitigate the effects of yesterday’s inheritances. They need to address today’s business needs, and they need to prepare the organization for tomorrow. They need a deep understanding of all three timelines, and the ability to help others understand.

CIOs need a new set of skills and new kinds of relationships. As one speaker put it, CIOs need to be communicators and story tellers as well as effective managers. They need visionary business executive partners who are willing to embrace the opportunities that technology creates, in the ability to deliver innovative products to changing markets. CIOs also need technology partners who will not just deliver today’s solutions but co-evolve with the CIOs to meet tomorrow’s challenges.

“I will invest in any technology initiative that increases our agility,” said one insurer CEO who understands. But far too many CEOs are still at a loss as to how to quantify the value of technology and continue to manage their technology investments as if spending more than 5% of premium on IT were a greater sin than letting the future pass them by.

Meanwhile, while the conference was in session, Google Ventures announced an investment in innovative health insurer Oscar. The clock is ticking in insurance, and it’s not counting down anymore. It’s counting forward.