Insurers today are facing technology challenges on several fronts. The first is the evolution of consumer demands and the need to engage with the IoT, insurance-on-demand and the ‘API economy’, as more consumers of all age groups expect responsive customer service through mobile and digital channels.
The next is the rise of the insurtechs and start-ups that are seeking to disrupt various parts of the traditional insurance value chain, including the smart home and other augmented risk services, from claims processing, pay-as-you go services for motor insurance, to photo recognition, to social proof and crowdsourcing for insurance products.
Then, we see technology realignments with mergers and acquisitions (M&A) active in the industry. Recent examples in the UK are AXA’s acquisition of XL Group and its commercial lines business, Inflexion’s double buy-out and subsequent merger of the brokers Bollington and Wilsons, recent acquisitions of some of the Lloyd’s vehicles. Allianz and LV launched their joint venture in which Allianz will write the commercial lines business for LV, whilst LV moves in the other direction writing the personal lines business for 600,000 Allianz home and motor customers. Both companies commented that even with such a volume of change in gross written premiums, the net result is an improvement in profit, in focus, and higher combined operating ratio (COR) or profitable underwriting, defined as the sum of the net claims, commissions and expenses divided by net earned premium.
M&A is adding to the complexity of technology developments
Dealing with the current challenges, some insurers are choosing to divest non-core lines of business whilst others are looking to redesign products targeting new customer segments and new channels.
With underwriting profits very hard to reach, insurers are under pressure to deliver customer value and profits for shareholders in a world where technology integration in M&A deals has historically been very difficult.
We see a picture where the insurtechs are approaching technology with a clean slate, usually in a narrow focused part of insurance. Meanwhile, traditional insurers are on the whole still challenged by legacy technology with siloed systems, bound by inflexible integrations on a large-scale, inhibiting faster innovation and post-merger integration.
One of the main tasks at LexisNexis Risk Solutions is to help our customers evolve their tech stack to keep pace with current innovation, and integrate with our contributory data platforms and other services in the fastest, most effective way, whilst also building for the future. Insurance technology is facing a multi-layered scenario of operating layers, customer segments and distribution channels.
As far as possible we work with our insurance clients to view such technology upgrades in a holistic way, optimising the overall operating model for the future, and not just as a system upgrade endeavour.
A recent survey of global CIOs in insurance and other sectors from KPMG/Harvey Nash found that companies are planning to invest heavily in adaptive XaaS (anything-as-a-service) models, suited to delivering products at the edge of the Internet of Things and the future smart world. In insurance 23% of CIOs said they’re investing in IaaS (insurance-as-a-service) models in the current year and 38% said this is a focus for the next two to three years.
Digital leaders place higher priority on cloud technology, data platforms and exchanges
Digital market leaders are more likely to have significant investment in mobile solutions as well as artificial intelligence, on-demand marketplace platforms and the Internet of Things (IoT).
Collaboration, data platforms and partnerships are key to navigating the insurance eco-system. Considering the technology barriers for the insurance business, the majority of insurers say that legacy technology creates difficulty sharing data securely with third parties. There are also challenges measuring ROI from third party partnerships. Other technology barriers include incompatibility with the nimble approach used by insurtechs, such as cloud-based systems, and concerns about controls for sharing commercially-sensitive information across a platform.
At a recent meeting hosted by The Digital Insurer, Yoshi Makita, Director Insurtech, Technology and Performance, KPMG Australia said there is a trend for traditional insurers to work more closely with the insurtech sector through a range of business models. And it’s especially true, looking at recent developments in Asia with more direct equity investments going into insurtechs, not just digital incubators and looser types of cooperation.
The insurtechs are helping to enable new capabilities of the incumbents, with an increasing scale and maturity of cross-industry platforms, for example in data analytics and customer reach.
“Despite all the hype, and the discussions we have [at KPMG] with various parties, it goes to show that cloud technologies, cloud migration is real. It is being really considered a key part of the enterprise capabilities across the board,” commented Yoshi Makita.
“Insurance executives are looking at partnerships and collaboration and also creating an ecosystem to accelerate their business growth in the future,” he added.
“I think we’re starting to see some unification of efforts across the globe….Companies are actually looking at industry-wide problems together and how they can solve the problems together as an industry, as a whole. And whether it’s the data or the innovation, or collective industry knowledge, I think insurance companies are becoming more open to leveraging others’ strengths for their own growth.”
More insurers looking to collective industry knowledge and solving problems together
Legacy IT systems are tightly coupled with the data and other infrastructure built on the prior technology, which is usually not open around the world. To a large extent this is preventing the potential connections with external parties or capabilities outside of the typical insurance company. And also the legacy system landscape is very complex, partially due to the history of mergers and acquisitions and issues with aligning the legacy books of business.
All of this is to some extent a function of the time pressures of the past, which shows itself in shadow IT projects, where for example, marketing departments built their own systems that are not really aligned with the core.
Yoshi Makita commented that although the cloud is becoming the preferred model in most insurers, many large organizations are left with the hybrid model of a public and private and on-premise features of the cloud. All of this is a really complex environment as well.
“To remove the roadblocks for ecosystem growth, we have to solve the issue of the legacy systems,” said Yoshi Makita of KPMG.
“And we need to make sure those issues are addressed in the execution, from the strategy point of view….Regarding the operating model and decisions on technology investment, for us, with our insurance clients, it’s important that we first clarify our core strength and what we intend to do with it. Some leading companies are heavily investing in extending their dominant capabilities. And then they further extend those capabilities to competitors or other affiliates or other businesses in the adjacent markets as well, by way of commercializing [their strengths].”
“Bigger companies use economies of scale and their operational expertise as competitive advantages,” he added.
“So I think as an insurer we need to decide, what are the capabilities to invest in? Should I build or buy a partner? Those are the decisions we make on a daily basis. How are we going to change our model to better enable business strategies? I think it’s important to take a strategic lens and think where our core strength is, and what we intend to do with that core strength.”
Legacy systems hold the key to growing the ecosystem
The future data ecosystem for insurance is raising the challenges of data security when dealing with (mostly non-regulated) third parties in the IoT. It’s also raising challenges for data access at scale, for defining ROI in these third party relationships, compared to a world where insurers had a clear linear road-map for their internal technology investments.
The changes are creating more lengthy and complex procurement processes, potentially raising concerns for sharing commercially-sensitive data in an open platform.
Jacob Abboud, CIO, Allianz speaking at The Digital Insurer meeting, commented that it’s mainly the regulatory security and privacy requirements that are driving insurers to turn towards the private cloud. But it takes about 18 months, generally, to move a legacy application to the cloud in a cloud native form. So it’s quite a big undertaking for an insurer to do that.
At the same time, there are some applications that have a data burst load characteristic which are probably best run in a public cloud, rather than a private cloud. Because the cloud is ultimately about time and cost to value, whether you achieve that through a private cloud or a public cloud, is the same eventuality.
“[At Allianz] we have built a hybrid cloud strategy,” said Jacob Abboud. “We’ve leveraged on premise and public cloud capabilities. We tried to move away from vendor lock-in through design and abstraction. And we started to look at the building of native cloud applications….This is about an API first approach, building life cycle API management solutions, looking at full automation and having something that’s going to support the business in the future.”
Changing views of interoperability and ownership of systems
Issues of interoperability and portability of data, the hybrid cloud, all of this is requiring a major shift of talent in data engineering across the insurance organisation.
Global insurers have been looking at the agile approach adopted by the likes of Spotify, Google, Netflix or the Dutch banking group ING, and in the dev ops space that requires different skills and talent. It’s about technology moving away from a slower, solid way of working, towards more a collaborative model of working in smaller teams.
“We have a founding premise that in order to be a digital company, you’ve got to design a global infrastructure for the future to support that,” commented Jacob Abboud of Allianz. “It is about providing high availability, digitally secure, and consolidated global infrastructure that’s supported by a hybrid cloud strategy. This will enable the rapid delivery and fast adoption and re-use of digital assets and customer journeys.”
More and more we see insurers focusing on their core technology with a changing sense of “ownership” which is seeing higher maturity and adoption of cloud services with increased openness of architecture.
It’s a transition which we at LexisNexis Risk Solutions aim to support, with our ability to leverage the source data with economies of scale, security, and our insurance expertise.
It’s a world ultimately being driven by tech-savvy consumers making purchase decisions in a less linear way, the need to make products more openly ready for purchase in the digital eco-system. Consumers today can reach out for insurance services from many places, online, offline and across other related purchases.
To find out more about how we support insurers follow these links for information on our Connected Car Team, the LexisNexis® Telematics Exchange or the LexisNexis Risk Solutions website for US insurance or UK insurance.