5 minute read 12 Jul 2021
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How can the insurance sector evolve from pure automation to digital transformation?

By Roland Voggenauer-Graf von Bothmer

Insurance Digital Transformation Leader, Financial Services Consulting | Switzerland

Experienced insurance professional, building a better world by publishing crime stories and films

5 minute read 12 Jul 2021

Different perspectives and cultural change are just as important as technology in driving digital transformation in insurance.

In brief
  • Insurance tends to lag behind in offering clients the digital convenience they experience in other industries
  • Digitalization is not just about adopting innovative technologies but reshaping business models
  • Insurers should focus on a few key areas along the value chain to drive digital transformation

Almost across the board, Swiss insurers are working on digitalizing their business models. Surveys on the topic often mention two key aspects:

Digitalization is the implementation of new technologies, and the process of embracing those novel technologies has not yet reached its full potential.

In contrast, surveys of private clients reveal a slightly different picture: clients do not perceive insurers as particularly tech-savvy, and personal contact with an advisor is still the most common way to conclude a contract, as confirmed once again recently in the Swiss Insurance Monitor 2021 from the University of Lucerne. Ultimately, this is also reflected in the notoriously low usage of insurance apps, which have so far failed to make a meaningful step towards digitalization from the client perspective.

All of this is hardly surprising, since equating digitalization with the adoption of new technologies, as noted above, is essentially automation. The industry as a whole has certainly made significant progress in this regard and has no doubt achieved efficiency gains. This may tempt some market participants to judge the success of their digitalization strategy based solely on the expense ratio. This is certainly an important indicator, and the automation of existing processes a key prerequisite for successful digitalization. But that won’t beenough on its own.

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Chapter 1

Reshaping the business model

Clients expect simplicity, transparency, and swiftness

Digital transformation essentially means reshaping and enhancing the underlying business model. And this is exactly what clients expect.

Insurers have always known that private clients have a limited desire to look at insurance solutions in detail. Insurance products have rarely managed to trigger interest or even raise an intense desire to own the product. On the contrary, what clients want most are simplicity, transparency and speed. This attitude has become more pronounced, especially in recent years, due to the influence of other industries that have transformed or re-created their business models. This has led to a general shift in client expectations that insurers must also meet. Not an easy task given that insurance products require a higher level of advice and are traditionally sold personally, especially as this is likely to remain the case for some time.

Essentially, then, we are dealing with two very different points of view – that of the client (policyholder, outside-in) and that of the insurance company (insurer, inside-out).

Their expectations of what makes digitalization successful diverge, as do their views of activities in this area to date. These two perspectives – as noted above – appear to have little overlap. While this is a classic conflict of objectives, it is by no means an insurmountable obstacle to successful digitalization of the insurance industry. Resolving this conflict starts by separating the two perspectives, the one of the policyholder and the one of the insurer, so they can be developed separately before being realigned step by step.

There are of course other perspectives that arise from the insurer's external relationships, e.g. with the claimant and other parties involved in the claims process, and – the most important - the intermediary. As a rule, the intermediary is positioned between the policyholder and the insurer and therefore holds both points of view.

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Chapter 2

Separating the perspectives

How to enable digital communication

There are of course other perspectives that arise from the insurer's external relationships, e.g. with the claimant and other parties involved in the claims process, and – the most important - the intermediary. As a rule, the intermediary is positioned between the policyholder and the insurer and therefore holds both points of view.

From the perspective of the client, as well as the intermediary and all those involved in the claims process, the goal of digitalization is to enable, but not to force, purely digital communication between the insurer and client. This starts with contacting the client and concluding the contract but continues along the processes of contract management and – crucially – claims settlement. It has been repeatedly demonstrated how important it is to allow for personal communication during the claims process in particular. Digital interaction alone is not enough, it is essential to include in-person elements and channels. The client, not the insurer, must choose preferred methods, i.e. clients should be free to choose the communication channel that suits them best.

In fact, most insurers have already made good progress in this area. Almost all market players offer a range of communication channels for many products and claim types. The principle is always: the client makes the choice and selects their preferred method.

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Chapter 3

Personalizing products

Why choices start with standardization

If this kind of client centricity is elevated to a principle, then digitalization means nothing other than generally giving clients a choice, or – put another way – personalizing insurance products and services. Digital transformation is not just about technology, but it depends on a shift in the corporate mindset that also tends to affect corporate culture. Giving the client the choice means prioritizing the client perspective over the insurer perspective. It means turning client expectations into your own and – if possible – fulfilling them. This is what allows innovation to emerge – and be perceived as such by the client.

But this cannot be a one-way street. A paradigm shift like this is only possible if the other perspective, i.e. that of the insurance company, is also considered. How can this personalization be achieved while still enabling the necessary scalability? The answer is standardization and simplification from within, and this is precisely what digitalization is about from the insurer's perspective.

Successively bringing these two views together is the silver bullet.

Digitalization means personalizing products from a customer perspective and standardizing processes internally.

In concrete terms, three components need to be aligned and combined to form a successful team:

  • Process management i.e., the management of all processes, primarily internally and with the help of IT
  • Technical expertise, i.e. the classic know-how of product development, underwriting and claims
  • Client focus, i.e. know your client (KYC)

A catalyst for the success of this project is the cultural component mentioned above: rethinking corporate culture. This is more elusive and less concrete than other aspects, but it is the most important one. It is vital for an overarching and sustainable digital strategy, but shouldn’t stand in the way of certain areas being developed separately. It is perfectly possible and sensible to develop individual competencies in line with digital requirements without creating a digital patchwork in the company.

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Chapter 4

Scope for transformation

Seven focus areas for digitalizing insurance

In the remainder of this series, we will explore those components of the value chain where there is scope for digital transformation in the company. We have identified seven key areas, which we present briefly here. Content and concepts will be developed in more detail in further articles on the selected topics.

  • Distribution – the starting point for digitalization

    Digitalization of sales and distribution is the most essential part for the customers.

    Almost all insurance companies have digitalized their policy application and administration processes to a great extent. This means that essential components such as online purchase and simple contract variations are dealt with via client portals as is standard throughout the market. Further potential lies in the development of intermediary portals as agents and brokers dominate sales in the foreseeable future and will need to be integrated into the digital transformation process. In the medium term, client and agent portals should converge.

  • Products – the core of digitalization

    Digitalizing insurance products is a key topic.

    As already described, the product needs to be clear and easy to understand, otherwise the client will quickly be lost in the digital application process.

    It follows directly that the provider should focus on just a few core products or modules as the basis for deriving others, i.e. personalized, products. These core products must be designed to enable internal standardization.

  • Underwriting – potential for artificial intelligence

    There is still considerable progress to be made in underwriting, which should be as non-invasive as possible for clients. To the extent that the client no longer even notices the process is taking place, underwriting and product management should converge so that the primary insurer performs collective, dynamic portfolio underwriting rather than individual, static policy underwriting. The latter method no longer makes sense in a digitalized product world. In other words, product management should be the goal in the private client segment and can be achieved by embracing new technologies, including artificial intelligence (AI), but the call for new pricing methods distracts from the fact that it is more about data than new processes. Greater leverage results from improved data, not from increasingly specialized methods. Data expertise – in short supply in the market until now – needs to be built up.

  • Claims – the moment of truth for digitalizaion

    After distribution, the most progress has been made in the area of claims processing. This is hardly surprising since – for instance - the first notification of loss (FNOL) is a key element of client communication and was digitalized early on. Interestingly, it is precisely in their “moment of truth”, i.e. in the event of a claim, that clients have a desire for personal contact.

    Given the number of employees involved and the importance of claims for the business model, major efforts have already been made in this area, and many processes have already been digitalized to a large extent. Since the frequently noted lack of trust in the insurance industry stems from claims, companies should strive to increase transparency and efficiency going forward. It is likely that this will only be achieved through increased straight-through processing (STP), clear triaging with the help of modern data analytics with a view to combating fraud. 

There is still a lot of scope for digitalization on the client side in claims.

  • Reserving: digitalization with big data

    Technical provisions are the most important positions on the liability side of the balance sheet of a P&C insurer. Historically, there have been massive errors of judgment, leading to subsequent recognition of reserves and even recasting of financial statements, which has damaged the industry’s reputation.

    At the same time, investors are increasingly calling for more reliable figures and timely valuation. It is probably not possible to resolve this conflict conclusively, but we can exploit significant potential for improvement through automation and improved underlying data. This is particularly true for data in the long tail lines of business. If we can establish interactions between claim handlers and actuarial departments, the data situation can be improved considerably in the medium term.

  • Finance and reporting – handling digital acceleration

    The finance functions of medium-sized and large international companies are currently focusing on implementation of the new International Financial Reporting Standards IFRS 17 and 9. In addition, many insurers are in the course of transitioning to or implementing the latest generation of accounting/ERP platforms as well as the first ESG standards. In parallel, however, digitalization is accelerating and reinforcing the need to transform the finance function.

    New technologies enable conventional accounting and controlling activities to be automated, while also creating opportunities to increase the added value for the business through predictive and more focused analyses. This marks an important step toward the acclaimed concept of business partnering. Cultural change will be the key to this along with recruiting and retaining the right skillsets and people. Agility and the readiness to take risks and innovate are not necessarily attributes that one associates with the finance function. That is why active management of this shift is a success factor that is all too often underestimated.

  • IT and operations - agile project management to drive digitalization

    IT is usually at the heart of all digitalization activities.

    It is also often the very place with rigid systems, processes and methods still in use, which hinders flexibility and personalization of products.

    The role of IT is to meet the expectations of all stakeholders, i.e. clients, sales partners and employees. From the corporate perspective, IT is the key enabler of digital transformation – without IT, nothing is possible. Operating digital channels, developing individual products along with product modules, and setting up tech-supported claims management are all dependent on the implementation of transformed IT architectures and agile methods.

This is the starting point, and we can progress either by radically driving forward complete system conversions or – more likely – by successively replacing individual subsystems.

Summary

This is the first in a series of articles highlighting what digital transformation could achieve in the insurance sector, and where Swiss companies currently stand. We start by focusing on primary insurers and identify seven elements of their value chain where digital transformation of the business model can – and must – take place to give clients the convenience they know from other sectors and hence expect from their insurer. At the same time, however, we fully acknowledge that most clients continue to value personal contact with their insurer and expect a seamless digitalization of all insurance related processes.

About this article

By Roland Voggenauer-Graf von Bothmer

Insurance Digital Transformation Leader, Financial Services Consulting | Switzerland

Experienced insurance professional, building a better world by publishing crime stories and films