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What’s Your Game Plan for Insurtech?

Over a year ago, Stephen O’Hearn, global insurance leader at PwC, predicted, “Insurtech will be a game changer for those who choose to embrace it.” Since then, the insurtech playing field has matured. Many insurers that have operated in the “good enough” zone are finding that it is no longer, well, good enough. The game has changed. Whether you’re in underwriting, claims or exposure management or are a CIO, insurtech will have an impact on you. There’s no option to stay on the bench.

So, what’s your game plan?

Partnership is the way forward

Right now, collaboration should be a part of everyone’s game plan — not just insurers, but everyone from commercial tech providers to managing agents and brokers. Insurance is a team sport and has been since its inception. Insurtech will not change that; it will only amplify the need to partner — quickly. Who insurers pick as their partners to accelerate transformation matters, and the technology they employ to transform matters.

See also: Insurtechs Are Pushing for Transparency  

In the last year, talk of “disruption” has turned to talk of “collaboration” as the insurance community is realizing the fastest way forward is through partnerships. A more mature conversation is happening. Insurers are realizing the benefit — and speed — of leveraging what insurtechs have to offer. Once labeled “disrupters,” insurtechs are now “enablers.” Fact is, the vast majority of insurtechs aren’t looking to oust incumbents. They’re looking to find a niche where they can succeed and leverage the sheer scale of their more established partners. As a recent InsurTech Bytes podcast observed, “Partnership is the way forward. Enablers are leading disruptors across the insurance sector, presenting an exciting opportunity for insurers to drive forward their digital transformation. Insurtech has developed (largely) with a view toward partnership rather than disruption.”

New digital opportunities are opening up more choice for consumers and businesses alike — think Internet of Things (IOT), vehicle telematics and, especially, advanced data and analytics. As customer expectations grow, an insurer’s data and analytics will need to keep pace in an effort to drive competitive differentiation. This includes the ability to hasten and streamline the quote process, more accurately price risk and mitigate and respond to claims. Insurers recognize data and analytics as a leading insurtech priority and, like other digital transformation priorities, are looking to either VC opportunities or partner integrations to accomplish this. In fact, in a KPMG survey of insurance executives, 25% of respondents said they already had a VC unit set up to make investments in technology companies. And 37% said a VC unit was in the works. Likewise, these same insurers are looking for partnerships to help accelerate transformation; three-quarters of respondents said they “will partner to gain access to new technology infrastructure.

Still, while some insurers are clearly making plays toward making insurtech investments a priority, others are still on the bench. Only 39% of insurers believe they are harnessing digital technologies successfully. And one in five property and casualty (P&C) insurers do not apply advanced analytics for any function. This last statistic is mind-blowing when you consider how intrinsic data and analytics is to insurance. So, what is holding a large percentage of insurers back from embracing digital transformation?

The gap between knowing and doing

In a recent column, Denise Garth talks about the gap between “knowing and doing.” She writes, “Even though most companies know they should respond to key internal and external challenges to create promising growth opportunities — and more importantly to ensure survival — many are still only thinking about doing something, at best. Why is there a gap between knowing and doing?”

The gap exists because the list of challenges is long: legacy systems and processes, lack of budget and downright risk aversion. Understanding where to start with digital transformation, and how, is critical for insurers that recognize the need to digitally transform. But the goal shouldn’t just be transformation. It should be to succeed — to lead and compete in ways that produce profitability, efficiency and innovation. However you measure success, integrating insurtech — whether IOT, blockchain or advanced data and analytics — should achieve those goals.

But where to start?

First, “see over the horizon”

Without doubt, insurtech is an epic climb. It’s not a bump in the road, it’s a mountain that will shape the future of the industry. If we’re to succeed, we must start climbing — only by doing can we compete and start shaping what’s next. However, you first must climb to the top and, as Jon Bidwell, former Chubb chief innovation officer and now SVP and underwriting transformation leader at QBE North America, put it, “see over the horizon.”

See also: 5 Insurtech Trends for the Rest of 2017  

SpatialKey is insurtech, and even we’re not immune from the need to digitally evolve. We’ve been providing geospatial insurance analytics since 2011, and we’re constantly evolving our own platform and product offerings to include the latest technology. Our role as an insight hub is to help shorten and accelerate the transformation that’s necessary for insurers to remain competitive. But, at the same time, our insurance clients are recognizing that not all digital transformation has to be hard. Technology integrations can be swift and painless with the right partner.

What is hard about insurtech is making the right choices, making the right investments, prioritizing the right transformation initiatives, collaborating with the right partners. It’s all a risk — but not as big a risk as doing nothing. There is no option to stay on the bench. No one knows what’s over the next horizon, but we all have an opportunity to shape it.

Key Findings on the Insurance Industry

Insurance CEOs are acutely aware of the disruption and change facing their industry. Keeping pace isn’t just a matter of adopting new technology. It’s also about being innovative and developing the customer intimacy needed to meet fast-shifting market expectations, while sustaining an unrelenting focus on reducing costs.

Disruption and change

Insurance CEOs’ concerns over regulation, the pace of technological change, shifting customer behavior and competition from new market entrants have continued to rise from their already high levels. In fact, no other industry group of CEOs is as “extremely concerned” about the threats to growth in these four areas.

Incremental innovation and marginal cost savings won’t be enough to sustain profitability and growth in this disrupted marketplace. The good news is that many insurers are embracing innovation. Two-thirds of insurance CEOs see creativity and innovation as very important to their organizations, ahead of other financial services sectors. They’re also ahead of the curve in exploring the possibilities of artificial intelligence and humans and machines working together.

Innovation and growth

86% of insurance CEOs believe technology will completely reshape competition in the industry or have a significant impact over the next five years. The gathering transformation is already evident in areas ranging from robo-advice to pay-as-you-go and sensor-based coverage.

See also: Convergence: Insurance in 2017  

Cutting-edge customer interaction and data analytics have enabled insurtech businesses to set the pace in the marketplace. However, rather than being just a threat, collaboration with insurtech businesses can help more established insurers to make the leap from incremental to breakthrough innovation. This includes improving insurers’ ability to analyze the huge amounts of data at their disposal, which can lead to better customer understanding, higher win rates and more informed underwriting. Partnership with insurtech can help insurers improve processes, increase efficiencies and reduce costs.

Data, digitization and trust

While digitization and data proliferation are now central elements of the insurance business, they bring increased cyber risk. More than eight out of 10 insurance CEOs (81%) are “somewhat” or “extremely” concerned about the impact on their growth prospects, on a par with banking and capital markets (82%).

Given the volume of medical, financial and other sensitive policyholder information that insurers hold, breaches could lead to a loss of trust that would be extremely difficult to restore. More than seven out of 10 insurance CEOs (72%) believe that it’s harder to sustain trust in this digitized world, though they also see the management of data as a competitive differentiator.

Grappling with regulation

A massive 95% of insurance CEOs are at least “somewhat concerned” about the potential impact of over-regulation on their growth prospects, and 67% are “extremely concerned.”

See also: Insurance Coverage Porn  

The need to implement so many regulatory reforms across so many areas has inevitably tied up management’s time and made reporting more cumbersome. Compliance demands and costs also continue to rise, straining operational infrastructure and holding back returns. However, these are the unavoidable realities of today’s marketplace. Insurers that are able to build the changes into business as usual can gain a critical edge. And pressure on returns means the “second line” now has to pay its way as part of an approach that shifts the focus beyond compliance to sharpening competitive advantage.

Download the full report here.

A New World Full of Opportunity

The primary drivers of disruption in insurance – notably, fintech (and more specifically, insurtech) – are coming from outside the industry. However, while the pace of change and market disruption has been daunting for most incumbents, the growing presence of insurtech companies is not a threat, but rather is creating real opportunities for the industry.

We see a combination of market and organizational priorities that open the door for these new opportunities.

  • External opportunities primarily relate to social and technological trends and pertain to the shift in customer needs and expectations (which digital technology has facilitated). Insurers have been taking action in these areas to stay relevant in the market and at least maintain their market position. For many companies, focusing on these opportunities remains critical, but this is not enough for them to gain a truly competitive advantage.
  • Internal opportunities relate to using technology to enhance operations and business function execution. For example, some insurers have used artificial intelligence (AI) technology to enhance internal operations, which has improved efficiencies and automated existing customer-facing, underwriting and claims processes.

To take full advantage of these opportunities, insurers need to determine their innovation needs and make meaningful connections with innovators. Doing so will help them balance their innovation mix – in other words, where they can make incremental innovations (the ones that keep them in the game) and where they can strive for real breakthroughs with disruptive and radical innovation (the ones that position them as market leaders).

An effective enterprise innovation model (EIM) will take into account the different ways to meet an organization’s various needs and help it make innovative breakthroughs. The model or combination of models that is most suitable for an organization will depend on its innovation appetite, the type of partnerships it desires and the capabilities it needs. EIMs feature three primary approaches to support corporate strategy:

  • Partner – Innovation centers (also known as hubs or labs) are the most common of the three EIM approaches. Their main purpose is to connect insurers to the InsurTech ecosystem and create new channels for bringing an outside-in view of innovation to the business units.
  • Build – Incubators are a common and effective way to build innovative capabilities and accelerate change. They can be internal, but most companies have preferred to establish them externally and then bring their ideas back into the company.
  • Buy – In this case, an insurer typically will establish a strategic corporate ventures division that sources ideas from outside the company. The company provides funding and support for equity, while the venture explores, identifies and evaluates solutions, and participates in new ventures.

Companies can select elements from each of the above models based on their need for external innovation, the availability of talent, their ability to execute and the amount of investment the organization is willing to commit.

See also: Innovation — or Just Innovative Thinking?  

Insurance leaders’ innovation agenda should include:

  • Scenario planning – What are potential future scenarios and their implications?
  • Real-time monitoring and analysis of the insurtech landscape – What’s out there that can help us now, and what do we want that may not exist yet?
  • Determining how to promote enterprise innovation, including which combination of approaches will most effectively accelerate and enable execution – What’s the best approach for us to stimulate and take advantage of innovation?
  • Augmenting the organization with new and different types of talent – Where are the innovators we need, and how can we best attract and employ them?
  • Cyber security and regulation – Are we prepared for the operational challenges that new technology can present, and have we and our real and potential partners considered the compliance ramifications of what we’re doing or considering?

Typical Exploration Topics

Some of the typical exploration topics across lines of business are:

  • Personal lines: usage-based insurance, shared and on-demand economies, peer-to-peer, direct-to-consumer, ADAS & autonomous cars.
  • Commercial lines: direct to small business, drones and satellite imagery, internet of things, alternative risk transfer, emerging risks.
  • Life and retirement: robo-advice, personalized insurance, medical advances, automated underwriting, decreasing morbidity and mortality risk.

Opportunities for insurers

As part of PwC’s Future of Insurance initiative, we have interviewed many industry executives and identified six key insurtech business opportunities. We see a combination of market and organizational priorities, which open the door for both external and internal opportunities.

External opportunities primarily relate to social and technological trends and pertain to the shift in customer needs and expectations (which digital technology has facilitated). Insurers have been taking action in these areas to stay relevant in the market and at least maintain their market position. For many companies, focusing on these opportunities remains critical, but this is not enough for them to gain a truly competitive advantage.

External opportunities:

  • Are mainly driven by customer expectations and needs and enabled by technology.
  • Offer front runners the opportunity to gain market relevance and position themselves.
  • Also offer fast followers opportunity because value propositions can be quickly replicated.

Internal opportunities relate to using technology to enhance operations and business function execution. For example, some insurers have used artificial intelligence (AI) technology to enhance internal operations, which has improved efficiencies and automated existing customer-facing, underwriting and claims processes.

Internal opportunities are:

  • Mainly driven by technological advancements.
  • A source of competitive advantage but demand deeper change.
  • An opportunity to set the foundation for how the company understands and manages risk.

To take full advantage of these opportunities, insurers need to determine their innovation needs and make meaningful connections with innovators. Doing so will help them balance their innovation mix – in other words, where they can make incremental innovations (the ones that keep them in the game) and where they can strive for real breakthroughs with disruptive and radical innovation (the ones that position them as market leaders).

See also: 10 Predictions for Insurtech in 2017  

Some examples of change are:

  • Incremental: Omni-channel integration, leveraging mobile and social media solutions and experiences to follow existing trends in customer and partner interaction;
  • Disruptive: Usage-based and personalized insurance that leverages technology and data to develop new risk models based on behavioral factors. This also has the potential to drive radical change.
  • Radical: Crop insurance, where data from different sources (such as weather and soil sensors) is leveraged to optimize and predict yield. As a result of this deterministic model, claims are paid up-front at harvest time.

There is no single perfect innovation mix. It depends on a company’s strategic goals and willingness to invest. Insurers should take into account current insurtech trends and determine long-term potential market scenarios based in part on current indicators and emerging trends. A short-term view will not foster the change that leads to breakthrough innovation.

As a starting point, the following questions can help you evaluate how prepared your organization is to drive innovation.

  • Corporate structure
    • Which parts of your organization drive innovation? Does the push for innovation occur at the corporate or business unit level (or both)?
    • How is the board engaged on decisions about the organization’s innovation mix?
    • What is the organization doing to make innovation a part of its culture?
    • What are the main challenges your organization faces when driving innovation?

  • Strategy, ideation and design
    • How does your organization become familiar with new trends and their implications?
    • To what extent has your organization used an “outside-in” view to inform your innovation model?
    • Which potential future scenarios have you identified and shared across the organization?
    • To what extent have you aligned your innovation portfolio strategy with potential future scenarios?
    • How does your organization approach ideation through execution?
    • Which capabilities are you leveraging to enable and accelerate the execution of new ideas?
  • External participation
    • What investments has your organization made in innovation?
    • In which areas is your organization participating (e.g., autonomous cars, connected economies, shared economies)
    • What structures (potentially in specific locations) has your organization created to support external participation?
    • To what extent has your organization managed to attract talent and partners?

Fast prototyping is key to quickly creating minimally viable products/solutions (MVP) and bringing ideas to life. Early stage start-ups develop and deploy full functioning prototypes in near-real time and go-to-market with solutions that are designed to evolve with market feedback. In this scenario, the development cycle is shortened, which allows startups to quickly deliver solutions and tailor future releases based on usage trends and feedback and to accommodate more diverse needs.

Incumbents can follow the same approach and align appropriate capabilities and resources to develop their own prototypes. They also can partner with existing startups that have a minimally viable product (MVP) to help them to move to the next stage, scaling. For this, they have to take into consideration several factors, including operational capacity, cyber risk and regulation (among others) to deploy the MVP in an “open” market. As opposed to controlled pilots or proofs of concept that are controlled environments, this “open” market is driven by demand. Lack of proper resources and the inability to scale the startup will severely compromise or actually prevent successful innovation.

See also: 7 Predictions for IoT Impact on Insurance  

The ways to accomplish all of this vary based on how the organization plans to source new opportunities and ideas, how it plans on executing innovation and how it plans to deploy new products and services. The following graphic provides examples of enterprise innovation operating models by primary function.

Final thoughts

In a fast-paced digital age, insurers are balancing insurtech opportunities with the challenge of altering long-standing business processes. While most insurers have embraced change to support incremental innovation, bigger breakthroughs are necessary to compete with the new technologies and business models that are disrupting the industry.

This article was written by Stephen O’Hearn, Jamie Yoder and Javier Baixas.