Digital Disruption of the Insurance Industry

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1 WHITE PAPER Digital Disruption of the Insurance Industry New technologies have the potential to destroy some companies and propel others to new levels of success 1

2 Digital Disruption of the Insurance Industry Eyes on the Horizon: Insurers Prepare for Disruption With modest premium growth predicted for the near term, insurance companies have every reason to keep their costs as low as possible yet Celent estimates that, globally, insurance IT spending will grow to US$184.9 billion in 2016, with continued growth to US$208.1 in 2018 a CAGR of 6.1%.. 1 Why are insurance companies spending more money on IT infrastructure when they could be increasing their profitability instead? These legacy systems can t support the 24/7 service, userfriendly mobile experiences, electronic bill-pay, and seamless and efficient claims processing that today s customers expect. Instead, these siloed systems and disconnected processes frustrate clients and agents, who are trying to keep customers happy, win a larger share of customers business, and bring in new customers. Deep in the DNA of every insurance company is the habit of keeping an eye on the horizon, preparing for coming storms. The digitizing of the industry is well underway and promises to bring fresh waves of disruption. Already, digitization has transformed customer expectations. It s lowering the bar for new players to enter the market and undercutting pricing models of more established businesses that carry bricks-and-mortar overhead. And more change is coming: competitors are launching new products and services, and InsurTech could upend traditional business models. Insurers recognize that in order to turn disruption into transformation, they must invest in technology to digitize processes, meet consumer-centric demands, and manage and understand data. The investment is simply overdue: many insurance entities are running on 40-year old technology, according to a recent TrustMarque report. 2 Disruption brings a huge potential upside for insurers: an opportunity to use new technologies to modernize, innovate, differentiate, and become more competitive. According to Harvard Business Review (HBR), a thoughtful digitization program can deliver up to 65 percent in cost reduction, a 90 percent reduction in turnaround time on key insurance processes, and improve conversion rates by more than 20 percent. 3 Deloitte is equally enthusiastic. In a recent report, it cites opportunities for nimble companies to develop products for such emerging markets as usage-based insurance for vehicles, homes, and business coverages while expanding cyber insurance sales and cyber risk management services.insurers can leverage telematics and IoT technology to make their life products more relevant to buyers with healthy living incentives, investment tips, and dynamic pricing. 4 Carriers will need to constantly innovate and experiment as they adapt to the accelerating evolution of technology and consumer expectations, reinventing their products, systems, and business models accordingly. insurers may not have much time in many cases to transform their operations, policies, and personnel in response to an emerging strategic threat or opportunity. 1 2

3 The HBR article goes on to explain that these benefits come from three types of initiatives: Mining the digital data consumers leave behind on the internet and on driving apps and wearables, which helps carriers target customers and price policies more accurately Boosting efficiency and margins by digitizing existing insurance processes (allowing straight through processing, for example, and rapid product configuration) Increasing digital marketing to better connect with and retain existing customers, as well as to upsell and cross sell to bring in new revenue. 5 To achieve these results carriers must embrace digitization/ omni-channel support, real-time analytics and Big Data, and the Internet of Things. They ve got to ensure security every step of the way. And, they also need cost-effective IT solutions so they can respond rapidly to the market. For all these reasons, they re considering hybrid IT for its cost-effectiveness and flexibility. Celent sees many insurers tackling their problems by investing in technology solutions that improve front end sales, distribution and customer service, and increased back end operational efficiency and expense management. 1 Boost Efficiency with Digitization and Omni-Channel Support Digitization and support of multiple channels drives productivity gains and creates new opportunities to improve sales and service. Efficiency Many insurers are still using processes that require several paper-based steps, which cost more and take longer than digital processing. However, the industry as a whole recognizes the value of straight through processing (STP), in which companies capture data and documents electronically at the start and then use those same electronic files throughout the process, as the policy passes from broker to insurer, insurer to reinsurance broker, then from reinsurance broker to reinsurer. Sales and Service Companies that have launched direct online sales models have found them to be more cost effective than more conventional sales efforts. Even when companies offer a discount for policies that originate online, they can undercut the cost of traditional agent-based sales. But to make online sales possible, insurers need a seamless service model across multiple technologies, including web, mobile, point-of-sale devices, social media, chat, agent portals, and call centers. According to Celent, STP continues to be a significant driver of IT spending, especially for new business. Automated underwriting tools along with electronic applications, electronic signatures, and electronic policy delivery are seeing upticks in adoption in both property/casualty and life, says the report. Concerns over risk and business model changes that kept many carriers on the sidelines are not gone, but the understanding is that STP, when used appropriately, has benefits that more than offset the risks. 6 Once the sale is made, customers expect round-the-clock service and a seamless view across all their policies. Most backend systems don t support a client-centered view; they were designed just to help insurers manage policies. Digitization can support increased levels of service by providing integration of backend systems into a single user-friendly view of customer information. 3

4 Mobile Channels and Multiple Devices With the lines blurring between phones, tablets, and computers, customers and agents require access to insurance policies and applications across their devices. This is particularly important for sales and service: consumers use tablets and computers to research their insurance options and also want to be able to file claims or update policies from whatever device they re using at the moment. Mobile capabilities are convenient for customers and deliver back-end productivity gains, too. The HBR report gives the example of apps that allow people who ve been in an accident to file claims via their phones directly from the scene of the accident, often eliminating the need for an appraiser. 7 Gain Insight with Big Data and Analytics According to Celent, North American insurers are increasingly undertaking Big Data and analytics projects, such as predictive analytics and fraud detection systems. Insurers now have access to a wealth of data from the marketplace and from their own systems, and with analytics tools, this can disrupt the way insurers have worked in the past, changing everything from the segmentation and targeting of sales efforts, to the risk evaluation and pricing of policies, and the way insurers evaluate claims. At the leading edge of digitization, insurers are already using data from their customers interactions to gain insights into providing a better customer experience. Some have also started mining data from consumers social media and online searches to learn about life events job changes, moves, marriage, or babies that might create opportunities to sell new policies to existing policyholders. For existing and new customers, digital data is helping insurers to decide whom to target and how to price a policy more accurately. 8 Analytics capabilities are supporting a shift from products based on actuarial tables to ones that use behavioral models to segment customers' categories, price policies, and manage risks. Insurers can parse real-time data from sensors and telematic streams to analyze behavior and calculate driving scores, so they can better predict risks and therefore enter new markets and offer more price competitive policies without increasing their risk. For example, with usage-based insurance (UBI), insurers no longer price auto policies based on the number of miles a driver logs per year, but instead use continuous driver monitoring and analysis to price coverage based on how safely they drive. Driving sensors can also embed loss prevention incentives, education and early warning support and can provide data that flags fraudulent claims 9. Other examples of using behavior to price policies include reducing life insurance premiums based on lifestyle and health monitors. Sophisticated risk assessments enable insurers to offer policies that are customized to the individual, so they can profitably serve more markets and manage a more complex set of policy sales and liabilities. But before investing in analytics capabilities, firms must establish a strong underlying data structure, with excellent data governance to ensure the quality and accessibility of their data assets. In addition, insurers need the computing power to manipulate the data in real time. Once they ve built a foundation for data capture, storage and processing, firms can focus on creating the analytical abilities software tools and machine learning algorithms that they need to turn those vast amounts of data into useful information. 4

5 Tap in to New Sources of Information with the Internet of Things (IoT) The vast amount of data flowing from the Internet of Things (IoT) is augmenting internet data to create even greater data sets that fuel insurers analytics, support their decision-making, and enable entirely new, behavior-based policy types and even self-healing claims filing. Real-time sensors, for example, offer granular data that can be transformed into highly accurate risk assessments. For example, a few insurers are already using data from fitness monitors to offer favorable rates to customers who exercise regularly 10. Insurers could also gain insight into risks and damage from sensors that measure water levels, detect contents spoilage in cargo transport, and identify building foundation cracks. Soon insurers might be able to offer self-healing claims for example, the first notice of loss could be from a sensor in the car bumper, followed by an auto-generated repair estimate and a digital payout. Drones, robots, and autonomous vehicles could reduce the need for on-site adjusters and investigators, while improving underwriting and pricing accuracy and lowering claims frequency. While data from the IoT has a lot of promise, it also brings significant challenges. In order to analyze the data accurately, securely, and rapidly, companies need a comprehensive IT solution to collect, aggregate, normalize, integrate, store, manipulate, and analyze these huge and ever-growing data sets. But it s not going to be easy to build a global scalable network along with a big data architecture, large amounts of storage, and compute resources. According to IDC, with 21 billion devices gathering and sending data, carriers will need IT partners to manage their portion of the estimated 50 trillion gigabytes that will be produced by IoT in 2020 (IDC Research Firm). Dare to Connect: First, Ensure Excellent Security New levels of connectedness are possible, but while greater connectedness brings new capabilities, it also creates new vulnerabilities. This isn t just a problem due to vulnerabilities of some IOT devices. The challenge is bigger than that: mobile devices and third-party points of access have expanded the overall threat surface. Every point of connectivity to agents, the internet, distribution partners, and the firm s global backbone may be vulnerable. And many firms have several network providers, which makes it harder to manage security and quality of service. In this heavily regulated industry, insurers are rightly concerned about the security of their data and processes. They must protect the customer, credit rating, transactional history, and policy details. Insurers can t afford to be hacked and lose crucial policy, pricing, or private client data. When integrating new technologies with legacy environments, insurers need to safeguard PCI compliance and use certified resources, which can be hard to find. Many companies don t have in-house the highly specialized skills they now need. Transform your Entire Organization with Help from Hybrid IT To leverage the Big Data and machine learning technologies that enable dramatic improvements in risk analysis, fraud detection, client segmentation, and behavior-based product innovation, insurers will need to increase their compute, storage, network, and specialist resources. Most can t afford to build a huge and expensive IT infrastructure inhouse. A hybrid IT infrastructure is a cost-effective option, a model that supports the new capabilities insurers want, while still supporting their existing systems and investments to keep the lights on. Insurers need to make sure that these sometimesfragile older systems continue to run efficiently, to deliver maximum value over the life of the investment and avoid the disruption of a complete cut-over to new systems. A hybrid IT solution should encompass: 5

6 Access to cloud-based resources to support the computeintensive variable loads involved in Big Data analysis A strong underlying data structure, with data governance processes and real-time access to big data sets An agile and secure enterprise network fabric that spans both physical and virtual instances A flexible, scalable IT platform across the organization Both in-house and outsourced staff: the first for managing legacy systems and strategizing; the second for supporting cloud-based applications, storage, and processes, as well as offering specialist expertise in areas such as the IoT, analytics, and security. Profit from Disruption with Help from CenturyLink To take full advantage of the digital disruption that is sweeping through the insurance industry, companies need to align their IT resources to support their transformation into highly automated, data science-driven businesses. This is new territory for many, and insurance companies will benefit from engaging with experienced IT partners to use a hybrid IT approach, combining virtual and physical resources to support the legacy business, run day-to-day operations, and evolve toward a modern data science-driven infrastructure. CenturyLink s broad portfolio of IT services make it easier for insurers to transform their businesses, helping to shift resources toward emerging areas while optimizing cost efficiencies with legacy and day-to-day operations. CenturyLink helps insurers to create their own unique hybrid IT solution with deep expertise across data, networks, infrastructure, and security, including: Deep data science and big data expertise with Cognilytics Day-to-day cost efficiencies with the automation of IT services, government grade cyber-security programs and a broad global network Infrastructure-as-a-Service platform to move seamlessly across co-located, hosted, and cloud environments Enterprise-dedicated professional services group. About CenturyLink Business CenturyLink, Inc. is the third largest telecommunications company in the United States. Headquartered in Monroe, LA, CenturyLink is an S&P 500 company and is included among the Fortune 500 list of America s largest corporations. CenturyLink Business delivers innovative private and public networking and managed services for global businesses on virtual, dedicated and colocation platforms. It is a global leader in data and voice networks, cloud infrastructure and hosted IT solutions for enterprise business customers. Insurance organizations that are flexible, agile and can offer advanced technology to create the kind of business processes that today s clients demand are the ones that pose a threat to the traditional, perhaps even larger insurance organizations. 1 1 Celent, IT Spending in Insurance: a Global Perspective, Insly, 2 Technology Trends for the Insurance Industry in 2017, 3 Harvard Business Review, Insurance Companies Untapped Digital Opportunity, 2014, 4 Deloitte, Insurance Outlook 2017, 5 HBR 6 Celent 7 HBR 8 HBR 9 HBR 10 Celent Global Headquarters Monroe, LA (800) EMEA Headquarters United Kingdom +44 (0) Asia Pacific Headquarters Singapore Canada Headquarters Toronto, ON CenturyLink. All Rights Reserved. The CenturyLink mark, pathways logo and certain CenturyLink product names are the property of CenturyLink. All other marks are the property of their respective owners. Services not available everywhere. Business customers only. CenturyLink may change or cancel services or substitute similar services at its sole discretion without notice digital-disruption-of-insurance-industry-financial-whitepaper-wp170083