Digital transformation for insurance companies

Cyril Diamandi
Cyril Diamandi

Insurtech as a game-changer: how technologies transform the insurance in 2020

It would be fair to say that the insurance industry has never been an early adopter when it comes to innovation and technology. However, as with any other industry, the conservative and traditionally product-centric insurance market is becoming more technologically advanced even though this transformation goes too slow. Insurance companies, as well as banks and other financial providers, are more and more becoming IT-driven facing new challenges and forced to respond to digital disruption by providing a new customer experience.

As customers prefer digitalization communication methods, clarity, and transparency, this is the right time to be part of that trend. Gone are the days with 30-page application forms that clients fail to understand. If earlier consumers might hear from insurers once a year about the renewal of their policy not even understanding the coverage provided, now with a customer-oriented business focus, they are aware of all changes going on. 

There is no easy transformation. Now insurance leaders are having a tough time responding to this new set of needs: nearly 51% stated that they feel uncomfortable and are extremely concerned about the pace of shift in technological changes. In addition, AI, ML, IoT, Blockchain and other emerging technologies are enabling insurtech startups to enter the market. While insurers still have an advantage in knowledge and expertise, they can’t sit still and walk a fine line as they transform in order not to disrupt their bread-and-butter businesses.

Insurance challenges 2020

People don’t look for insurance, they want to protect themselves and the stuff they care about. Insurance companies constantly face regulatory changes, macro-economic uncertainties, innovations, decreasing loyalty, and commoditization. However, as technologies evolve, in 2020 they will have to deal with the digitalization of business processes that leads to the following challenges to be solved:

  1. Grow business via customer experience. Many insurance carriers fail to meet policyholders’ expectations: 84% of customers are looking for immediate accuracy and responsiveness that they receive in other markets and 40% of them continue insurer relationships based on the quality of experience. Attracting new customers and keeping existing ones is crucial so easy-to-use friendly solutions should be at the top;
  2. Maintain legacy systems. Many companies, especially those that have been on the market for years, still trust their business to complex disconnected legacy systems that require financial and human resources. Another problem lies in developing skills that are hard to hire: 65% of insurance organizations find the process long and expensive;
  3. Information and workflow management. Insurance carriers struggle to handle manual process steps including repetitive tasks, creating reports, managing claims and requests. Finding and processing the required data becomes harder, longer and less efficient;
  4. Staff lack. In the US only, just 2% of university alumni plan to work in insurance. It means that many insurance companies lack the skilled staff required to follow, apply and develop new insurance innovations;
  5. Fraudulent claims cost. Fraud costs the insurance industry $30 billion annually making insurers seek smarter, effective and more secure solutions. Today fraud analysis is mostly done after the fact and includes more traditional management approaches: nobody is trying to invest in fraud detection and prevention;
  6. Cyber risks management. As technologies evolve, understanding cyber threats will help companies cover customers’ needs like costs for personal and business losses from data breaches, loss of reputation, settlement costs and cyber extortion;
  7. Rise of digitalization. With tech giants already entering the market, insurers need to take care of web and mobile-first platforms and brands. As 68% of consumers buy auto insurance on the web, an online presence is a must for those companies that want to stay competitive in this space. It means delivering solutions via web/mobile, call centers and chatbots anywhere and anytime at the same time keeping up with global regulations.

In 2020 the balance of power is shifting from product to consumer. Social trends are going to shake up traditional business patterns and strategies in the insurance industry and this is mainly caused by the rise of technology. Although the insurance sector has a bad reputation for being behind the tech advancements, it is still important to stay up to date on innovations and find ways these innovations can be used to make your company grow and your customers satisfied. Not every technology needs to be used, but being knowledgeable of the trends will help you be on the same page with your customers and share their concerns offering relevant solutions.

Insurers and insurtech

With companies like Amazon, Google and Apple providing their customers with rich digital experience, users are demanding the same individual approach from insurance companies. Now more than ever they feel the presence of newer startups that meet customers’ expectations in the shortest terms – the insurtech. New technology-led players are entering the insurance sector to provide coverage to a more digitally savvy customer base. They create a competitive threat and potentially valuable opportunities for partnering on the changing terrain.

InsurTech areas

In response, insurers must embrace change and rethink their business approach to move forwards an agile, digitally-enabled, customer-centered experience to achieve competitive advantages by meeting tomorrow’s customer needs. Although insurtechs have not yet made deep inroads in the field, they are growing fast to capture a meaningful share of value pools within a few years. The size of insurance companies’ share depends on how quickly they can adapt to the market changes in the industry and become scalable.

There are two primary types of insurtech with a number of others rapidly catching upon:

Number One: Blockchain

Over the last few years, insurance firms have started to slowly but efficiently integrate Blockchain in their processes and 2020 is expected to speed up this flow a few times. As Blockchain enables the creation of a digital ledger that cannot be changed, it becomes a giant audit trail of all transactions. With its help insurers can reduce the admin costs that come from numerous claims and billing usually made by third parties. 

Blockchain technology ensures that all the information is shared, protected and easy to verify via smart contracts thus saving insurance companies around $5-10 billion by excluding all unnecessary steps. The main value here is to avoid fraud and make customers’ claims resolved much faster. Try to think of insurance as a smart contract which is exactly what it is: people pay money to be covered for the terms specified in a contract.

To understand better how it all works, let’s imagine you’ve decided to buy a house from a retailer:

  1. A customer adds all the information about the house to Blockchain to create a smart contract and indicates their preference with the insurance company X. Prior to closing, a smart contract integrates all the data about the house (number of floors/rooms, location, quality of construction, etc.) with the insurance company X;
  2. Insurance company X uses these details to underwrite the policy, generate a binder and a payment request and it is added as a block to the customer’s chain. The invoice request is added to the closing costs and then paid from the closing proceedings;
  3. A customer creates a block that has the following information: the date, dollar amount, and other details of the transaction. Using all this data, there is generated a complex encrypted hash function with a unique digital signature. This block is added to the public chain interlinked with previous blocks of this chain;
  4. A hacker wants to change the past data. To do this, he/she has to change not only this block but all the previous and following blocks at the same time not being detected by the network which is nearly impossible;
  5. Both retailer and customer are protected with a smart contract of the insurance company X which is activated based on a set of conditions or business agreements. If any claim appears in the Blockchain network and the terms are met, a decision is made instantly. It happens because the insurance company X uses Blockchain to automate large parts of their manual processes keeping their customers happy and costs cut.
Traditional contracts versus Blockchain contracts in insurance

According to statistics, 44% of insurers have no idea how Blockchain can be useful, 21% are thinking about implementing it to simplify the claim process and reduce fraud and only 2% have actually applied the technology. Using Blockchain in insurance can cause a fundamental shift in all processes although its future still depends on legal hurdles and public acceptance. But this is too powerful to be ignored.

Number Two: Artificial Intelligence

Insurers believe that Artificial Intelligence will significantly transform the industry in the next three years: such functions as fraud prevention, price and risk identification and policy, and claims processing are based on cutting the human element out of all processes. It allows them to access data faster, predict risks, produce more accurate reporting in tight timeframes, improve turnaround cycles, identify new revenue sources and change the underwriting process fundamentally. In the insurance world machines that can learn independently are becoming game-changers in several important areas:

  1. Autonomous vehicles. Autonomous (driverless) vehicles are no longer the future as they are slowly integrated into society changing the face of auto insurance. Now in case of a car accident the fault lies by all means on one of the human drivers but with fewer people involved who will be guilty then? Google, Mercedes, Tesla and Volvo already stated they would accept liability for any accidents with their cars while Uber created a need for ridesharing insurance instead of typical auto coverage. It makes insurance agents reconsider their current policies to bridge the gap between them and technologies;
  2. Personalization. In 2020 personalization and customer-centered approach will prevail which means that insurance companies need to supply personalized premiums. That requires diving deep into data: 77% of customers are ready to provide it if they can benefit from a cheaper premium package. For example, smart home technology that allows people to monitor their electricity and water usage and check the cameras while they are away is the case to provide a personalized premium as there is less chance of theft. Another case is wearables that are used for health insurance personalization: if a person takes 10K steps a day it may be a reason for a cheaper premium as the risk is lower;
  3. Enhanced customer experience. AI will keep improving customer experience across all sectors in insurance:
  • In claims settlement, there is no place for manual work: in addition to processes automatization for employees, AI allows customers to manage their claims via self-service. For example, in case of a flight cancellation that becomes a reason for a high volume of claims, customers can log in to the AI-powered platform to check the details of cancellation and be instantly paid on the claim. Only if the request fails, it involves a human’s review;
  • Chatbots. As insurance is usually pretty complicated for customers to understand, it leads to a great number of clarification requests. This problem can be solved by trained conversational AI bots handling customers queries: by 2025, 95% of customer interactions will be powered by them. The ability to work 24/7 significantly cuts the costs compared to human employees and immediate reaction improves customers’ experience. Some companies even think of chatbot agents integrated into the process;
  • All-in-one. Traditionally customers have different insurance providers for travel, auto, residential, life, health, pet and legal insurance. By data analysis, companies can gather all customer information in a single profile and provide a single package for all insurance types.
Innovation & Insurance: on-demand insurance, telematics, property insurance, wearables & AI

This is just a short list of basic AI values for insurance companies. We can also add the use of telematics in car insurance to collect real-time driving data: it gives discounts for insurance to safe-driving drivers and penalizes those ones who play with speed. Natural language processing can extract necessary data from unstructured piles of documents, emails, chats and other sources of our day-to-day interaction thus reducing the time for processing the claim. 

At the same time, computer vision used by 20% of insurers already allows to extract meaning from visual data: for example, users take pictures of the damaged vehicle and AI Auto Damage Estimator trained on thousands of car accident photos can assess damage and costs of this claim within a few seconds. All this is supported by real-time analytics, fraud prevention and smart suggestions for delivering a better service and increasing the incomes. 

Although AI-based insurance is still in its early stages, insurers have to already start thinking about its implementation in their current processes not to be left behind.

Reasons to outsource insurance software development

These technologies are just the tip of the iceberg with more coming soon. Now internal processes across the industry are unnecessarily complicated: 1 million jobs in the US alone can be automated, saving costs by up to 40%. Of course, transitioning from paper to online is not easy: 9 of 10 insurance companies say they are struggling to develop the technology infrastructure they need blaming legacy software and outdated IT systems. However, digitalization is not always enough as it requires the complete transformation of existing business models.

To overcome these problems and enable new efficient offerings, insurance companies are developing modern solutions using offshore talents. To boost data-harvesting capabilities,  internal workflow automation and keep the right balance, they are focused on building customized software to catch up with trends and grow revenues. These can be the automation of claim processing, claim and policy management platforms, peer-to-peer insurance, APIs, personalized pricing, chatbots, fraud detection software, and even insurance marketplaces.

Getting the most from the insurtech

Insurtech has shaken up the insurance business with new solutions and better experiences. One of the biggest challenges for the traditional insurers is to combine their years of experience (something insurtech companies lack) with new ways of interaction between customers, agents, and partners: quickly. No pressure, right? Today almost 90% of insurance executives state that they have a clear long-term plan for technology innovation. Of course, this is not done overnight, but some of the companies have already started the process:

  • In 2019 almost 80% of insurance companies CEOs agreed that AI should become the part of their business models in a couple of years;
  • The increased use of IoT sensors, AI, ML, and Blockchain combination has already helped businesses move forward towards more proactive operations;
  • Over 30% of insurers already use these technologies in their business.

However, the integration of innovative technologies and reconsideration of current business models is not a logical next step for everyone yet. Understanding the essence of the customer-centric approach has been a struggle for many insurers. They have to get the necessity of breaking their legacy shells to grow with the changing times. What does it mean?

  • What used to be a sign of success may not be anymore. Large companies are no longer associated with trust and stability;
  • Speed matters more than ever. Customers require next day delivery and claim decisions in less than a minute;
  • Being agile is a must. Successful digital transformation means implementing agile ways of working not only in IT departments but beyond.

Yes, data is the king: the ability to collect, clean, store, transmit, protect, forecast and analyze data is a must-have. To make use of this data, there are some priorities to be set:

  1. Understand your customers. Discovering the customers’ needs is still the heart of any successful innovation. Speak the language of Millenials to have a relevant approach based on their behavior;
  2. Make a SWOT. In addition to understanding your customers, you need to have an idea about your strengths, weaknesses, opportunities, and threats. It is crucial to stand out and offer your customer a different service in terms of innovation and customer experience;
  3. Explore your business model. Say hello to insurance as the industry with multiple business models. The ability to build supply and demand chains, revenue models and control points is as crucial as underwriting today. However, there is a difference between the model on paper and the MVP with initial customers to target;
  4. Create a connected digital ecosystem. A variety of insurance companies expand their businesses and broaden markets by accepting other companies in their ecosystem: this is called a big to small collaboration. Both startups and insurers have strengths and both are hungry so why not work together for a mutual interest based on agility?
Insurance companies goals for 2020

Build the right platforms. To ensure that your business is able to support a tech change, you require the right digital architecture and cloud infrastructure. Today many insurers have a mix of complex outdated  IT systems and the idea to change anything in this pile seems risky and expensive. But this is the first step to build a technology foundation ready for the future. As many traditional IT departments struggle to cope with this, insurers often find help in hiring an offshore development team.

These are some very good waves for change-makers to ride in the market and future-proof the insurance venture. Customer expectations for real-time communication, individual approach, convenience, and transparency are re-shaping the industry and wherever you choose to place your bets, just don`t expect a change and new status to emerge right away. Remember:

  • Great products are still essential – just create them with a deep understanding of who your customers are and what they care about;
  • Servicing claims still matter – you just have to use real-time data not to be interrupted;
  • Underwriting is still crucial – you just need more complex data to fuel it.

Digital transformation is the journey from existing legacy systems to a customer-centric approach and one of the biggest challenges on the way is to trust technology and integrate it into daily operations. The fear of job loss still exists while the goal is not to replace a human but to make them focused on high-value tasks allowing customers more direct access to the information and self-service. Insurance companies still have many hurdles to overcome as they look to remodel their businesses and retain market leadership status. That is why they need to have a coherent strategy, understand the cultural fit and manage innovation.