This is the first of a multi-part series exploring key technologies and trends that will drive both analog and digital transformation in the insurance industry over the next decade.
The insurance industry will continue to change rapidly over the next decade, furthering trends that have already begun. Well documented are the drastic industry changes accelerated by the COVID-19 crisis, and firms that intend to become or remain market leaders must be prepared to adapt and innovate. Both incumbents and new entrants will need to not only improve on their existing business models but also take into account of increasing innovation in the insurtech space, which saw nearly 250 private funding rounds and IPOs of $33 billion in market capitalization in 2020 alone. Given the increasing pressures on margins, insurers will need to contend with these changes while also remaining operationally disciplined and focused on efficiency.
Based on our experience working with major carriers, brokers, reinsurers, and digital service providers, as well as through market research and interviews with industry experts, we have pared down the changes to the insurance industry to seven key trends companies must consider for sustained excellence and continued margin expansion in an increasingly digital market.
New technologies, from enhanced data capture, particularly in the personal insurance space, to risk analytics and machine learning to digital enablement and automation are expected to fundamentally change how insurance is distributed, how risk is assessed, how products are developed, and how customers interact with insurers for servicing. As each of these technologies matures within the insurance space, existing functions will be automated or enhanced with AI and analytics, with many middle and back-office functions seeing as much as 50 percent of their volume decrease and front office functions (such as underwriting, distribution, and actuarial roles) becoming increasingly specialized. Key roles and capabilities within the industry will shift as technology becomes embedded in core functions, and emerging technologies will be intertwined with the work of human employees to increase efficiency and reduce the time it takes to complete operations.
However, alongside this redefinition of roles comes an accompanying talent crisis for the industry. More than 400,000 employees will retire from the insurance industry in the next five years. Noting that insurance has attracted fewer individuals in the millennial generation, this attrition alone is cause for concern. Firms will need to shift their approach to recruiting and retaining talent as well as investing in technology to bridge the gaps. However, insurers should also view this as an opportunity to further embed deeperrelianceon new technologies and a more malleable mindset within the culture of their organization. Firms that seize on this shift in mindset by employing a robust talent acquisition program will yield benefits far into the future. Insurance – particularly in the complex commercial risk space – is still a relationship business that requires human intervention. Firms that can effectively segment risks into those that can be more accurately assessed via algorithms, versus those that require human intervention, will be winners in the long run on risk selection and operational efficiency.
The workplace itself is changing, too. While Covid-19 has forced a shift in remote work and flexible schedules with increasing expectations on workplace agility, insurance companies generally lag behind other financial services institutions in workplace agility. However, looking at flexibility as a measurable asset has highlighted paths to increased efficiency and agility: There is a 20 to 30 percent increase in throughput and efficiency when effectively deploying a flexible work environment, and the acceleration of process automation will further help improve margins, reduce costs, and serve clients more efficiently. Firms that utilize agile and cross-functional teams are more effective and realize better results than those with siloed alignment.
The industry is already facing significant disruption, as small to mid-sized firms begin offering more customization and simplified, user-friendly solutions. It is imperative that legacy firms shift from their traditional mindset in order to remain competitive. Firms that can frame the shift in customer expectations as an opportunity and build their organizations and capabilities (either organically or through acquisition) around what customers want will be tomorrow’s success stories.
As more consumer-facing financial services firms offer multi-channel customer engagement paired with a digitally literate salesforce, insurance customers have begun to demand a similarly compelling experience. The market is already rewarding insurtechs, such as
These new product offerings will require changes in capabilities, skills, and behaviors, and even more, a shift in organizational structure itself. The size of the global outsourcing market has grown rapidly over the past three years, from $24.6 billion in 2017 to a projected $220 billion by the end of 2020. Insurers, too, will move toward more partnerships and outsourcing of skills. Successful firms will focus on expanding and improving upon core capabilities such as risk assessment and effective capital management and look to partners for non-core and supporting capabilities. As digital enablement of capabilities increases, the breadth of the supporting functions that can be serviced by partners will also increase, meaning the successful carrier or broker of the future is one that not only manages its own front office well but also has an effective organization spanning multiple partners.
In the face of these challenges, insurers are adapting their business strategies to attract, service, and retain customers in new and innovative ways. Technology and digital enablement will continue to impact the internal processes and people required to run a leading carrier, as well as customer interaction models and experience. Increasingly, firms will focus on their front office differentiation and value to customers while employing partner networks for non-core activities, ultimately forming their strategy for acting in and reacting to the changing market. In this swiftly changing world, the most effective organizations will be quick to adapt, communicate actively, and coordinate consistently across different teams, geographies, and business units.
By way of introduction to this series of articles, these key factors will predicate the meta-transformation the industry must undergo, and on which insurance companies must focus over the next decade: AI, analytics, automation, and digital enablement; the emerging talent crisis; multi-channel customer engagement; more and less measurable risk; product and service portfolios; partner networks and external knowledge sourcing; and operating model changes. Each of these area will be explored in further depth in future pieces. The combination of these trends is helping insurers drive continued productivity – in both front office distribution and underwriting and in the middle and back office – and will be key to maintaining profitability and competitiveness moving forward.
The next article will address AI integration and digital enablement, and how technology will drive future growth across the value chain.
