Making Sense of the Insurance Industry's Resistance to Going Digital

The insurance industry is late to the game. Digital initiatives are now the dominant business paradigm. By today’s standards if you aren’t doing digital transformation, then you are near the bottom of the learning curve. That’s where you can find most insurance companies—and they are steadily falling further behind.

New technology recently entered the market that sped up the pace of digital transformation: from machine learning and sensors, to virtual reality, autonomous cars, big data analytics and digital collaboration tools. These innovations didn’t just change business; they change the nature of risk and liability.

Everyday activities such as driving all the way to complex activities such as supply chain logistics demand a nuanced approach to filing claims, assessing risk and liability, settling disputes, and pricing out policies based on real-time data and analysis. But that hasn’t really happened. Why haven’t insurance companies kept up?

Insurance Lives in the Past

There are a number of ways to explain why insurance companies are still largely operating with traditional policies, business structures, workforce culture, technology, procedures, and distribution models and systems.

According to a survey of 100 insurance companies conducted by Ernst & Young, 79% of insurance companies are “still learning” about digital initiatives; around 57% of insurance companies “have operating models that do not facilitate digital”; and, of the insurance companies surveyed, 89% “do not consider past interactions when recommending products or services to online customers.”

Lastly, approximately 80% of respondents do not see themselves as “digital leaders” and are “trailing the spectrum in customer engagement, analytics and adoption of mobile and social media.”

Insurance companies cite many of the same impediments to digital transformation I’ve heard from C-suite executives at conferences on the topic.

Those run the gamut of ideological obstacles (“people will forever need insurance”) to technological ones (“legacy systems stifle innovation”), in addition to talent, generational, and system lock-in issues. In a few cases, even denial of potential disruption (“insurers are impervious to disruptions because we are so highly regulated”).

The exact causes vary from company to company, and pinpointing them is the first step to devising realistic digital transformation strategies. You can’t solve the problem if you don’t know the problem.

Disruptions in the Insurance Industry

As far as I see, research converges on a few predominant disruptions that directly impact the nature of liability and risk, the ways we assess both, and customer engagement and interaction. (McKinsey does an excellent job of laying them out.)

Products. Self-driving and semiautonomous cars that alter vehicle insurance; smart homes alter home insurance; cyber warfare and drones alter risk; and share economy companies alter both liability and risk in a number of areas.

Marketing. Consumer behavior and preferences changed noticeably in the past few years. There is a growing demand for personalization, transparency, digital communication, and branded engagement. Communications must reflect this change.

Pricing. The vast amount of data and analytics tools make usage- and behavior-based pricing possible, thereby outdating boilerplate insurance policies. Pricing should be highly personalized, informed by big data analysis, sensors, and self-directed user information.

Distribution. The few insurance companies that avail themselves of enhanced computing power, rich consumer data, and telematics are able to rapidly deliver accurate insurance policies and settle claims in minutes.

Service. In a word, Retail. Consumers expect service standards on par with the world’s leading retail companies (see: Amazon).

Claims. Automation, analytics tools, sensors, and smartphones transform the way people report claims and the way insurers settle them. A claimant can submit photos, insurers can send drones, and disputes can be settled in minutes with a high degree of efficacy.

How Can Insurance Get Ahead of the Game?

The short answer is: Get into the passenger’s seat.

What I mean is that many of the disruptions above stem from technological innovation. So team up with technology companies. Become technologically literate. Learn about the new risks. Learn about the tools at your disposal to assess liability and risk.

And don’t just spend all your time learning. Bring talent onboard that can experiment in-house, testing new policies, innovating on self-directed consumer claims, taking risks and trying new methods, new models. Bring all the core digital competencies you can into the fold and place a value on exploration, design, creativity, and innovation.

Also, explore these areas of technology: blockchain, data security, workforce automation, virtual and augmented reality, data visualization, cloud and mobile, and 3D printing and scanning.

Remember, digital transformation is a mindset. It’s equal parts equipment and equal parts perspective. Think about how you can change your philosophy and business structure to improve your consumer’s digital journey. There is a potent phrase that encapsulates this mindset for the insurance industry: “Insurance is a service, not a product.”

The difference between a service provider and a product distributor is considerable. Think about it and live it.

Entrants to Keep Your Eye On

Lemonade is a new insurer on the scene that managed to secure upwards of $13MM in funding from Sequoia Capital and Aleph. National Indemnity, Everest Re, Hiscox, Munich Re, TransRe, and XL Caitlin are among Lemonade’s reinsurers.

Theirs is a peer-to-peer insurance model (P2P) that costs $35/month for home insurance and $5/month for renters insurance. It markets on mobile platforms and provides each customer with a virtual assistant. Lemonade claims it can “sign up new customers in 90 seconds and settle insurance claims in 3 minutes.”

Is Lemonade thus the future of insurance?

In Sum

Insurance companies are extremely vulnerable to disruption because they’ve taken too long to implement digital initiatives up and down the entire value chain. Insurers born in the new, therefore, have a leg up on legacy players and are poised to disrupt the entire industry with ease. Incumbents must heed the call to focus on digital transformation in earnest and team up with digital experts to better understand the nature of liability and risk, and how new tools can improve pricing, claims, distribution, and customer service.

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