Carts & Horses: focusing on the business of insurance
Insurance technology spending is high. In April 2015, Celent estimated that the global insurance technology spend would top US $181.6 billion by the end of 2016. This spending would include a combination of standard modernization, keeping legacy systems alive and well, supporting infrastructure projects, and (increasingly) building digital and data frameworks.
Core insurance platforms are clearly a necessity, and without them, insurance operations of any size simply could not function. For that reason, many insurers remain focused upon upgrading or maintaining their core systems – convinced that it is the right thing to do in order to thrive and grow. In most cases this is certainly true.
The common internal debate is whether the insurer should maintain the legacy system or start over by adopting a modern solution. This debate almost completely ignores the proper approach to determining the answers to technology decisions, placing the cart squarely ahead of the horse. If one accepts the basic premise that core new business, policy, claims and billing management systems are really just table stakes, why not focus on the business – improving growth, increasing market penetration, and improving both the combined ratio and profitability?
If we do this, we are likely to achieve all of these things AND construct a technology framework that fits now and is flexible for the future. For the sake of conversation, I have come up with three areas where business focus will lead to the right kind of modernization and transformation. The first two are concrete business goals: Reduce the Cost Per Acquisition (CPA) and Increase Customer Retention. The third is less concrete and more philosophical: Embrace Change by improving an understanding of the opportunities it may provide.
Reduce Cost Per Acquisition
The CPA is the largest cost in the current insurance business model (outside of claims). It is currently under pressure due to the rise in aggregators and comparison sites that are forcing insurers to sell standardized products for the least amount they can. The result is a market designed to churn because of a continual focus on price.
How can insurers break out of this cycle, reduce the cost per acquisition and use the savings to remain competitive? Here are a few ideas:
- Insurers should consider a cloud solution for core systems / back office administration.UK insurers have been unfortunately slow to adopt shared services and technologies, when they are proving themselves in other industries and geographies. Now is the time to consider cloud solutions if they fit with cost reduction objectives and if they can sustain or improve service levels.
- The industry should use a permission-based consumer data storehouse. Churning policyholders benefits no one and costs all of us a great deal of time and effort. What is needed is a true permission-based marketing model, where consumers grasp the benefit of letting insurers see relevant profile information. This would enable the direct-to-consumer or small business framework where insurers would provide a digital front-end that “pre-fills” the quote with existing data on the customer or other third party data, streamlining the process. It would also enable insurers to better match tailored products to prospects, instead of having to offer standardized products.
- Insurers should hone data-driven target marketing. Today’s data sources and analytics allow for much more granularity and fine-tuning in the marketing process. With the right tools, insurers can now use consumer-provided data and detailed third party data to provide qualified offers to only those consumers and small businesses that fit a certain product’s risk profile. This would reduce CPA and improve risk selection.
Increase Customer Retention
With a high cost per acquisition, customer retention becomes an increasingly critical metric for insurers, particularly since initial acquisition costs are recouped over multiple years. The increasingly price sensitive market has reduced the number of multi-year policyholders. Industry studies have shown a clear correlation between a customer having multiple policies with a single insurer and their retention rate. Yet with exception of multi-car policies, little effort in creating an overarching combined personal lines product with auto, homeowners, and more has been put forward by UK general insurers. This is in stark contrast to insurers in the US market that have been focusing on the customer relationship with a goal of a multi-policy environment and customer retention business processes.
Most UK insurers’ core insurance systems are legacy systems built around the product, not the customer. Realigning technology choices, process reengineering and customer-centric product development will result in the ability to offer multi-risk and multi-year policies (and discounts) and preventive risk management services. These will help to build loyalty and retention.
Embrace Change and New Ideas
Technology is enabling exciting changes in insurance. Whether it is innovative new products, new customer relationship business models, implementing modern core insurance solutions, leveraging new data sources or embracing new technologies — each offers an opportunity to begin the journey to a new future that is rapidly unfolding in the industry.
New technologies will give insurers improved data, better analytics and lower transactional costs through self-service. Consumers will benefit with services closer to an “Amazon experience,” hopefully with a greater level of insurance understanding.
To capitalize on the opportunities presented right now, we must embrace new ideas and change before new entrants do so and disrupt the industry. InsureTech is the conceptual umbrella containing insurance ideas and technologies that are rewriting the rules of insurance and helping insurers succeed. Internal education on the highlights of today’s InsureTech landscape may be an excellent catalyst for change within your organization.
Preparing for change should still include conversations about the core insurance solution. The core can serve as a catalyst for change instead of an inhibitor to market potential. Discussing even a small part, such as the financial benefits of core change, can fuel both creativity and a desire to create and capitalize on a new model. Nothing will pull leadership together faster than a plan for real growth and solid change where efforts are directly tied to outcomes. Those are healthy approaches to core conversations.
So where do we begin?
To begin, focus on business priorities. If you do this, your organization will end up with the right technology solutions and a core system that fits to support the business. You’ll make technology investments, not expenditures. Your costs will lower. Your customers will be more loyal. You’ll recruit better business. And, you will keep the horse in front of the cart, enjoying the way systems and processes and people work in unity to accomplish goals.