The 5 Levels Of Disruption That Will Force Insurance To Redesign Their Business Models
Digital trends are dissolving the traditional boundaries and the long-held competitive advantages of insurance companies. Pillars of the insurance industry such as underwriting, risk management, expense control, and product distribution are being disrupted. We believe there are five levels of disruption that will affect the insurance industry and force insurance carriers to redesign their business models:
Level #1: Digitizing Operations
Automation has driven process efficiencies for many years. However, there were limitations and impact was slow due to high implementation cost, system risk, and other factors. RPA provides a relatively better mechanism through its efficient deployment, ability to treat core technology like a BlackBox, and higher returns at lower cost and risk. While the initial years saw more impact in higher volume transactions, typically in personal lines, RPA is now gaining ground in more complex operations like commercial lines through cognitive and AI combinations. The primary driver is cost, but it also has a significant impact on customer outcomes through enhanced quality and speed.
Level#2: Digital Customer Engagement
Traditionally, insurance has been agent-driven, and even as the direct channels have grown, many of them use non-digital modes of engagement. Other financial services industries like banks have taken the lead in redefining customer engagement using digital with reduced friction, cost and more importantly catering to the millennial population. Most insurance companies are grappling with this issue and making investments to tap digital channels that help attract and retain customers. Digital engagement applies to new business through digital marketing, online customer journeys, digital underwriting, and binding, as well as policy administration and claims through self-service. These digital channels are only effective when the backend is digitized, which requires digitization of operations.
A study suggests that the life insurance ‘winners’ of tomorrow will likely be those organizations that blend an advice-driven approach with a digitally enhanced engagement strategy to help meet evolving consumer expectations.
Level #3: Digital Data Flows:
Advances in artificial intelligence and the Internet of Things (IoT) have opened up new markets and new opportunities. Telematics, home sensors, drone surveys, and other innovations can provide insurers with critical data they can leverage using analytics to help make a better decision in areas including underwriting, pricing, and claims adjudication. Digital data flows help insurers manage their customers as individuals rather than groups — an expectation of today’s digital customers. This also allows for tremendous speed in decision making and provides a more accurate and personalized offering to the customer.
With 6.4 billion devices already connected and 5.5 million new devices added every day, the IoT’s real-time data collection and sharing power will create significantly, new opportunities in finer product segmentation, more specialized pools of risk and predictive modeling to better assess risk, improve loss control and accelerate premium growth.
Level #4: Digital Capitalize Enabled Safer World
Over time, digital technologies like connected homes, sensors, and driverless cars will reduce human error and provide better responses to hazards, improving safety. While the need for insurance will not go away, it will impact its pricing and scale. However, this safer world will create the need for more innovative products and protection services. Risks arising from cybersecurity will fuel the need for risk coverage from corporations and individuals. Risk coverage fundamentals will shift as risk coverage requirements shift.
Insurers of the future will play more of a risk avoidance role and less of a risk mitigation one.
Level #5: Digital Disintermediation
This type of disruption changes the way business is done. Spotify and Uber exemplify this. Spotify doesn’t just provide music streaming, it’s made music consumption a collaborative activity. The same goes for Uber; they haven’t made taxis more efficient, they have changed the model for traveling in non-self-owned vehicles. A simplistic (perhaps too simplistic but fundamentally correct) way of describing an insurance carrier is being an intermediary between risk-cover seekers and those with capital to deploy. Similarly, brokers act as an intermediary for customer engagement. The intermediary is an aggregator, algorithm and customer engagement model. Digital technologies can do all three. There are insurtech companies, though at an early stage of their evolution, who offer these three functionalities through online customer journeys, comparison platforms, chatbots, automated underwriting, and claim adjudication, pricing algorithms and peer-to-peer networks for capital deployment. While they currently serve a narrow and low-end risk segment with an occasional need for exception processing, they have demonstrated that aggregation algorithms and customer engagement can be an end-to-end digital offering.
Leading companies are using data and analytics not only to improve their core operations but to launch entirely new business models