Insurance in the Digital Age: Protect, Save, and Invest Differently!
As part of “Business Months,” an initiative by the digital transformation consulting firm Maltem, I gave a presentation on what insurance is and the current and future challenges we face in the digital age we are currently experiencing.
I shared my knowledge of the insurance industry, my beliefs, and my perspectives on this market, as well as the challenges its players face and are likely to face in the future.
What are the current issues and future challenges facing this sector in the age of digital transformation?
I am a business analyst and PMO consultant at Maltem Consulting Luxembourg, primarily in the insurance sector but also in the banking sector for the past few years.
My areas of expertise and focus are:
- Organizational consulting: Operational excellence, business process optimization, change management, and project management.
- Information Systems Consulting: Digital Transformation, IT Projects, Agility, Automation, and Optimization of Operational Application Processes.
I am passionate about insurance and the financial sector in general, as well as new technologies and the impact they have and will continue to have in the future. As part of the digital transformation consulting group Maltem, I know that I am actively contributing to this digital transformation.
First, let’s review what insurance is
Insurance allows us to protect ourselves against the financial risks of an event that, if it occurs, could cause damage or loss.
Financial risk arises from the quantification of damage or loss, which may be caused by a third party, oneself, or some other factor.
Insurance is useful in both our personal and professional lives.
Insurance is defined in more technical terms as “a service that provides a benefit upon the occurrence of an uncertain and random event, often referred to as a risk. The benefit, which is typically financial, may be provided to an individual, an organization, or a business in exchange for the payment of a premium.”
The insurance contract sets forth the essential rights and obligations of each party. It establishes the terms under which the service will be provided. It generally includes:
- The premium that the policyholder agrees to pay;
- The benefit that the insurer will provide;
- The uncertain event (the risk);
- The insurable interest (expressed negatively): the insured or the beneficiary must have no interest in the occurrence of the risk (in life insurance, the death of the insured is certain, but the insurable interest is that it does not occur during the term of the policy).
There are two main categories of insurance: those that cover risks related to individuals and those that cover risks related to property.
It is also possible to purchase so-called “multi-cover” policies that cover several types of risks.
Personal insurance: insurance known as “life insurance”
The purpose of personal insurance is to cover risks related to individuals, such as bodily injury, illness, death, or disability.
The following categories are distinguished:
- Insurance: loan protection, daily benefits, education annuity…
- Health – Basic coverage: divided into two distinct categories: basic coverage (Social Security) and supplemental coverage (mutual insurance, private insurers, etc.).
- Savings: Pension savings, Branch 21 life insurance (with guaranteed rates), Universal Life, Branch 23 life insurance (linked to investment funds), Branch 26 life insurance (short- to medium-term savings), group insurance, and dedicated funds.
Life insurance can be purchased either individually or as part of a group plan. Some policies allow you to build up and receive savings in the form of a lump sum or an annuity. This is particularly true of life insurance.
Property and casualty insurance (P&C)
Property and casualty insurance provides compensation in the event of a loss.
It includes both liability coverage (general liability, family liability, or professional liability) and property coverage (property damage, and protection of personal property or real estate).
Property insurance is divided into minor risks (broken glass, water damage, residential fire, etc.) and major risks (construction sites, commercial buildings, factories, regional natural disasters), thereby covering the resulting damage and losses.
There are also concepts of co-insurance and reinsurance, but these will not be discussed here. In short, co-insurance allows the risks associated with a policy to be shared with other insurers; in reinsurance, the insurer of a risk transfers all or part of that risk to a reinsurer, who may in turn transfer part of it to another reinsurer.
An insurance company is a business that designs and markets insurance products and manages policies from the time they are purchased until they are “settled” or canceled.
These products can be sold through several distribution channels:
- Brokerage: Non-exclusive insurance networks
- Traditional brokerage: independent brokers who sell products from multiple insurance companies
- Mega-brokers: marketing of contracts by major international brokerage firms
- Insurance finance: brokers or agents tied to the exclusive sale of an insurer’s products.
- Exclusive insurance networks without banking services
- Exclusive insurance agents who sell products from a single company (typically one company for a specific type of insurance)
- Insurance agents affiliated with an insurance company
- Bancassurance: exclusive insurance networks with banking operations
- Insurance products sold through bank branches.
- Direct: no middleman
- Direct sales (business-to-business)
- Direct marketing (business-to-consumer)
- E-commerce without intermediaries: online sales and subscriptions
- Other live streams
- Interest groups: retail stores, organizations, sports clubs, etc.
- Captive insurers: a subsidiary of a commercial company (holding company) that acts as an insurer for the risks incurred by the parent company or the group.
The distribution of certain products is the hallmark of specific distribution channels: in Europe, non-life insurance (property and casualty) is primarily sold through agents and brokers, accounting for an average of 69% according to data from Assuralia.
For life insurance, distribution is split between bancassurance and agents and brokers, while group insurance products are most often sold directly.
The "new" trends in distribution are shifting toward websites or apps that provide product information. Customers can either contact the insurance company to purchase a policy or, if possible, purchase it directly through the digital platform.
The industry's challenge: digital transformation
The digital age has revolutionized every type of market since its emergence in the year 2000; for two decades now, virtually every sector has been swept up in what is known as “digital transformation”—a term borrowed from English but which, in proper French, is referred to as “transformation numérique.”
Many sectors have made tremendous strides and are leading the way in digital transformation, including biotech, healthtech, scientific research, the pharmaceutical industry, the automotive industry, telecommunications, and many others.
The banking and insurance sectors are still lagging behind somewhat, but are doing their best to catch up and keep pace with the times.
Digital Transformation in Insurance: What’s the Point?
First, following the advent of the internet, the technological revolution brought about by Web 2.0 marked a break with the world as we knew it, thanks to the emergence of an ever-increasing number of technologies that are transforming everyone’s daily lives—from telecommunications devices (smartphones, tablets, laptops) that are increasingly powerful and accessible to many, connectivity and access to the internet, the ability to transmit, store, and access data, as well as the traces left by this data on the web (cookies, browsing history, bank details, social media, etc.).
The insurance industry is benefiting all the more from this trend, as the wealth and relevance of the available data, combined with the tools to analyze it, enable the industry to make the most of it.
Large-scale innovation: the players who can set themselves apart through primarily digital innovation at the right time are the ones who capture the largest market shares. Time-to-market is becoming a key concept in digital innovation; the time between an idea and its transformation into a market-ready product must be reduced. To achieve this, it is best to be as agile as possible; software development is a prime example of this.
The more pronounced the break with the past, and the harder it is to return to the way things were before, the more successful the disruptive innovation is.
Hacking, startups, and tech giants (GAFAM) form the ecosystem driving this disruption, along with universities, research labs, regulations, tax policies, user-friendly innovation, and corporate and risk culture.
The insurance industry has been reluctant to embrace this change, but has finally taken a tentative step in that direction. This is partly because the change is inevitable, and partly because it represents a major shift in people’s habits while also offering immense opportunities.
Insurers are gradually embracing this "HYPE" innovation trend through communication channels, emails, and websites, but also by leveraging existing innovations to refine their products or their relationships with affiliates (e.g., connected devices, sensors, etc.).
We are in the age of data; the sheer volume and richness of available data are a godsend for insurers, as this data helps shed light on information about policyholders, employees, and market players that is not readily available or difficult to obtain at the right time.
Real-time data enables insurers to tailor their market strategies to account for changes in the market or in the behavior of market participants.
Big data—the combination of data and technology—forms the foundation of the strategies insurers can use to make sense of data, which is increasingly available through mobile devices and connected devices.
Data has thus become a genuine “asset” capable of creating value for anyone who can successfully organize and leverage it. BI is an integral part of the strategy needed to organize, analyze, and make the collected data accessible—and thus put it to work.
The goal, then, is not simply to provide insurers with vast amounts of data, but to organize that data and make it available at the right time to anyone in the industry who can use it to create value.
Data can therefore be valuable for marketing, insurance pricing, communications, product management, and customer service.
The digital age has brought with it new habits and practices regarding how we consume and produce, and companies are creating new models to address these changes.
The new behaviors influencing the insurance product offering are primarily:
- The sharing economy: carpooling, shared housing, group buying, the shift from ownership to usage (Airbnb, car-sharing), etc.
- Digitization: the use of digital, paperless documents, for example
- Personalized and instant service/product
New business models have also emerged with the digital revolution, most notably e-commerce—which is a huge success worldwide—as well as digital intermediation, which allows web platforms to connect users and serve as comparison tools. We should also note the growing influence of search engines. We must not overlook the strong influence of social media, which, through the exchange and sharing of content, can promote an insurance industry player (through recommendations, user reviews, satisfaction ratings, etc.).
Digital technology has not only brought about positive changes and innovation; it has also given rise to new risks. Cybercrime emerged alongside digital technology and continues to grow as the digital age expands. Among the most well-known cyber risks are hacking, phishing, viruses, and spam.
These new risks for policyholders and industry stakeholders have given rise to new professions, such as IT security managers, antivirus software developers, and all roles and projects related to data protection, etc.
It’s worth noting that “new risks” implies “insurance”—so why not have insurance products designed to protect against cyber risks or compensate for the resulting damages? Some such products already exist for businesses!
The digital age has had a significant impact on the business world and certainly on the insurance sector. On the one hand, we have shifted from a product-centric model—designed to address one or more specific issues—to a customer-centric model, encompassing not only the product and related services but also marketing and management. The customer is now the center of attention and intends to make the most of it.
New strategies and initiatives are no longer merely structural and organizational in nature for the company; they are end-customer-focused and aim to meet the needs of new types of policyholders and the associated ecosystem.
There is clearly a shift from the insured of the past—a fragmented consumer who was misinformed about their insurance policies, dissatisfied but loyal to their insurer or broker—who was more akin to a user or consumer of insurance products than to a client.
In the past, insurance was something you bought; now, it’s something that’s sold. Today’s insurance customers are better informed or able to find information instantly and in a structured way. They are also less loyal, as regulations and competition allow them to switch insurers whenever they wish. These customers are much less dependent on their insurer or broker; they are also better protected and better informed, particularly through consumer associations, policyholder advocacy groups, and insurance comparison websites.
This new customer is demanding because they want a specific product tailored to their unique situation; they want it as quickly as possible and without having to go to much trouble.
Insurance companies can no longer design and market products as they see fit. They must listen to and observe policyholders, analyze their situations, behaviors, and needs, and use that information to develop models and products that address what policyholders are willing to pay for.
We must therefore make life easier for consumers by streamlining processes, moving to digital wherever possible, facilitating the digitization of sales and post-sales processes (transactions related to existing contracts), and offering omnichannel distribution and marketing channels (brokerage firms, websites, e-commerce, apps, social media, events), with the goal of achieving operational excellence and a customer experience optimized to the fullest extent possible.
The industry must also contend with new entrants, including insurtech companies and tech-driven insurers (GAFAM). It is essential to embrace change and foster a culture of partnership; while traditional insurers have a long history in the market, they lack innovation, whereas insurtech companies and other digital insurers bring innovative ideas to the table but lack experience.
Some insurers are already forming partnerships with digital players in the insurance sector, such as innovative software providers (CRM or ERP), insurtech companies, and IT service firms with experts in technology or in supporting and managing digital projects.
Others have instead focused on creating in-house innovation labs or even funding startups.
Digital projects come in many forms, depending on the challenge faced by the insurer or broker initiating them:
- Launch of new products or redesign of existing products
- Overhaul of business application systems (CRM or ERP): Moving toward the Cloud and Platforms
- Improving the customer experience: Multichannel vs. Omnichannel (website redesign, back-office systems, chatbots, customer welcome avatars)
- Digitization and Archiving
- Business Process Management
- Optimization of support services (HR, IT, Marketing, etc.)
- RPA, or robotic process automation, is used to automate processes that do not add value but cannot be eliminated because they are necessary in the production cycle. The robot does not replace humans; rather, it takes over tedious and repetitive tasks, allowing humans to focus on value-added tasks.
- Regulatory initiatives: GDPR, PRIIPs, Twin Peaks, DDA, MiFID II, Solvency II, IFRS 17
- Blockchain
- Business Intelligence and Data Mining
- etc.
In conclusion, the insurance industry has been shaken by the wave of digital innovation and has been slow to respond.
Today, it is actively engaged in shaping the evolution of the digital world, playing a leading role not only through the funding of startups and the transformation of insurers and brokers themselves, but also through partnerships with new competitors such as Insurtech companies.
Robotics, artificial intelligence, and blockchain, when combined, could, among other things, revolutionize life insurance companies by using algorithms that may be more or less autonomous, drawing on data from policyholders and society at large to refine products, pricing, and the management of risks to be covered.
Savings and investment insurers would also benefit from this type of development by leveraging these innovations to adjust their investment, portfolio, and asset management strategies—but above all, to optimize risk modeling, the cornerstone of their performance.
Tomorrow, the market will face the challenge of incorporating concepts that are still relatively unfamiliar to the market—such as blockchain and artificial intelligence—to enhance the customer experience and design and market new, cutting-edge products.
The digital transformation consulting firm Maltem is helping to invigorate and strengthen this ecosystem, which comprises traditional insurers, agents and brokers, insurtech companies, startups, and a new breed of customers.
Thierry Ishimwe
Business Consultant
Insurance | Banking | Financial Services
Maltem Consulting Group.[/vc_column_text][/vc_column][/vc_row]