In Transformation

Canada’s property and casualty insurance industry, as elsewhere, is at a tipping point. Traditional, more conservative approaches have worked until now, but pressures faced through maturing markets, increased risk and technologically sophisticated customers are creating a need for demand-driven innovation.

To succeed, insurers will have to consider using new technologies to work faster, more efficiently and, above all, smarter.

Technology used to be considered by insurers as a means to an end – a tool to cope with changes in markets and in regulations, although insurers are increasingly using technology to transform their business models – something that is no longer optional to remain competitive.

Moreover, technology is not only providing the opportunity to extend insurance companies’ reach beyond the industry’s traditional boundaries, but it is also allowing new entrants to compete against existing companies in the industry. The rapid growth of fintech is bringing new entrants into the marketplace who may not have the same restrictions as traditional insurers.

MOVING FORWARD

With customer empowerment increasing and expectations rising, today’s status quo, low speed-to-market and product innovation is becoming an issue. Customer loyalty is at an all-time low – it now lies in the best solution with the best price.

Data from several IBM surveys reveals helpful insights into how insurers must act to be ready for these changes. Over the next 10 years, it is believed two technological trends, in particular, will have a high impact on the future of business across industries: the rise of cognitive computing and the increasing potential for decentralization of systems and decision-making.

Decentralized systems

Decentralized systems enable low-level components to utilize local information to achieve global goals without the direction of a central organizing influence. Devices use sensors and actuators to provide the potential for total autonomy, while the security of transactions is enabling the use of electronic ledger technologies such as blockchain.

The devices required for these kinds of decentralized systems are increasingly being used, with an anticipated growth to 25 billion in 2020 and more than 100 billion in 2050, notes the 2014 report from IBM Institute for Business Value (IBV), Device democracy: Saving the future of the Internet of Things.

If systems are decentralized, however, the questions will be where will the centre of control sit, and how fragmented will the networks be? For example, limitations imposed by privacy concerns, regulations or liability could hamper strong device autonomy and drive centralization of control.

When privacy becomes a concern from decentralized systems, there can be accusations of discrimination and critical miscommunication. Accusations of discrimination – or red-lining – could occur if there is a perception that services are either directly or selectively being denied through increasing prices for people based on the racial or ethnic composition of the areas in which they live.

Another possible issue is founded on possible miscommunication resulting from conditional coverage. For example, if some teenaged drivers have conditions under their insurance, or if a thermostat fails and the water heater malfunctions as a result, local brokers may start taking on the role of “cognitive trouble-shooters” for insurers.

Cognitive computing

Cognitive computing refers to next-generation information systems designed to accelerate, enhance and take advantage of human expertise. These systems can use machine learning to understand and perpetually improve decision-making using large amounts of data – both structured and unstructured. Structured data is data currently being used, such as customer insights and buying patterns. Unstructured data – or “dark data” – is where the opportunity lies.

SINTEF reported in 2013 that 90% of the world’s data had been created in the last two years alone. What kind of information lies in the 88% of dark data that could transform how the insurance industry looks in the next decade?

Technologies like cognitive computing and machine learning enable companies to handle unstructured data across wide subject domains, giving them the opportunity to remake business processes and vastly improve decision-making. These technologies could reach maturity by 2025.

A 2016 IBV insurance survey, Insurance 2025: Reducing risk in an uncertain future, found that 79% of polled insurance company leaders believe technology will have a major impact on their organizations, and 71% say they have begun to use cognitive technologies. When combined with artificial intelligence, cognitive systems can enable insurers to assess the risk to a high degree.

LEAVING PAPER BEHIND

In tandem with embracing cognitive technology, leaders in the industry are also moving away from the antiquated, paper-based model of doing business and are starting to digitize the customer experience on mobile platforms. As the insurance market becomes digital, customers are becoming more digitally savvy and are expecting more from their insurers.

The ability to digitize is seen as a key differentiating factor in the Canadian insurance industry’s ability to change its trajectory to being a leader, as opposed to a fast-follower.

Embracing innovation through technology is becoming a “must-do” for industry leaders. To progress in succeeding over the next decade of a demand-driven transformation, insurance companies should consider the following moves:

• Increase flexibility: Taking out expenses and building in flexibility by moving core systems to a hybrid cloud that is available “as-a-service” will enable experimentation and entry into new markets at low costs on secure platforms. As products move to as-a-service models, legacy systems should be turned into components to help sustain cost competitiveness.
• Develop partner ecosystems: Organizations in the insurance industry will need to collaborate in order to have the best data about consumers and their associated risks. The goal is to cultivate partnerships and membership in ecosystems within the insurance industry.
• Improve predictive capabilities: Insurance companies will need to improve their speed of change by bringing together technology, business capability and product investment. They should use analytics, pattern recognition and data to chart progress, as well as understand customer behaviour and risk parameters.
• Embrace innovation: Leading innovators build an organization with a corporate culture and design processes that encourage innovation. Corporate structures can be made more flexible by streamlining internal innovation processes, with centralized funding and investment models.

LOOKING TO THE FUTURE

Embracing innovation will build skill with component technologies of whichever future scenario wins, providing the capabilities necessary to prosper in changing conditions. And building agile development and business service composition skills will keep an organization nimble enough to capitalize on market changes.

As technology evolves, C-suite executives, such as those in the insurance industry, will need to look to the future to maintain their organization’s competitive advantage. By using that approach, they can continue to transform their businesses even as their industry is restructuring all around them.

-Frank Attaie, Associate Vice President, Financial Services Sector, IBM Canada