In my last blog, I discussed how countless industries have faced digital disruption. This has brought about the birth of new companies that define the digital marketplace, like Amazon and Uber, and the death of businesses that refused to adapt, like traditional travel agents. Given I have family involved in the P&C insurance business, this subject is of great interest to me and I am sure many others.
While insurance has mostly avoided digital disruption so far, this won’t last for long — because consumers are bringing their expectations for digital capabilities to their insurance experience. Therefore, it’s critical that insurers begin planning now for how their business model will need to change to adapt to a digital marketplace.
Why legacy technology is a hindrance
One of the main hindrances to insurers adopting digital transformation is legacy technology that impedes their ability to access and analyze the data that’s critical to creating differentiated client experiences. This legacy technology can include the mainframe computers that run mission-critical workloads for most major insurance companies as well as legacy batch processes.
In short: Insurers’ mainframe infrastructures need to be flexible and responsive to change in order to leverage the data needed to run the analytics and models that they need to stay competitive.
The trifecta of rewards
No one is pretending that there won’t be challenges for insurers when it comes to making a digital transformation. But for insurers that embrace digital transformation, the rewards could be substantial, including the trifecta of:
- Higher customer satisfaction levels—Simplicity, 24/7 access to policy information, and innovative insurance products and services are increasingly being demanded by insurance customers. This will take friction out of all insurance transactions; purchase, renewals, self-administration and claims management.
- Margin expansion — Digitizing existing business operations will remove significant costs across the insurance value chain, increasing customer lifetime value and boosting insurers’ profit margins. There will be continual pressure for insurers to decrease their expense ratio and loss adjustment expense.
- Rapid and sustained growth — Offering more innovative insurance products designed for the digital age will present insurers with long-term growth opportunities that simply don’t exist in an analog world. These products will need to be created to adapt to the new business models that are being created to support digital transformation in key business verticals.
Intermediaries are vanishing
The intermediary-based ecosystems that have been ingrained into many industries are starting to vanish before our very eyes as manufacturers of some products bypass intermediaries to build relationships with end users. One good example of this is Dollar Shave Club, which bypasses major retailers to sell shaving equipment directly to consumers. Another is Tesla, which bypasses auto dealerships to sell directly to car buyers. Tesla now has the highest market capitalization of any auto manufacturer.
Many traditional insurers that do not have any direct to consumer/policyholder relationships could soon find themselves in a similar situation to intermediaries like retailers and auto dealerships. This could open the door even wider digital disruption for these traditional insurers. Insurers need to migrate to an omni-channel distribution model to support the changing and needs of the consumer. This includes a direct model as well as a direct-hybrid or partially direct model.