Digital transformation and the legacy of insurance

The insurance industry is mid-transition during an economic slowdown and investment drought. So what does the immediate future look like?

It’s fairly safe to say that, when it comes to digital transformation, the global insurance industry was a touch late to the party.

Incumbents were process and paperwork-heavy. Worse still, customers were conditioned to accept the status quo, which involved waiting weeks for claims to be processed and payments to be made – because that’s just how the system had always been.

Then COVID-19 came along and everything changed.

Newly-founded companies with high levels of tech in their business models fared well. But the insurance industry, the vast majority of which was still traditionally modelled using legacy systems, struggled to adapt.

Three years on, and the space looks very different. But so, too, does today’s global economic climate. And while transitioning to the cloud, adopting new technologies, and launching new products and services for relevance, the whole package comes with a high price tag.

The current state of digital adoption in insurance

Despite the reluctance of the insurance industry to embrace modern business models in the years preceding the pandemic, there have been massive moves within the space to bring to market digital innovations and technologies.

Mariana Henriques, Product Marketing Director, Insurance at FintechOS, explains her view of the industry and its current catch-up conundrum. “The insurance industry has definitely lagged behind others, like banking, when it comes to digital transformation. Though insurers have already taken major steps towards digitising their business models and the way they engage with customers, there’s still much to be done.

“One of the main challenges for insurers has been the complexity of their business models, which adds to the complexities of deploying and using the technologies themselves.”

Henriques points out that, because the insurance industry has been regulated for a considerable amount of time, updating it has been more complicated. “Being a highly regulated industry – with a complex product portfolio and distribution network – means added complexity in the processes and technology stack needed to support digital transformation. It also requires more specialised technology talent, which insurers have historically struggled to attract and retain.

“Technologies like fintech enablement platforms will play a big role in the next couple of years, enabling insurers to accelerate the pace of digital transformation. By helping insurers reduce the complexities of implementing a modern technology platform and empowering a wider range of roles to contribute to digital product innovation, these platforms will help insurers realise the value of the technology investments they’ve made in the past years.”

Manoj Pant, Senior Director and EMEA Insurance Industry Principal at Pegasystems, agrees: “The insurance industry is currently behind some other industries, for example, banking or telecoms, in terms of digital adoption, but it has come a long way. Insurers are now able to see the huge benefits of leveraging digital technologies to deliver a better customer experience, reduce costs and be more agile. In fact, the ongoing challenges of rising inflation, interest rate increases, and skills shortages have put pressure on insurers to accelerate digital transformation.

A fall in investment leaving insurance companies short-funded?

Developing new systems, however, takes resources. Not only that, but the culture within some incumbents has made the digital transformation journey take longer than it should. Both these elements, coupled with a global economic downturn, have had an impact on the speed of progress.

Jason Whyte, an insurance expert at PA Consulting, believes the current economic climate is having an impact on the maturation of the insurtech industry, as well as the transformation of incumbent companies.

We asked him if the recent drop in investment slowed down the digital transformation for insurance companies, to which he said: “The last 12 months have seen a number of economic pressures, some of which, such as soaring inflation and rising interest rates, the industry has not had to deal with for a very long time. The temptation would normally be to defer major change, but there are too many other pressures to stand still. Suppliers are withdrawing support for old technology, regulators have ever-increasing expectations of operational resilience, and other players in the market are innovating. 

“Instead, we expect to see successful insurers take a more hard-nosed approach, streamlining their transformations to focus on getting the fundamentals right while building the flexibility and capability – especially in data – to be able to respond to emerging trends and requirements.”

The insurance industry of the future

Agility, fresh products and services, and lean business practices will be big factors for many transitioning insurers over the next 12-18 months, says Henriques: “One of the biggest challenges insurers will have in the next couple of years is how they will tackle legacy system modernisation to become agile in product and service innovation.”

Insurers, she points out, are having to diversify their product portfolio to increase profitability and are competing with startups that are quick, tech-savvy, and have no legacy holding them back.

“For incumbent insurers, maintaining legacy systems eats away as much as 70-80% of IT budgets, leaving them little room to innovate. It may take an incumbent insurer 12-18 months to launch a new proposition, as changes to these systems are hard and time-consuming.

“In the current macroeconomic climate, a full ‘rip and replace’ strategy for legacy systems may prove too costly and risky, and insurers won’t be able to afford to wait years before seeing the ROI of such projects,” Henriques says.

She also says companies can look at building digital twins – which essentially operate alongside an insurer’s core legacy system – to update its services without compromising on performance.

“This allows insurers to innovate on top of their existing systems at speed, while giving them a way to continuously modernise without disruption to their business. As such, it might be the best strategy to weather the next three years. Instead of thinking of digital transformation as a process that is ‘one and done’, it can be tackled as a form of ‘ongoing digital evolution’, that continuously produces business impact.”

Sara Costantini, Regional Director for the UK and Ireland at CRIF, agrees. She says the next 12-18 months will see major adoptions of new technologies taking place – and a wide manner of strategies will be involved that drive forward the industry’s digitisation.

“Through the adoption of open data, insurers will not only be able to better meet their current customers’ needs, but also identify underserved groups and areas for potential new growth opportunities.

“We also expect to see digital services put at the heart of many insurers’ business strategies, with a keener focus on increasing efficiency, creating new digital products, and speeding up their launch to market.”

Constantini adds: “I’m confident that all of this will come together to create an industry that’s more customer-centric than ever before, putting people and their needs at the heart of products thanks to the greater insight offered by open data initiatives.”

Developments in the insurance industry for 2023/24

  • More intuitive end-to-end customer journeys, making much better use of external data providers
  • Streamlining of the underlying systems and back-office processes, running hand-in-hand with migration to cloud
  • Some initial moves towards Open Finance: greater connectivity, moves towards interoperable digital IDs, innovation in financial ecosystems serving multiple needs.
  • Forrester data shows that most insurance tech executives plan to increase IT spending in 2023, though by a smaller-than-expected amount. This increased investment, however, won’t be homogenous across all tech categories. 
  • With the pressure on profit margins and increased costs, technologies that are able to show immediate ROI in terms of cost reductions or revenue increases will be the most likely candidates for investment. 
  • Insurers will be laser-focused on technologies that will support their business model in 2023, which means we should see massive improvements in customer data, new product innovation, automation, and the adoption of low-code and no-code platforms.
  • Insurance providers will interact with their customers by offering personalised products and services, personalised content, seamless customer journeys, and more timely response to their queries and issues.
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