PWC and the Center for the Study of Financial Innovation paint a challenging picture for insurers in “Insurance Banana Skins 2017.” The study describes an industry requiring new technology fast at the same time as it is experiencing both shifting customer expectations and increasing pressure to reduce costs. The ability of many insurers to respond to these changes is also hampered by slow and unwieldy legacy systems. Meanwhile, new entrants -- unfettered by the constraints of existing market participants -- find themselves having “free rein to disrupt the most attractive parts of the insurance value chain.” The challenge of keeping pace has propelled change management to top of the list of industry business risks this year. Yet, to be fair, disruption does create opportunities for incumbents to boost innovation and differentiation.
The authors suggest that dealing with these challenges and opportunities demands clarity about where the insurers can add most value, and ruthlessness in targeting investment to these priorities. This is what Geoffrey Moore calls in Zone to Win “the crisis of prioritization.” At the same time, low-performing and inefficient operations that don’t add value need to be eliminated or overhauled. And while technology is the primary focus of investment, the authors say the right talent is important to fostering the agility, innovation and the customer insight needed to compete.
At the top of composite risks are three things: 1) change management, 2) cyber risk, and 3) technology. All interestingly involve technology choices. Rapidly evolving markets, rising customer expectations, and new distribution channels today threaten traditional insurance business models. The authors claim that incumbents are often held back by legacy systems and traditional approaches as they struggle to innovate in an unfamiliar and competitive environment. The industry is described by the authors as: “glacially slow in its response to change,” “too comfortable,” “inward looking, bureaucratic and complacent” and “reactive.” In the words of one insurer, “the principal risk that the industry faces is irrelevance.”
Cybercrime is seen as an exceedingly urgent threat. The authors say respondents to their survey warn that major attacks on insurers are inevitable, and many added that the impact could be catastrophic.
This risk is seen as increasing. “A more interconnected world means there is more exposure,” says one insurer. In fact, an ever-growing volume of insurers’ business is coming from digital channels. Dean Thompson, Vice President of Marketing and Sales at HCMS Group, said, “The old adage of ‘it’s not if, it's when’ applies here. Due to PHI for protected health information and financial information, the insurance industry has always been fertile ground for hackers and international cyber groups.” Damage could be caused in a wide number of ways for insurers. The greatest concerns say the authors are theft or ransom of sensitive customer data (such as personal, medical, or financial information), the corruption of insurers’ databases, and the theft of intellectual property.
There is much uncertainty about if and how insurers can come up with an economically viable business model. A respondent to the authors said, “how do we respond as an industry to provide solutions to this risk to our customers, particularly when reputational risk may be as great or greater than the financial risk we traditionally insure?”
While the risk that the insurance industry fails to keep up with technological changes in the wider world is a pervasive concern, modernization of internal business processes and technology is a very pressing concern, too. A much-repeated concern is that incumbents in every sector of the industry are hamstrung by legacy systems “designed decades earlier.” The finance director at a major insurer said to the authors that “legacy platforms are prevalent in most life insurance companies, and run at high cost and often with lack of proper support arrangements. Life insurance is way behind most industries in digitizing its offerings. It's hard for many to be able to interact with customers using anything other than telephone or letter, and this needs to change fast.”
Respondents says that using technology to improve internal processes will be key to minimizing insurers’ administration costs and to achieving their long-term survival. However, the cost of migrating antiquated and fragmented in-house policies into a modern system was described by one insurer as “staggering… and so most insurers do not. This firm continues to use old admin systems that in some cases are over thirty years old.”
The use of outdated technologies is also seen to have given insurers a stale and unfriendly image. One insurance executive said, “Part of the awkward way in which they engage with their emerging customer base is because they continue to use legacy technologies that do not engage effectively with the changing trends”. Meanwhile, industry disruptors pose a threat to incumbents because they are typically much less inhibited. According to the authors, “new companies are created with lean process, low costs and high tech systems, and they can offer different services thanks to these advantages.”
Legacy systems cannot as easily take advantage of the explosion in big data. New start-ups with no legacy system can use data to derive competitive advantage against incumbents.
So, the most critical thing these days is not interest rates or other traditional business items. Instead, it comes down to fixing the technology stack. Insurers need to figure out how to lead the next wave of disruption and get closer to their customers. As well they must protect their assets by showing that they do not create business or personal risk for their customers. To learn more about responding to these types issues take a look at a more detailed discussion on this topic that I created.