Technology at the Heart of Change in Insurance
By Doug French, Michael Hughes, Christopher Raham, Gerry Murtagh, Vikas Sharan, Gary Shia, Katie van Ryn, Yuan Yuan, and Logan Smith | December 05, 2016
With stagnant growth and lingering low interest rates, the life insurance industry faces a challenging future. Low engagement with current customers, limited penetration among currently underserved segments (including the middle market and Millennials) and inefficient processes, compounded by outdated technology infrastructure, are forcing life insurers to re-evaluate how, where, and with whom they do business.
During the summer of 2016, EY’s insurance practice conducted interviews with more than 20 CEOs and executives from leading U.S. life insurance and annuity companies, distributors, reinsurers, and regulators. The results were published in EY’s 2016 Life Insurance and Annuity Executive Survey, which confirm that a growing number of senior industry leaders recognize the need for accelerating change and, in some cases, a more radical transformation of the business model.
New thinking and new capabilities are needed across the entire enterprise, from underwriting and product development, to sales and service, claims and financial/risk management. Innovation is now broadly viewed as imperative, with plans and priorities varying by individual company.
Survey respondents recognized that they are operating in a time of great disruption and spoke openly about the need to embrace innovation and change with a scale and urgency not previously seen in the industry. Technology-driven innovation is high on nearly all the respondents’ lists, so the pursuit of new technologies is on the rise. Companies are establishing non-traditional partnerships and exploring other ways to adopt, develop, and integrate new tools and technologies. To be successful, insurers must navigate major challenges associated with outdated legacy infrastructures and lack of technology-adept resources.
This article addresses the technology-related issues and opportunities raised by survey respondents. Specifically, it covers the need to modernize systems and processes and deploy enabling technology, while also highlighting how technology innovation impacts virtually every area of the insurance business.
Technology-driven innovation in the near and long term
Respondents recognize that chronic underinvestment in technology means the industry must make significant investments in upgrades. There is considerably less consensus, however, on what to do first or where to turn for answers. Respondents described searching for solutions around the world, from the biggest technology players in Silicon Valley, to midsized disruptors in Des Moines, to innovation hubs in Bangalore. Many insurers have taken the initiative to learn everything they can about technology and new data sources, committing senior leaders to do the necessary in-depth research.
Insurers are also evaluating potential investments in companies with useful technology for core insurance operations and distribution processes. In addition, insurers are seeking trusted partners to help them identify emerging technologies and integrate existing tools and data assets. Fintech and insurtech companies present opportunities for partnering or acquisition.
The survey results confirm that technology overhauls are prominent on the agendas of senior leaders. Their advocacy and support are necessary to overcome formidable barriers to innovation, which include inflexible legacy systems, organizational resistance to change, and a severe lack of talent in the new technologies. Insurers need software developers, programmers and user experience architects to create mobile apps and better digital experiences, as well as more data scientists and analytics professionals to conduct sophisticated data mining.
Respondents identified the following near-term technology priorities:
New data sources: One respondent summed up the need for new sources of information: “We must have substitutes for physical medical data.” Fluid collection is one aspect of the underwriting process ripe for change because it’s invasive and time-consuming. Accessing medical databases, credit scores, and other types of data on individuals could ultimately shorten underwriting timelines.
Predictive analytics: Insurance companies have lots of data, but few are able to generate actionable insights via predictive analytics. With a better understanding of the data, insurers can gain new visibility into product performance and customer buying habits. They can uncover hidden growth opportunities, devise new cross-sell strategies and measure distribution efficiency. The goal is to better predict which products will be successful, the optimal price, and how long customers will keep them in force. As one respondent said, “There is no such thing as bad risk; just bad pricing.” It is worth noting that other mature industries in advanced economies with low projected organic growth and competitive pricing have relied on predictive analytics to compete and drive growth.
Wearables: Wearable technology is used by millions of consumers across the country to track their daily activities and overall health. Many in the industry are wondering if wearables can be used for underwriting purposes and to pass on better rates to consumers who lead healthier lives. Some respondents are skeptical. One stated, “Wearables are gimmicky and have no value.” Other executives pointed to more sophisticated applications, such as providing medical-grade vital signs from anywhere, at any time. These types of wearables may ultimately prove more useful for health insurers, but not exclusively.
One survey respondent shared a big idea: “We should find ways for insurers to help people be healthy.” This can be done in a variety of ways, including offering life insurance products that motivate and reward healthy behavior. Such products can be supported by wearable technology to keep track of consumers’ progress, with premium savings and/or policy discounts offered for meeting certain milestones.
Robo-advisors: Robo-advisors use algorithms to provide automated financial advice or suggest products that suit consumers’ goals and risk tolerance. Many consumers today prefer self-service, digital channels and will first turn to the web or their mobile devices to research and shop for insurance. Because they don’t require human interaction, robo-advice models may undercut traditional distribution channels.
Blockchain: Blockchain, or distributed ledger technology, is another highly disruptive, yet potentially useful force in life insurance. The upsides are reduced costs, increased information accuracy and reduced risk, based on blockchain’s ability to streamline transactions, such as monthly closes and execution of payments. Consider how blockchain can help reduce asset management costs for global insurers that spend millions of dollars every year in hedging fees to protect themselves from currency fluctuations. Similarly, blockchain can strengthen fraud-prevention capabilities by validating users and transactions and securely linking vendors in fully auditable ways. Claims management is another potential use case. A distributed ledger can enable the insurer and various third parties to instantly access and update relevant information.
Companies are already starting to experiment with the technology. In fact, one of the largest insurers in the world is currently exploring how to use blockchain in an insurance environment to streamline processes in investment management, business processing, policy administration, customer payments and distribution of proceeds, among other processes.
Machine learning and cognitive systems: New technologies use algorithms and self-learning to assess more data faster, detect anomalies sooner, and provide more precise modeling and rules definition. Faster and improved process automation may produce better assessments of lifestyle risk as part of the underwriting process and liberate senior underwriting associates to focus on anomalies and outliers. This not only enhances the speed of underwriting, it also moves it closer to becoming completely paperless.
Embracing technology modernization and innovation: The industry recognizes the opportunity and need for change, and industry executives have started to shape a strong and ambitious agenda around innovation, from enhancing the customer experience and product sets to embracing technology that will transform operations.
To be successful tomorrow, companies must take the right first steps today. These steps include:
- Begin piloting predictive analytics by combining existing internal data sets with third-party information.
- Develop “buy vs. build” business cases for robo-advice models and other fintech solutions
- Develop algorithms for the underwriting process
- Hire software developers, data scientists and advanced analytics professionals
While some insurers do not have a firm grasp on where to begin, industry leaders know that technology innovation must be at the heart of change, and it must happen faster and more broadly. For a traditionally risk-averse sector, this is no small task, even if survey respondents have made clear that they understand the imperative to drive innovation through technology investments.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.
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