• Graham Elliott, CEO at Azur


• 10.12.2018 10:30 am
undisclosed

The Turing test famously proposes that if a personcannot reliably distinguish between a machine and a human communicating with them in text, the computer can be said to be genuinely intelligent. The first software programme passed the test in 2014, doing a passable impression of a 13-year-old Ukrainian boy. 

The more important question for insurers, though, has always been whether their customers care. A milestone in this respect was recently passed when a survey of 2,000 people found that – given the choice – most people would prefer to make their claim online than speak to a human. That removes a big barrier to digital disruption in the insurance industry. 

Apocalypse delayed

On the one hand, the demise of the traditional insurance industry at the hands of insurtech start-ups has long been exaggerated. Few substantial insurers have actually yet been “Uber’d” – the fate promised by the editor of technology magazine Wired, two years ago, for those businesses failing to “think like a start-up”.

And that is not because the industry has become strikingly tech-savvy. On the one hand, a massive majority (96%) of traditional insurers in a recent survey for retail financial services associationEfma said they were open to collaborating with insurtech firms; and insurers have been among those contributing to the record number of insurance technology investments in the second quarter of this year. Furthermore, two-thirds (67%) said insurtechs could “redefine” the customer experience. 

On the other hand, with notable exceptions, collaboration remains far from mainstream, and the Efma survey shows a third of insurers still doubtful insurtech has that much to contribute. (Compare that with 92% of insurtech leaders who felt the technology would be transformative).

Most importantly, regardless of side projects and insurtech investments, insurance businesses’ core systems remain largely unreconstructed. Most are still heavily dependent on out-dated, inflexible legacy systems. 

That’s not an accident. The established legacy insurance software vendors have enjoyed a near monopoly when it comes to supplying the major insurance systems. That has brought them tens of millions in revenue, a fat stream of profits and little incentive to change.

These solutions have been tailored and tweaked over the years by the vendors to meet different insurance needs. Where companies need to add headcount, they buy licenses; where they want to change processes, develop new products or reach customers in new ways, they have to call on the vendor to develop new code. Consider this: A typical legacy insurance software house has dozens of versions of its code for different insurers’ needs. Facebook, with 1.9 billion users, has one version.

Even if younger chief technology officers or IT heads in traditional insurance businesses see the potential for new solutions and new ways of working, their ability to deliver these is limited. Changes have to come from the technology vendors, who have every incentive to discourage it. In fact, the reliance on the software houses for coding works against insurers fostering a proper in-house understanding of technology – something they badly need. The result is that insurers are tied to license-based, heavily coded and, frankly, inadequate systems.

A new age

Add to this the fact that traditional software vendors have at least one strong argument to discourage customers from trying something new: moving looks risky. 

Whatever the faults of the existing systems, insurers know what they are. A different solution will always have the potential to bring new, and possibly serious problems. On the surface there is some safety in sticking with traditional solutions. After all, the saying used to be “no one was ever fired for choosing IBM”. However, look at the pain that IBM’s share price has endured over the last 5 years, and you can see that the devil you know may no longer be the best option. 

Of course, it is true that new technology is less appealing where it is not matched with old experience. Insurtechs do need to bring an understanding of not just the technology but also the market. There are, however, options that offer both the benefits of modern technology and deep experience of the insurance market. Moreover, if IBM’s offering were entirely unsuited to the challenges facing the business, choosing them probably would be a sackable offence.

Natural conservatism, combined with the inflexibility of its biggest players’ legacy systems has slowed change in the insurance market. While other industries have seen real digital transformation (retail, music and film, for example), aspects of the insurance sector have changed little since the 1980s.

But, make no mistake, the old way of doing business is dying. And, as in life, a slow death isn’t necessarily better.

We are now entering the fourth age of insurance. In the first age, capital was in charge, with Lloyd’s as its leader. That is where the big margins were. Cheap money from international quantitative easing and new sources of capital for alternative risk transfer changed that, leading to domination by distribution. In this second age, brokers were bolstered by increased commissions, profit shares, pay-to-play deals, data sales, reinsurance structures, and broker-owned MGAs. Clients also benefited as wealth was redistributed from the risk bearers. Disintermediation in the third age built on this, with price comparison sites then squeezing premiums for capital and commissions for brokers alike.

In the fourth age, technology completes the process, putting clients firmly in charge and ushering in an era of Insurance as a Service. We are already seeing instant-access, pay-as-you-go covers for things like travel and motor cover. In the near future we will increasingly see subscription-based insurance covers, as well as integration of smart devices, portable, wearable and in the home. These will identify problems and prompt insurance solutions, seamlessly agreed, arranged and notified through people’s phones. 

If legacy systems cannot provide a decent customer experience for offering Insurance as a Product, how likely is it that it can cope with providing it as a service?

Transformation with the cloud

Much of the “innovation” or technology development for insurers to date has been at the front-end. It simply provided a web portal or app to cover the chaos or creaking behind the scenes. Digital transformation, however, requires tackling existing, core systems to access, analyse and enrich the data in real time for a much better user experience: faster, offering immediate acknowledgments and notifications about claims or applications, for example; and more efficient, so that costs are controlled and scale can be achieved to enable insurers to compete. 

Cloud-based, configurable software has the potential to answer both these needs and is increasingly likely to be the answer for insurers addressing their legacy systems.

Cloud-based means it is inherently accessible, connecting customers and making it easy and cost effective to roll out across organisations. Component-based configuration, rather than coding, meanwhile, means businesses can adopt the functionality they need, make changes rapidly and phase migration of the business over time, one component at a time. 

Indeed, the benefit of identifying the required changes early and beginning to act on them is that the changes can be made in a manageable time frame. The longer insurance businesses delay starting, however, the greater the risk that they will leave it too late.