Industry Insights

Three ways insurance companies can modernize and deliver value-added services

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In a previous blog post, I reflected on my own experience renewing an insurance policy. 

To summarize the blog, the insurance industry is undergoing a customer experience led transformation. Customers are demanding more and the marketplace is changing with new entrants and expanded business models from incumbents. In order to lead and grow, insurance carriers need to embrace two foundational technology enablers:  advanced analytics and cloud technologies.

At the heart of the insurance industry’s transformation are intertwined legacy systems built up over time in a pragmatic fashion as tactical solutions instead of serving a purposeful strategic intent.

Just to recap for a moment, these legacy systems are very good at their original intended purpose: they were designed as product-centric systems managing a high level of computational complexity and doing so at high volumes. The primary attribute of design was the insurance product.

Today’s environment demands customer-centric systems designed to manage individual customers, or households. That is a fundamental design shift that upends the design and architecture philosophy of legacy systems.

Compared to new entrants, most traditional insurance companies are already at a disadvantage with heavy investments (financial and human capital) required for maintaining business-as-usual operations. These 10-20+ year-old legacy systems are costly to operate requiring specially-skilled personnel and the on-going maintenance expenses only increase year to year.

For insurance companies relying on legacy systems, it is challenging to deliver new digital services that customers demand in an integrated and seamless manner.   For example, I worked with a CRM director at a major insurance brand wanting to test out a seasonal holiday promotions. Without having the necessary infrastructure in place, the IT department said it would take nine months to deliver the special offer to customers. By that time, the offer would no longer be relevant or compelling. In the new market dynamic, IT should never restrict business operations – rather IT’s mission is to deliver today’s business strategies and enable future options for the business.

Meanwhile, new insurance companies have an advantage. Their IT infrastructure natively relies on cloud computing with built in security, privacy and transparent regulatory features. These new insurance market entrants can be more nimble from the start.

Some options to help incumbent insurance companies become more agile and advance new business models that are transforming the industry include, but are not limited to:

  1. Cloud Computing. IBM recommends a nimble cloud infrastructure and application stack to create an abstraction layer around legacy environments to effectively “Free the Data.” This ensures to make customer data more readily available to advance digital strategies. Without the ability to access customer data, and follow on insights, new marketing, sales and product development cycles cannot be expedited allowing competitors and disruptors to gain an advantage.  Cloud solutions across the IT ecosystem lay the foundation for pivoting to a more flexible as-a-service subscription based model. Insurers need to redistribute legacy core related CapEx and use it to fund OpEx that can fund new test and learn activities using optimization strategies such as Cloud, to fund growth opportunities.
  2. Spend Less on Business as Usual and Invest More in New Service Offerings. Traditionally, the insurance industry has been sheltered by marketplace stability and regulations providing high barriers to entry. In a low-interest rate environment relying on investment income to underwrite losses makes risk evaluation and management much more important. Insurance companies that are able to harness customer insights and evaluate risk based on data sets previously unavailable or data sets that just could not be processed across internal silos can gain sustainable competitive advantages. “The purpose of [analytical] models is not to fit the data, but to sharpen the questions.” (Mathematician Samuel Karlin)
  3. Deliver Value-Added Services. Beyond the core insurance offering, forward-looking insurance companies are looking at ways to provide ancillary services to offer additional services to their clients. An insurance provider for a home-owners policy might also be able to deliver better rates for home security, moving companies, cable television, and Internet services and so on, thus developing a new fee income stream.

As the digital gap widens, insurance companies are operating at two speeds of business –slow and fast with few in between. Traditional insurance companies are very cautious and deliberate in delivering new services, possibly falling behind their more digitally astute counterparts. Fast-moving organizations are embracing a test and learn culture but maintaining a laser focus on customer experience. These new players regularly engage customers, while validating offers in a shorter period of time with less expense and risk.

Next year, when it comes time to renew my insurance policy, I’m sure there will be even more digital tools available to aid my decision-making process. While it would be great to continue to foster a long-term relationship with my new insurance provider, I am definitely going to evaluate what my insurer has done for me lately!

For more information about IBM’s specific solutions for the insurance industry, click here.

Associate Partner, Insurance CoC, FSS

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