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Perspectives

The Future of Insurance: Four Must-Have Capabilities For Success (Part 3 of 3)

2018-01-31


Data, algorithms and artificial intelligence are changing insurance in near real time. Here’s what insurers need to master to survive if not thrive in the years ahead.

As noted earlier in this series, insurers that fail to embrace a digital mindset risk missing out on the $1.6 trillion of value that next-generation insurance is set to create in the next three years. 

To understand these high stakes, we conducted a thorough review of the latest trends, competitive threats, promising opportunities and best ways for insurance executives to prepare a favorable response. Part one identified the challenges; part two highlight repositioning tactics. In this concluding installment, we explore four areas of a strategic focus for industry decision makers.

Four Crucial Capabilities

Once insurers have established the right vision for market differentiation, they will need to embed the right operating model to support it. To execute their strategies successfully, insurers must develop and sustain the following four capabilities. 

Creating an agile IT architecture.

In our view, insurers won’t be able to keep up with ever-changing, digitally driven consumer demands, disruptive technologies and insurgent competitors until they upgrade their heavily bandaged legacy IT infrastructures. In other words, having nimble processes, a forward-thinking business model and dynamic leadership will mean little if the IT that powers them is incapable of advancing business objectives. Toward that end, insurers must rewire their IT in a way that enables them to engage consumers in new ways (e.g., omnichannel, voice assistants, robotic advice and wearables), add value through actionable insights (e.g., big data meaning-making via data lakes), participate in third-party ecosystems via open application programming interfaces (APIs), and speed new product and service developments. 

Simply put, an agile IT model that incorporates as-a-service, cloud-based and asset-light approaches is the most proven (if not only) way to get there. Not only will this more automated and simplified approach eventually reduce costs, but it will also ultimately reduce errors, improve claims and enliven an aging insurance industry. 

Reinventing value.

The old, reactive insurance model is on its way out. Leading insurers that can master preventive models and go a step further to create new value propositions will drive down claims costs, generate more capital efficient revenue streams and ultimately own the future. 

For instance, commercial trucking and heavy equipment manufacturers such as Caterpillar are using telematics to help decision makers use assets more effectively, reduce costs and enhance customer service. But data insights captured also enable the company to avoid future failure by optimizing both driving techniques and maintenance cycles, thus reducing total insurance claims.

Since claims commercially represent by far the largest single cost to insurers—up to 80% of all insurance premiums are spent on claims payment and handling—insurers stand to gain a great deal from newfound operational insights and improvements. In response, there are several steps insurers can take to adapt their financial models: 

  • Redefine value with deft data capabilities like the above.

  • Pool risks to reduce exposure.

  • Target claims to better understand human and system factors that increase risk.

  • Automatically revise policies with dynamic and menu-based pricing to better reflect risk exposure.

  • Use data and analytics to ensure that lines of business that were once considered too high risk regain commercial value.

Establishing a partnering mentality.

Insurers will not be able to seize new market opportunities on offer and develop new sources of value for clients on their own; they will need to become highly effective at a new partnering model. This entails not only including more partners into the insurance value chain, but also leveraging outside technical experts. 

For example, insurers can bring a wealth of capabilities to startups, networks with highly respected brands and anyone seeking a deep understanding of historical risk data. This could come by offering informational enhancements to hardware manufacturers, which companies such as Caterpillar or as Panasonic and Allianz have done. It could also mean harnessing third-party data sets such as weather, tapping behavioral scientists to further reduce risk exposure, or incubating innovation from within, as AXA is attempting

Either way, the future of insurance seems brighter for those seeking strength in numbers.

Embracing human-centered design.

As insurers look to shape new value propositions based on coaching customers to mitigate risk and positively influencing their behavior, they must take a human-centered approach to service design. This is the final piece in the puzzle and typically includes behavioral nudges and helpful information to reduce risk.

In commercial property, for example, IoT solutions can capture data from building management systems that delivers early warnings about issues such as electrical cable deterioration, water leakage and machinery failure. In addition, insurers will need to understand if and why employees may not be taking appropriate actions already. Without this, early warnings may go unheeded, and the benefits of the system will be limited.

In other words, future success will depend on smart humans and intelligent machines working together.

Figure 1

Looking Ahead

The next decade is set to be a decisive one for insurers, as digital technologies, shifting business models and customer demands reset industry norms. Traditional insurers are already feeling significant pressure, which will only intensify for those frozen in time. To avoid irrelevance, established insurers must exit their comfort zones and embrace digital tools and thinking to extend their preeminent standing with new data and algorithmically driven business capabilities that savvy customers not only expect but demand.

To learn more, please read “Insurance at the Intersection: Reinventing the Model, Repositioning the Brand,” visit our Insurance Practice, or contact us.

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The Future of Insurance: Four Must-Have Capabilities For Success (Part 3 of 3)