Introduction

The insurance industry is at a crossroads. New regulatory compliance pressures, increased customer demands and a rapidly retiring workforce have all taken their toll.  However, while insurers shift their focus to these very real challenges, a greater threat looms on the horizon.

Disruptive innovators, both from within and outside the space, are positioning to make their collective moves.

Armed with agile business models and virtual back offices, these disrupters are poised to swoop in and capture market share before established insurers can effectively respond.

Think about where the retail industry was six or seven years ago.  Consider how PayPal and digital wallet options are eroding traditional payment methods.  The catalysts for these changes were innovators who recognized an untapped opportunity, and, ultimately, redefined the industry through non-traditional operating models.

Today’s insurance industry is encountering the same type of disruption.

It’s no secret that non-traditional companies are targeting the insurance industry.  Germany’s Friendsurance introduced an online, person-to-person insurance model.  Startups like U.S. health insurer Oscar or telematics-driven U.K. auto insurer, Insure the Box, are marketing direct to the consumers they serve.  Even Google is getting in the game, applying it’s search engine savvy to automobile insurance, and combining analytics with real-time home and health monitoring to create new models for risk management.

Although no one can predict the future, this much is clear: the insurance industry is fundamentally changing.  Insurers that use these emerging challenges as opportunities to redefine their business models can improve profitability, efficiency and gain competitive advantage.  Those that revert to the status quo put their companies, and their futures, at risk.

This paper explores the industry’s rapidly evolving business model, the enablers, and what companies can do to prepare for the coming change today.

Evolving Technology, Fragmented Models

In the past, most insurers operated in similar ways.  Growth meant selling more policies; process efficiency meant capital investments in legacy back office systems.  As these systems aged and profits stagnated, companies turned to business process outsourcing (BPO) as a means of labor arbitrage, transitioning more transactional tasks from in-house personnel to an outside environment.  The result lower costs, and in sole cases, higher capacity in talent-strapped jobs.

Fast forward to today.  The ubiquitous cloud has ushered in the “as a Service” era, in which companies can acquire software, infrastructure as well as business processes on demand.  Business Process as a Service (BPaaS) decreases costs by automating labor-intensive processes, but does so in a more flexible cloud-based, on-demand model.  By integrating operations management, analytics and technology, it’s the bridge to move organizations from a more traditional back office to virtual operations.

Although companies now have access to more transformative technology and service options, in many cases, these tools are applied in a vacuum, solving one specific problem or need.  Instead of taking a holistic approach, the operational model is often fragmented; a mash-up of enhancements and technologies, instead of a cohesive, end-to-end process.  In other cases, the model is incomplete, reactive or limited in scope.  Instead of fully utilizing legacy enhancements, inserting BPO for non-core functions, and leveraging BPaaS options, many companies are solving issues pieces and parts, without a roadmap to the future state.  So, they see improvement, but don’t realize the maximum number value of their efforts.

To compound the challenge, many companies are spending time and resources on client-facing applications, at the expense of their back office.  They’re setting up websites, vehicles for client self-fulfillment, and providing the all-important mobile access.  Although insurers do need an omni-channel presence to meet customer demand in the digital age, if multiple customer engagement channels are supported by an inefficient, cumbersome back end, companies can’t achieve the desired results.  Its like a sports car that runs on a golf cart engine: it may look great, but it’s just not going to get you where you want to go.

To move forward, the insurance industry has to consider a different approach; to more effectively use BPO, BPaaS and emerging technology to drive the entire business, not just a specific part of it.

The Weapons of Mass Disruption

For years, the insurance industry was insulated from the level of outside competition that’s happening today.  The paperwork and complexity of risk management was beyond the scope of most startups.  Although the digital transformation and the availability of accessible data analytics tools are not entirely new phenomena, the industry interlopers are simply using these enablers better than most established companies in the space.  For example, while the majority of the new entrants function in a completely digital environment, many traditional insurers are still wrestling with paper, and its inherent inefficiencies, on some level.

A recent industry survey conducted by Bain & Company, detailed in its Global Insurance Benchmarking Report 2015, polled executives from 70 insurance companies worldwide on all aspects of their digital profile.  Results showed that even the leaders were far from being truly digital companies. on average, the property and casualty carriers had a digital index score of just 48 out of 100, and life carriers had a score of 45.

Although there was digitization of some client-facing applications, it was the back office that lagged behind.  Among the benchmark participants in the Bain survey, only 8 percent to 49 percent fully utilized straight-through processing.  Not surprisingly, most experienced error rates as high as 70 percent to 90 percent for certain paper forms.  This inefficiency is costly, not only in terms of profitability but in customer satisfaction and retention.  Speed and accuracy are now table stakes.  Companies that want to stay in the game have to deliver both.

The proper use of analytics can also have a measurable impact.  With internet connected devices and sensors projected to reach 50 billion by 2020, insurers have an opportunity to exploit this wealth of information for better pricing, more efficient pricing and cost control.  While agile companies can automate the majority of the underwriting process. insurers without the means to turn this data into actionable insights will revert to traditional tactical decision making.  By all estimations, insurers who use real-time big data analytics and forward-looking simulation techniques are expected to gain a significant competitive advantage over those with old-school methodologies.

Fully embracing new tools and technologies to create a more streamlined automated business model offers another benefit to insurers: the ability to attract a younger workforce.  With 25 percent of the industry expected to retire by 2018, leaving an estimated 400,000 open positions by 2020, engaging a currently ambivalent Millennial employee base is not only advantageous, but necessary for survival.

Choose Your Approach

So, what should companies be doing right now?  On the macro level, start determining how your company will manage the inevitable change.  Will you lead or will you follow?  The answer largely depends on your resources, size and company culture.  Some insurers choose to simply wait until the change happens, and then adjust their businesses from there.  Taking this approach, you won’t make a mistake; however, you may be so far behind when the disruption happens that your organization may never catch up.

More innovative insurers are setting up their own in-house incubators; positioning not only to respond to the disruption, but become disrupters themselves.  This approach takes an investment in people and technology, as well as an ongoing, top down commitment to the inevitable trials and errors required to get to the endgame.

Other companies prefer a hybrid approach, tactically building out BPaaS-driven, completely virtual back office on parallel with their legacy IT.  In this scenario, the traditional and virtual enterprises function side-by-side.  After testing and trial, the insurer can implement change at its own discretion, transitioning to a virtual back office at a more evolutionary pace, instead of taking a more risky, Big Bang approach.

The important thing is to make a clear decision on how your company is dealing with change, and develop a long-term strategy.  Outsource non-core functions, integrate BPaaS in point solutions, and move toward the future state, which many believe is the virtual agency.

Rethink Your Business and Operating Model

The most successful companies will look at the industry disruption as an opportunity to strengthen their organizations and their balance sheets.  That takes a combination of creative and strategic thinking, in combination with honest self-assessment.  The time to start this self-reflection is right now.

When you answer the questions, approach them as if you were starting a company from scratch, with no barriers or limitations.  In the perfect world, using tools and technologies available to day, how would you sell and service insurance?

Consider every aspect of the insurance value chain.  Get down to the details.  Look at all the tasks that roll up into policy acquisition, claims, underwriting and servicing.  How much would end-to-end transformation bolster efficiency and your ability to compete?

Typically, business and operating models focus heavily on distribution and underwriting. However, every component of the overall process impacts the customer experience and the company’s ability to compete.  While outdated underwriting processes should be addressed, it’s the combination of underwriting excellence and operational efficiency that will have a greater impact on the company’s acquired ratio.

Then, it’s time for a reality check.  Assess the current state of your company to determine the gap between where you are today, to where you want to be.  If you have the resources, bring in an independent outside consultant to take an objective look at how your operations work today versus your ideal, and identify inefficiencies throughout the policy life cycle.

Identify Areas That Produce the Greatest Incremental Gains from Change

By objectively contrasting your current organization with your ideal business and operating models, you can not only see inefficiencies, but see what those inefficiencies are costing you.  Ultimately, it all comes down to profit.  How can you enhance the way you’re currently operating to reduce costs of acquiring, financing and servicing policies?  Then you can apply new services and technologies in the areas that give you the greatest incremental gains.

For example, if underwriting expense ratios are high, companies could benefit from automating a portion of the risk assessment process, and focus their human capital on the more complex types of policies.  Or, they could consider supplementing a smaller in-house underwriting staff with offshore people on a legacy system, or implement a BPaaS solution that leverages people and software.  The goal is delivering a higher level of quality more rapidly, a a reduced cost.

By applying analytics to the claims process and automating case management, companies can lower loss adjustment ratios, and speed settlement time. So, insurers not only reduce expense, but improve service levels at a critical customer engagement point.

The key is to move away from the one-off, reactive operational fixes, and instead, approach operational transformation from a more holistic perspective.  It’s not just a quest for back office efficiency anymore; it’s an evolution into an operation that can support what could be a dramatically different insurance model in the not-so-distant
future.

A Change for the Better

No question, the world is dramatically changing, fueled by connectivity, a more savvy client base and instant insight from data analytics.  The insurance industry is changing as well, disrupted by innovators that are building new business models and approaching the art of risk assessment, insurance and customer interaction a whole new way.

Although no one knows what the insurance industry’s optimal business model will become, with an engaged management team and the right mix of technology and services, established insurers can not only position for the future, but begin operating more profitably in the process.  It’s the best of both worlds.  They effectively prepare for what’s to come, while gaining the incremental financial returns of running a more efficient enterprise today.

Posted by Derek M. D'Onofrio

Growth Leader | Trusted Adviser | Insurance Industry | Analytics | Business Process Management | Automation | Platforms & Ecosystems