It isn’t easy to review a business or political strategy document without coming across a commitment to invest in digitalisation. The retail industry was among the first to give consumers a taste of the ease of buying things online.
Some online retailers are better than others. Amazon provides shoppers with an online, clearly structured website where products can be viewed transparently, enquiries are answered in a matter of hours, and disputes settled reasonably expeditiously. Other digital service providers are setting new standards in customer communications, thereby raising the expectation of consumers for fast and efficient service.
The financial services industry embraced digitalisation decades ago. Fintech companies realised that the capital required to provide niche services was not as formidable as used to be the case when traditional banks monopolised the industry. Aggressive insuretechs are now shaking the insurance industry, which still lags behind other financial services operators in providing digitalised services.
One needs to understand what is meant by digitalisation, as often this concept is misinterpreted to mean cost-cutting initiatives limited to little more than process automation and restructuring. IT transformation programmes in some financial services businesses were made necessary to overcome the obstacles created by obsolete IT legacy systems. But this is not what digitalisation is about.
The business model of traditional insurance companies continues to be relatively profitable because of restructuring efforts that most insurers have undertaken. But the industry continues to embrace digitalisation with great caution even if senior insurance executives sell their restructuring programmes as the adoption of digitalisation.
The industry’s inertia and reluctance to change the traditional business models run the risk of a steady erosion of business opportunities as savvy insuretechs will, in the medium to long run, cause the kind of disruption that banks faced with the advent of fintech companies. Restructuring programmes will reap benefits thanks to more automation and optimisation of processes but true digitalisation will impact traditional insurers more profoundly.
As in any business transformation strategy, the adoption of digitalisation in the insurance industry can only succeed if employees are willing to accept cultural changes
For digitalisation to succeed, insurance providers need to secure cross-channel customer communication and a seamless customer experience across traditional and modern media. The success of online retailers to meet consumers’ expectations shows how this is the most critical success factor. To achieve this objective, a robust business and IT infrastructure is a prerequisite that enables services to be provided flexibly.
Data analytics will open up new opportunities even if the challenge of maintaining high-quality data within the parameters of data protection regulations must not be underestimated.
The adoption of digitalisation as a strategic option will also necessitate the review of the traditional business models used by many insurance companies. The conventional business model of an insurer covers any damage or loss that occurs and prevents ruin in high-risk costs for policyholders.
A McKinsey report argues that “the Internet of Things (IoT) has entered customers’ everyday lives around the globe and transformed business models across industries. This environment brings opportunities for insurers: to develop new products, open new distribution channels, and extend their role to include prediction, prevention and assistance.”
IoT, for instance, makes tailor-made risk assessment and prevention as well as fraud detection that much easier for insurance companies.
Digitalisation is forcing insurers to rethink their business models. Insurers now need to see themselves as service providers rather than providers of products. To achieve this, they need to build alliances with other service providers and insuretechs. This is what is commonly referred to as building a digital ecosystem.
Insurers can also reap immense benefits if they invest in artificial intelligence. AI can help through automation and the optimisation of the processing of business incidents. This will help insurance claims to be settled more speedily and fraud more easily detected in claims management.
Once again, the big stumbling block that might prevent traditional insurance companies from adopting this ground-breaking technology is the quality of IT infrastructure. Outsourcing data to a data management specialist is not the only challenge confronting insurance companies wanting to revamp their business model. Stricter data protection regulations need to be respected at all times.
As in any business transformation strategy, the adoption of digitalisation in the insurance industry can only succeed if employees are willing to accept cultural changes. Business and IT departments will need to collaborate and be flexible to support employees to manage the disruption that significant operational changes will invariably cause.
Digitalisation presents formidable challenges for the insurance industry. But there is no option for its leaders but to put this transformation change at the top of their agenda.