Alternate Routes

• TBA - Writer
• November 2015
• 

Most insurance executives realize they have to step up their digital investments to meet customers' expectations for anytime-anywhere interactions. Yet many remain unclear about where to start and how to proceed in organizing for digital innovation and redesigning their processes.

Bain & Company's new benchmark survey of 70 property/casualty and life insurers worldwide finds that many lack confidence in their ability to execute the digital transition. Almost half of the companies do not believe they have set up a realistic plan, because they are missing some key elements for the journey, such as a clear vision or compliance and risk processes. Indeed, on average, P/C carriers have a digitalization index score of just 48 out of a possible 100, and life carriers have a score of 45.

There is a practical way forward--actually, four ways. The benchmarking reveals patterns of responses that, when combined with qualitative analysis of current strategies, allows us to identify four major pathways that leading insurers are taking to realize digital progress.

These pathways--advanced analyzer, digital distributor, customer-centric insurer and effective operator--help orient companies on their digital journeys. They define the competitive advantage that companies can obtain, informed by their points of departure, their existing pre-digital business models and their core strengths. While the majority of insurers have chosen one of the four major pathways, 21% of the companies have no clear path and the lowest average digitalization level, putting them at a disadvantage in making the digital transition.

The Advanced Analyzer

At 31%, advanced analyzer is the pathway chosen by the largest group of respondents, which is not surprising given the importance of analytics to the industry as a whole and the hunger to exploit big data. Many insurers have strong analytical capabilities in their actuarial group, focusing on how loss prediction can improve pricing or better detect fraud. But the potential for analytics is much broader, and the methods go beyond classic actuarial analysis. Some high-performing firms deploy advanced customer analytics for risk selection, customer loyalty and claims management.

Progressive Corp., for instance, has benefited from being out front with in-vehicle telematics and from running thousands of tests a year to systematically vary messages, product design, pricing, delivery channels and more.

Much of the data now generated comes from outside the policy administration system, including unstructured data like sensor readouts, user reviews on social networks and videos. Excelling in analytics thus will require the capability to capture data at the various points of interaction with customers, and to glean wisdom from messy data. It also requires an organization that is skilled at and enthusiastic about innovation and experimentation.

The Digital Distributor

This is the pathway chosen by 20% of respondents. Only 8% of new life premiums and 10% of new P/C premiums flow through online sales channels today, though many insurers plan to increase that portion substantially. Companies pursuing a digital distributor model aim to accelerate that shift, with product features and pricing tailored for digital channels as needed. Service levels for digital-only distribution can be comparable to or even better than physical channels, because the company can start with a clean sheet and design simpler processes.

Direct digital distribution works best in regions like the Nordic countries, where consumers already show a strong digital uptake for other services, such as online banking. The primary challenge involves the inherent conflict between an insurer's digital channels and its tied agent or broker organization.

Where the agent network is strong, some insurers have created a separate entity or brand with different pricing, to avoid or mitigate the conflict. Kyobo Life followed that logic when it created Kyobo Lifeplanet through a joint venture with Japan's Lifenet; Lifeplanet offers a no-frills product line through its website. Over time, however, most companies will benefit from a "Digical" model with the same products and prices in all channels, which customers can access whenever convenient.

The Customer-Centric Insurer

Insurers that double down on a customer-centric model, the pathway chosen by 16% of respondents, mobilize their operations around the goal of earning greater loyalty and advocacy among customers. That's because customers who are loyal promoters of their insurers stay longer, buy more, recommend the company to friends and colleagues and usually cost less to serve--with the mix of these forces dependent on the particular market and type of insurance. In the United States, for instance, Bain analysis shows that a promoter's lifetime value is worth nearly seven times that of a customer who is a detractor of the carrier.

Truly customer-centric companies regularly gather feedback from customers to identify patterns and take actions that will improve the customer experience. They put customers' priorities front and center when designing products and services. Adding digital channels also allows insurers to interact more frequently with customers, and Bain's customer surveys have found that more interactions can be an important factor in earning greater loyalty.

That's a departure from most insurers' internally focused stance, which assumes agents are the customers. In a business built around loyalty, the sales force serves end customers, whether they are new or existing. Digital technology does not just support and automate internal processes; rather, it's deployed to accommodate customers' priorities in ways that can actually delight people. Incentives and processes also must align with the goal of providing customers with a superior experience. An insurer could measure its contact center, for example, on "first time right" call resolution rather than on average handle time.

The Effective Operator

Huge opportunities to reduce costs and error rates abound in insurance. Among the benchmark participants, for instance, only 8% to 49% currently employ straight-through processing, depending on the operation, and most experience error rates as high as 70% to 90% for certain paper forms.

The effective operator model, the pathway chosen by 11% of respondents, seeks to create value by reducing operating expenses across all back-office activities, without compromising the customer experience. Digital technologies can even enhance the experience by making things like documentation much simpler. Relevant metrics include a low cycle time for claims, a high proportion of auto-underwritten and auto-adjudicated business, and straight-through processing wherever possible.

Auto-underwriting a health policy, for instance, allows customers to enter personal health data that a digital engine uses to calculate a base payment plus surcharge, producing a quote directly. Humans still need to read and approve the quote, but digital technologies accelerate the process and improve accuracy.

Established insurance companies have hundreds or even thousands of existing IT systems and applications to manage, and coordinating them to simplify processes constitutes a major management challenge. The shift from manual to straight-through processing requires more IT experts and fewer administrative staff, most likely requiring an insurer to hire or train for new skills.

A Guide for Focusing Scarce Resources

None of these pathways is inherently better than others, and they are not mutually exclusive. Customer demand will compel insurers to raise their game over time on all digital dimensions. But by emphasizing one pathway, a company can focus scarce resources on the battles it must win today--and has a better chance of winning--than on trying to do everything at once.

Multinational insurers may want to pursue different pathways in different countries. In Germany, the price-sensitive auto insurance market favors highly effective operators, whereas relatively strict consumer privacy laws make the advanced analytics model less appealing. In Brazil's fragmented insurance market, by contrast, advanced analytics can yield a high return when applied to customer segmentation, pricing and fraud prevention. Some emerging markets such as Indonesia are leapfrogging from paper processes directly to mobile technologies, so a mobile distribution play could make sense there. In the U.K. and Australia, any company lacking decent digital distribution will have a tough time surviving.

Established insurers have well-known brands, extensive tied agent and broker networks, and legacy systems and processes. But the complexity of the digital journey requires a clear roadmap to determine how to sequence the initiatives and how to organize for them. As insurers travel along one of these four pathways, they will have to integrate their physical assets with new digital assets and build a model for future growth, even as they manage the current business for next quarter's results.

Insurers have no option but to make the digital shift quickly, as today's innovation quickly becomes tomorrow's standard practice.

By Florian Mueller, Andrew Schwedel and Harshveer Singh

(Best's Review Contributors: Florian Mueller, Andrew Schwedel and Harshveer Singh are partners in the Global Financial Services practice at Bain & Company. They can be reached at florian.mueller@bain.com.)