- Where Insurance & Technology Meet

Digital Divide: A Tale of Two Insurance Models

Common wisdom says that insurers must adopt digital technologies in order to become more flexible, more innovative, and more effective. The alternative is to face ‘disruption’ with insufficient resources to respond. But is this assumption accurate? Let’s compare two insurer models and develop some thoughts on the value propositions.

The ‘digerati’

Digital transformation is a non-trivial exercise. Moving from a traditional insurer to the digital form is expensive, resource heavy, and risky, as tools, platforms, and processes are still evolving.

For example, developing analytic processes and techniques requires sophisticated and expensive tools.   And this is just the infrastructure. Highly qualified data scientists and analysts need to be hired. Data sources must be identified, vetted, acquired and integrated with operational data sets.

More significantly, digital transformation ultimately impacts most every aspect of the business. As a result, managers- including every member of the executive team – will have a role that mixes imagination, communication, control, and sensitivity.

Do larger insurers have the edge? Not really. Here in Canada, there are large organizations that are deep into digital. But mid-sized organizations are taking the same path. And some smaller companies (including mutuals) view digital transformation with the same urgency as the others.

The not-ready-yet

The majority of insurers is still in a wait and see mode. Cost and the commitment of scarce resources are the big issues. But there are other reasons that are not cited.

First, the era from 2001 until present saw the majority of insurers undertaking core technology modernization. Many of the business plans for these projects assumed that, when completed, the investment would move from development to maintenance.

Some insurers are done. Others have hit delays and more development investments are required. Regardless, the boards of many organizations are taking a wait-and-see approach before making a large digital investment.

And who can say they are wrong?

The Wholly Trinity of Insurance

A great mentor of mine suggested that insurance is a unique proposition with 3 critical drivers for success:

  • Customer Experience (aka customer service)
  • Product
  • Distribution

If an insurer can execute on these elements, while maintaining control over risk and expenses, it has a high probability of success.

So, how does digital support these? Customer Experience would seem to be the most logical starting point.

Does the next generation need ‘experience’?

Common wisdom says that the Millennials are the generation that will require more engagement from insurers.

Common wisdom can be pretty common. As with every generation, there is a good degree of nuance.

Citing data from various studies, including a 2015 Gallup poll, freelance finance writer, Autumn Cafiero Giusti,  says that “when it comes to buying insurance, millennials appear to have a lot less attachment – and a lot more complacency.”

After reviewing several sources, Giusti suggests that this is not different than previous generations: “it’s always been more difficult to engage younger people with any kind of insurance.”

So, by itself, Customer Experience might not be enough to build a strong business case.

And distribution?

One of the benefits of digital is the ability to support multiple channels with a common infrastructure. This allows comparison of results and the ability to fine tune marketing strategies.

However, there are a lot of developments in the channels themselves (brokers and MGAs) that would allow insurers to outsource distribution and/or accommodate multiple channels through a third party.

While not particularly interesting to larger insurers, this provides real options for mid-sized and smaller carriers.

And that leaves product

This may be the area where digital investment offers the best opportunities for return generally.

In my career, I have had the opportunity of working with some great marketers, underwriters, and (really) claims professionals who have developed excellent ideas for new insurance coverages. However, a high proportion of these never get off the ground for two reasons:

  • The existing systems don’t have the flexibility, and, or
  • There are insufficient data to model the product.

The digital insurer will be able to leverage features to make these requirements part of the infrastructure.

What do you think?

Are you considering or executing digital transformation? If so, do the constructs above ring true? If not, what are we missing?

If you are waiting, does the rationale here sound reasonable? Are there others aspects that need to be examined?

Leave a comment below or reply digitally to [email protected] or @patrickvice onTwitter.


Editor’s Note:  Several Canadian insurers – including Aviva Canada, Sonnet, and Slice – will be presenting on their experiences and plans with digital transformation at the 2016 Executive Forum on 30 August 2016 in Toronto.  We will also have a panel of Millennial Insurance customers.

One Comment

Danish Yusuf

I agree with most of the points in here. Though just because the mid-sized and smaller carriers are taking the same path, that does not mean they will have the same results. I do think that larger carriers have an advantage given their scale for a few reasons.

1. They can make bigger investments. For instance, a typical GuideWire investment for all three platforms for a large carrier ($3B+ in premiums) comes to about 4-6% of premiums. For mid-sized carriers that comes to 6-10% of premiums, so almost twice as expensive on a relative basis.

2. A big part of Digital is the data and analytics that allow for more intelligent decisions and actions. The larger the carrier, the more data they have on which to base their decisions.

3. Digital may not drive profits to the bottom line for quite some time. However, in the long-term carriers that do not invest will be at a disadvantage (like Blockbuster, traditional travel agents, Barnes & Noble….). Take esurance for instance. They have been running at a 120%+ combined ratio for a decade. Their loss ratio is fine, its the expense ratio that is extravagant. Allstate understands this, and knows that they have to invest for many years in order to own the annuity stream in the future. They continue to invest despite the losses, something a small carrier just can not afford to do.

4. On the product front, larger carriers have the ability to allocate a sizeable R&D budget to figure out new products and pricing. A Radar Live installation for advanced product and pricing takes tens of millions in investment. However, the result at the end is an improved loss ratio, and the ability to offer differentiated products. Alternatively, carriers like Intact can put $25M into MetroMile to bring in pay-per-use insurance or invest in building a partnership with Uber. A small or mid-sized carrier would be challenged to match such investments, or even attract the interest of the startups.

Naturally a larger organization comes with its own challenges, such as more red-tape and slower decision making. But I think overall they are better positioned to invest. Economical & Sonnet will be a good test to see whether my points above hold true!

I agree that there is tremendous innovation in the channels, which may compensate for a slower change on the carrier front. There is plenty brokers can do to improve the perceived experience by the end-consumer. is all about driving innovation on the edge (i.e., channel) versus necessarily waiting for the carriers.


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