Insurance is overweight and unhealthy. For too long, the insurance industry has accepted that it is OK for at least a third of customer’s money to be spent on admin, overheads, sales and marketing. Insurance CEOs have been announcing operational efficiency programs for years, yet the percentage of premium left for the risk pool hasn’t really changed. Thank goodness for the insurtech digital implementation strategy for insurers!
Hampered by legacy technology, large workforces and cumbersome business processes, insurance is an inefficient business. But that’s changing! Insurtech is now on the corporate agenda for all insurers who wish to be around in the next five to 10 years — which means embracing digital ways of working in an age where speed of change is the defining characteristic.
For this month’s “Insurtech Insights,” Rick Huckstep explores the subject of the insurtech digital implementation strategy and the impact of digital platforms as an alternative to core systems implementations.
Why now for insurtech?
The insurance industry has always been a technology user, so why is there now all this fuss over and attention about insurtech digital implementation? IMHO, insurance is going through a massive catch-up phase. I call this a rapid evolution, rather than use “disruption.”
Nonetheless, this is about digital implementation for insurers, who have failed to keep pace with technology since the mid-’90s and the birth of the internet. You only have to consider the iPhone, already a decade old, and incumbent insurers still appear clumsy when going “mobile.”
For decades, software vendors and systems integrators were the source of technology insight and innovation. Now they find themselves increasingly irrelevant in the digital age — even more so with the emergence of insurtech. That is why many are scrambling around looking for ways to engage with the insurtech ecosystem; if anyone is going to be disrupted by insurtech, it will be them!
See also: Let’s Keep ‘Digital’ in Perspective
The problem is that software vendors have focused on providing all-encompassing core systems at massive expense and demand on company resources. Often, by the time these large IT implementations are finished, they are already a legacy system. It is no wonder that so much of the IT budget is spent on keeping the lights on, leaving little for internal innovation and value creation.
These core insurance systems are like giant aircraft carriers. They’ve got massive capability and scale and are deep and rich functionally, are generalist and are built to last (well, at least 17 years, which is about the average for a policy admin system.) They are designed and built to do just about everything! They are also very expensive, take ages to commission and are difficult to adapt to external, unforeseen changes.
Whereas insurtech’s core systems are like the latest generation of robotic armed patrol boats — agile, automated, cheaper, have a shorter cycle times to commission and are task-specific.
The demise of core systems
In the traditional software licensing model (the way legacy systems are sold), the insurer buys a license to use the software. For this, the insurer typically pays a large one-off, upfront fee. Then, the insurer pays an annual maintenance charge that is based on a percentage of this fee (in the 15% to 25% range).
Added to this is the cost of implementation. This is where the systems integrators come in, because not all software vendors provide the services needed to implement and configure the new system.
These implementations become large IT-led projects that are measured in years and tens, if not hundreds, of millions of dollars. And they’re big decisions that the insurer is going to have to live with for several decades! That is why the average time to make a buying decision is also measured in years.
Meanwhile, the product and sales teams are frustrated by the IT department because it sees customer opportunities and competitive threats in a constantly moving market and is powerless to respond. IT has become a constraint — not the enabler it was always meant to be. Speed-to-market has become an oxymoron!
The rise of the platform
By contrast, those involved with insurtech are digital natives, mobile in nature and cloud-savvy. The entrepreneurs and founders are born out of the post-iPhone world. For the insurtechs, it’s all about building a flexible and agile tech platform. There’s little need for an in-house IT department when the insurer can buy a service on a pay-as-you go basis.
The insurtech digital implementation can be measured in months and thousands of dollars (instead of years and millions). Speed-to-market is the defining characteristic of these tech-enabled platforms.
In the old-world model, if an insurer wanted to launch a new product or enter a new market, they’d have IT on the critical path, defining the timescale for the launch.
Partnering is the new route to market
In the insurtech world, it’s a different story. And the incumbent insurers have cottoned on to the new way of working: partnering. In this model, the insurer picks insurtech platforms — rather than deploying their own core systems — when launching new products. The insurer focuses on insurance. The insurtech focuses on tech. A leader in this model is Munich Re Digital Partners. Its approach is to provide its own underwriting platform as the back-end engine while the insurtech partner provides the product and customer engagement. Either way, this insurtech digital implementation strategy offers insurers speed, cost and customer advantages.
The result is a significantly less expensive implementation approach with a quicker actual speed to market.
Let me give you an example. Let’s say Insurer A wants to launch a health product in a new territory. Its insurtech digital implementation strategy is to partner with, for example, Sureify.
If you don’t know Sureify, here’s what I wrote about them last year under the heading “Sureify, the Salesforce.com of insurance engagement.” In it, I described the company as follows:
“Sureify is an insurance technology platform that allows insurers to digitally acquire, engage and up-sell with prospective and current policyholders. Part of the platform capabilities includes health, disability and life insurance products built around IoT devices to enable dynamic premium modeling. It is a platform that emphasizes web and mobile distribution channels with multiple engagement possibilities. And it is offered as a white-label platform for the carriers where they define the underwriting questions, policy terms, risk and pricing tables using a plug-and-play approach.”
Digitalization is the redirection of the company to the customer
We met up recently at a RiskMinds conference in Amsterdam, where we were both speaking. Martin and I first met during Startupbootcamp’s original insurtech cohort in 2015. I was mentoring, and he was the executive in residence as part of the Munich Re/Ergo support for the program. Martin has spent 25 years in the insurance industry, but he also has several years working with insurtech start-ups at SBC and Axel Springer Plug & Play Accelerator.
I asked him for his POV on digital implementation. He said:
“Digitalization is the redirection of the company to the customer.
This means that we have to look at the whole value-chain — from product management, contract closing to claims processing. Everything we do has to be from the customer’s mindset. It’s a totally new way of thinking for the insurer. There is nothing else, it is all about the customer.”
This is 21st century insurtech thinking inside one of Germany’s oldest life insurers. Formed in 1884, Nurnberger has plenty of experience adapting to challenges and changing customer behavior. The company is no stranger to technology, either. Any life insurer that has been around this long will have seen massive technology change — from tabulation to the introduction of programmable computing in the 1950s to the internet age and now to 21st century digitalization.
Moving from passive risk taker to active risk manager
Martin had something to say about this, as well:
“The new model for insurance is tech with insurance. Insurers must change from being a passive risk taker, where they take a bet and wait for a claim. They win when no claim is made.
“With the use of tech, insurers can have a new relationship with customers. They become an active risk manager. In this model, the insurer will add value through additional services to the customer, such as giving customers advice on ways to manage their risk or offering them specific support and solutions when they have a problem.”
What Martin is describing is one of the key insurtech trends of engagement. This is where the relationship with the insurer is not a once a year occurrence. Instead, the insurer finds ways to continually engage with its customer through the use of tech, such as wearables, telematics and IoT. The result is enhanced customer loyalty where value replaces price as the key buying criteria.
See also: Digital’ Needs a Personal Touch
Executive mindset is critical to insurtech digital implementation
I asked Martin how well prepared he thinks are insurers for digital implementation? He said:
“It starts with the very top. The executive mindset is critical because they can not measure the outcome of their decisions based on a business case or ROI anymore.
Never try, never learn! That is the way insurers have to think now. That is the way startups and entrepreneurs think and act. But that is very difficult for insurers who are risk-averse. Which is why the strategic commitment to digital implementation can only come from the top layer of management.
In my view, this is no longer optional for insurers. The only way to stay in the market is to become totally digital. It is a matter of survival.”
I totally agree with Martin on this point. When we look back at today, the winners and losers will be defined by those that did and did not embrace an insurtech digital implementation strategy. The likes of Munich Re, Swiss Re, Aviva and others are all showing a clear intent towards embracing insurtech digital implementation through partnerships and a customer centric digital strategy. They will be among the winners.
Ditching the legacy
The only way insurers can fully embrace an insurtech digital implementation strategy is to take a clean-sheet approach. This means ditching the legacy!
IMHO, we will start to see insurers separate out their current operations, books of business and all the legacy that goes with it. They will no longer try and re-platform, modernize, migrate their existing core systems or redirect precious resources at another operational efficiency program to take out huge swaths of costs. At the end of the day, all these programs do is shift cost from one place to another. They seldom drive truly permanent and radical change.
The insurance digital implementation strategy will be to run down investments in legacy operations and start new business ventures based on insurtech partnerships. And companies will put the customer at the very heart of their thinking.
That will be the insurtech legacy!