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Jun 2020

Transformational execution is key to success for insurers

Source: Asia Insurance Review | Apr 2020

In a challenging environment, strategic use of technology is essential for (re)insurers to stay relevant and get an edge over the competition. DXC Technology’s Phil Ratcliff suggests four ways to help with digital transformation.
 
 
The insurance industry is undergoing dramatic transformation driven by heightened consumer expectations, unprecedented competitive pressures, the need to automate and optimise processes, and the surge in costly natural disaster pay-outs.
 
While these challenges are formidable, so are the opportunities. Collectively, 11 of the largest economies in Asia-Pacific were under-protected by around $58tn, according to Swiss Re Institute. 
 
And nearly two-thirds of all global losses in the property and casualty market are uninsured. So, there are tremendous opportunities for insurers to boost their penetration rates and increase profits globally.
 
Today, the best-performing 20% of insurers capture almost 100% of the industry’s total economic profit (after allowing for the cost of capital), according to McKinsey & Co. The other 80% of insurance companies are struggling.
 
So, how do the top-performing companies separate themselves from the pack, and what strategies should insurance companies employ to gain market share?
 
The four critical strategic imperatives are: Increasing customer engagement, broadening the insurance proposition, delivering simplification and automation, and partnering for success. However, leading insurers are achieving profitability not by having the most differentiated strategy, but by doing the best job of executing their strategy.
 
The four imperatives
 
Challenging times for insurers
The challenges facing insurance companies are coming from all directions. Customers who are accustomed to doing their banking on a smartphone and their shopping online are demanding the same type of personalisation, speed and service from their insurers. They want a digital, omnichannel experience.
 
Competitive and economic pressures have resulted in the blurring of the traditional lines of demarcation among agents, insurers, and reinsurers. Brokers are trying to become de facto risk managers, taking on greater underwriting responsibility, particularly when it comes to larger and more complex risks.
 
Insurers are trying to become more relevant to policyholders by increasing the amount of customer engagement while competing with brokers for the role of trusted adviser and risk manager. This tug-of-war is creating tension between brokers and insurers.
 
Similarly, insurers and reinsurers are increasingly at odds. Insurers are ceding less business to reinsurers, particularly for life and simple indemnity products. This raises the competitive pressure on reinsurers, causing them to enter the core insurance market. In fact, eight of the largest 11 reinsurers are now providing primary coverage alongside their traditional reinsurance business.
 
Reinsurers are increasingly moving into direct specialty businesses, such as agriculture and cyber insurance. And reinsurers are leveraging partnerships with InsurTech start-ups, which are shaking up the industry with their focus on using technology innovations to squeeze savings and efficiency from the current insurance industry model.
 
InsurTechs will continue to be a driving force in the transformation of the insurance market, as funding continues to flow to them at ever-increasing rates. The InsurTech market is expanding at a compound annual growth rate of 28%, with total investment in 2018 topping $4bn. Further muddying the competitive waters: Some InsurTechs are partnering with existing players, while others are acting as a new source of market competition.
 
Finally, we are witnessing a rise in claims expenses, driven in part by the increasing frequency and cost of natural disasters. In 2018, wildfires in California, an earthquake in Indonesia, and typhoons in Asia drove the total amount of insured losses to $79bn, making it the fourth most expensive year on record. 
 
Overall market conditions
It would be one thing if companies were competing for a bigger piece of a significantly expanding pie, but in many markets the growth rate is slow. This is not necessarily the story in some parts of Asia, particularly in China and other countries in emerging Asia. By 2029, Asia-Pacific will account for 42% of global premiums – share of China is forecast to be 20% and the country is on course to become the large insurance market by mid-2030s. 
 
The global life insurance market, which represents 61% of the total insurance market, grew only a modest 3% in 2017, with virtually all of that growth taking place in China. Swiss Re Institute predicts that in advanced markets, life premiums will grow by 1.2% in 2019-2020. In advanced Asia Pacific, long-term growth drivers like ageing populations and rising affluence will support premium growth. 
 
The global property and casualty market increased by a healthy 5% to $1.4tn in 2017, but the US market drove more than 40% of that increase, mainly through higher auto insurance rates. In contrast, the overall market experienced deteriorating profitability due to the huge volume of claims in the aftermath of storms, floods, and wildfires. The reinsurance market grew by a modest 3%. 
 
In this challenging environment, it is vital that companies focus on transformational execution.
 
The four strategic imperatives
Insurance companies should adopt four strategic imperatives as the foundation of their digital transformation initiative.
 
1. Customer engagement. The goal is engaging customers more thoughtfully through the use of data for specific, relevant, and timely customer insights. Companies need to use big data to predict risk accurately in a way that does not come across as intrusive to the customer. A deeper understanding of customers can help insurers identify and respond to life events that may trigger the need for additional or different coverage.
 
2. Offering expansion. The second strategic imperative is delivering a comprehensive offering to policyholders that provides greater value than simple indemnification. This could, for example, encompass risk advice and mitigation or contractor management after a claim. It might also involve the extension of core offerings into related markets, such as car financing, or establishing a compelling ecosystem on an industry platform.
 
3. Simplification and automation. Insurers must embrace simplification and automation, from products to infrastructure. Increasingly, this automation will be driven by AI. For example, it is estimated that within the next five years, half of all customer service talk time will be conducted between customers and AI-driven automated systems. The types of products people demand now are a lot simpler, and the way insurance products are sold needs to be simpler, too. Companies offering products that are easier to understand will be the ones that attract this new breed of customer.
 
4. Ecosystem partnerships. The fourth imperative is a broadening of the company’s capabilities, which will require new, deeper partnerships enabled by seamless API integration. This could take the form of partnerships with InsurTechs, with other insurers, brokers or reinsurers; or new, deeper relationships with service providers and companies from outside the insurance industry.
 
Successful execution across all of these imperatives will incorporate a platform-empowered strategy that will be able to collect and analyse the data needed for more meaningful customer engagement, enable the rapid integration of third-party capabilities, and allow for seamless integration with robotics and AI to drive down complexity.
 
Conclusion: Opportunities are waiting
The insurance industry is struggling to deliver revenue and profit growth, despite a substantial market opportunity. To build a path to sustainable growth, the industry needs to focus on execution.
 
It all starts with providing real and timely customer value based on unique customer insights. And it ends with a full ecosystem-led service model that can be delivered in near real time and handled in an increasingly automated manner.
 
To succeed in this new world, insurers must not only embrace new products and services, but also clearly define digital transformation strategies and strive to operate more efficiently. It all comes down to transformational execution. A 
 
Mr Phil Ratcliff is vice president and general manager, Global Insurance, at DXC Technology. He is responsible for defining and implementing insurance go-to-market strategies and plans, managing the global industry P&L and leading the development and commercialisation of DXC’s portfolio of insurance offerings.
 

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