Digital transformation is penetrating the insurance industry. Technology is being implemented, investments made and digital agendas set. However, the industry is far from seeing the big picture and seizing all the benefits of digital transformation.
A survey by DXC Technology and IDC on the digital transformation situation in the insurance industry in Northern and Central Europe showed that the European insurance industry is still digitally immature, with only 36 per cent of the respondents having implemented a digital strategy. And fewer than half of those organisations have had a positive outcome, which indicates they are still in the early stages of the digital transformation journey.
Why is this? The industry has been adopting and using technology for decades. However, these IT investments have dealt mostly with optimising risk assessment. Insurers have been focusing on inwards-looking investments to reduce risk and optimise processes and costs for the benefit of the organisation. But, where is the customer-oriented investment?
The insurance industry is changing globally, and European insurers need to start investing in IT that enables them to provide more customised services and products for consumers. To embrace the digital era, insurance companies should start defining digital agendas by asking themselves several key questions: What do we want to achieve as an organisation? How can we achieve this by building a digital strategy? Is it a cost-reduction initiative to improve margins, a way to provide new products and services to increase the top line, or perhaps a combination of both? And how shall we meet the objective? Perhaps there are multi-faceted goals, but they need to be defined.
Here is another key question to consider when creating your digital strategy: Where is the insurance industry going? I see the industry being shaped by three major trends.
I. Digital insurance ecosystems
Insurance companies traditionally owned the entire value chain of services offered to customers – from customer service to product development. Now there’s a new trend: Insurance companies are becoming parts of ecosystems where other companies help them provide services to their customers. This platform strategy is intended to offer a unique range of best-in-class services that strengthen the customer relationship. It also implies that insurers to a large extent will focus on the customer experience and position themselves as service providers.
For example, imagine you are on a skiing holiday and your jacket is stolen. In the traditional scenario, you contact your insurance company, inform it about the incident, create a police report, and eventually the insurer will handle this claim, process it and refund you for the loss. This process takes time, depending on the claim-process efficiency, and you will still need a jacket to continue enjoying the fresh powder on the slopes. However, by using an ecosystems strategy, insurers can provide new services that address the actual problem: no jacket. By partnering with retailers and logistics companies, your insurer can offer to replace your stolen jacket with a new one and ship it quickly to your desired address or to a nearby store for pick-up. As a customer, your actual problem is solved instantly, improving your overall customer experience.
This is a new way of thinking, and it opens endless new opportunities to build stronger customer relationships that can, in turn, create competitive market advantage for insurers.
II. Product innovation
Offering innovative services and products is another path digital insurers could take. Some insurers are becoming product innovators, focusing on leveraging the technology and capabilities to develop sophisticated products customised for individual customers, which in the long run can be sold and made available to other insurers. One such product could be developing the most efficient claim system. Companies are differentiating themselves from competitors by following such a business strategy and can become niche players, expanding the business across the vertical value chains.
III. Lean organisations
A classic strategy for insurers is to continuously become leaner and — by minimising costs and becoming more efficient — provide products and services at the most competitive market price. However, this is not a sound long-term strategy. For commodity products, new pure digital entrants are joining the market and providing services that out-compete classic offerings. Cost-cutting is relevant, but it should be leveraged to invest in new products or services. By pursuing a pure economies-of-scale strategy, insurers risk losing market terrain.
These are some of the steps insurers, especially those in Europe, need to think about. In theory, these are easy and straightforward questions, but solid answers are needed since they will affect the future long-term direction and success of your company.