The Technology-Enabled Digital Insurer

The legacy approach

Consumer insurance products have remained largely the same for the last five years. The mechanics of distribution may have changed, and price comparators have helped to promote price transparency, but little has fundamentally changed. The increase in dog and pet ownership has led to a new line of business, but cross-selling has been limited, despite business models being now increasingly orientated towards upselling and add-on sales.

As far as technology is concerned, we have witnessed a slow-moving race to replace pre-Internet legacy platforms with those that have emerged over the last ten years. The complexity of insurer estates, the elaborate nature of the underlying propositions, and business cases built through adding more layers with their own specific features, has led to a complex solution stack. This stack has itself been supported by solution sets requiring ever more detailed configuration and management. 

Naturally, the API-based “as a service” opportunities are now being pursued by vendors and insurers alike. However, the evolution of platforms over the last ten to fifteen years means that many companies are not as suited to the new world as they would like. A large number of vendors now find themselves having to adjust their (now almost monolithic) platforms, while at the same time managing an extensive customer base and the various migrations that will be required.

Digital insurers

Meanwhile, the demands which technology must now meet are developing at a rapid pace. Insurance propositions appear rather different from those which held sway in the bygone age that many insurers continue to inhabit. Future needs will include the following:

• A focus on serving new and evolving types of risk
• Provision for partner integration
• The ability to target specific customer types and tailor products accordingly
• Greater flexibility on the specific timing of coverage for the customer.
• A frictionless customer experience for all digital channels
• A data-enabled operation, from the point of view of both customer and underwriter, that secures a competitive advantage beyond what might be expected from run-of-the-mill solutions
• The ability to react quickly to exploit potential market opportunities

These features should be underpinned by nimble technology solutions which are robust, can be tested and refined, or dismantled quickly. Moreover, all of this must be wrapped in an agile business model equipped to operate in a new world.

Startups are an integral part of this environment. Many of them emanate from outside the insurance industry, including those specializing in the gig and sharing economies. InsurTech companies have grasped the way the world has changed, and have been gradually shifting their focus towards new insurance opportunities.

We believe that mainstream insurers must also address these customer needs, using new methods,  technologies, delivery techniques, tools and processes. A greenfield approach has long been advocated as the mechanism for achieving this radical change. However, we believe that we now need to re-examine this idea. With a cutting-edge technology eco-system and with the injection of new technological capabilities, it is possible to challenge deep-rooted and widespread approaches to technology and to proposition development and deployment.

Digital banking parallels

While there are many differences with banking, the digital banking revolution does offer some interesting insights and food for thought for incumbent insurers:

• Start-up digital banks, including Revolut, Monzo, N26 and others (i.e. not the mainstream big six banks) inspired the change in approach to delivering customer-orientated banking and services
• The digital banks have been ruthlessly focused on serving specific segments well
• The incumbent banks now see the digital start-up approach as supplementary to their existing estate, and many are now developing it as a hedge against future developments
• Migration has not been a factor in delivery. The focus has simply been on establishing a new-world proposition, unconstrained by the challenges of migration or aligning propositions and needs
• The first digital banks built their own core engines, but new-world core banking engines have now emerged, using ground-up engineered digital core banks
• The ecosystem of services and capabilities needed for the technical construction of a bank is now completely cloud-based, fully API-enabled, while using a totally agile approach and an OpEx model of financing. Successful completion therefore comes at a fraction of the cost of a similar endeavor just five years ago

What this means for insurers

Unlike the digital bank, the digital insurer has not yet emerged. When it does, it will look and feel very different to those insurers serving the needs of consumers today, as will its supporting technology. Digital insurer use cases currently center on niche consumer scenarios, based on sporadic insurance needs and on-demand models.

The challenge for incumbent insurers is that current customer needs are not that different from those of the past, and may therefore not warrant a new approach to delivery and technology. The existing estate can still be deployed to cater for future needs. However, this is a complex and costly process, while demands for the necessary budget must compete against those relating to large books of business that are still currently in force.

For those that have invested in replacing their core platform over the last few years, the challenge is even greater. Demonstrating the value of their investment to previously supportive stakeholders continues to be essential. There are certainly parallels with the motor industry. In that industry, those that have embraced the electric revolution have recognized that, while they can squeeze more out of their existing setup, they must completely re-engineer their platforms for the purposes of the new drivetrains if they are compete effectively with propositions such as Tesla.

In the future, core insurance technology solutions will become the glue to connect the various necessary components. Much of these needs may be met by capabilities that derive from InsurTech. In turn, InsurTech and its surrounding services will be selected from a pre-approved range of options, with rapid testing of both proposition and service.

Much like the digital banking platforms that have been developed over time, the first wave of the new breed of core and API-enabled solutions have been custom built to support specific InsurTech needs. However, a second wave of platforms is now emerging. Moreover, we can also see start-ups which have identified an opportunity to industrialize their robust platforms for a broader set of customers. These core solutions are much simpler, focused on what they do well and supporting a fully native cloud-based DevOps methodology.

Essential capabilities

Building new-world technology-enabled propositions and services will require a new set of capabilities that are most easily achieved using greenfield techniques. We don’t believe insurers will be able to move in an incremental way to the progressive, nimble and low-cost technology and operations that are now necessary.

Creating technology solution(s), as well as future capabilities, will depend on the following attributes, all of which are themselves underpinned by processes, tools and techniques based on an agile approach:

• A corporate willingness and ability to experiment with small and new vendors
• The two-pizza principle with small, co-located teams (a meeting should never have so many attendees that they could not all be fed with two pizzas)
• Combined business and technology teams
• Teams, equipped with multidisciplinary skills and experience, firmly rooted and focused on the new world
• A meritocratic culture within those teams
• A ruthless emphasis on the business outcome
• Clear points of interaction with the broader enterprise ecosystem, for example in the field of operational risk management
• Senior sponsorship which sets out a clear path and provides support at critical moments

Where to start

Using the precedent set by the digital banks, it is clear that unwavering focus on the initial customer (or partner) value proposition is critical. The task of designing a technology architecture that supports a range of scenarios should be a short, sharp iterative endeavor that is closely aligned with the business strategy and proposition. Given the current pace of change, spending too long and investing too much in this phase makes no sense. The focus should instead be on rapidly creating business solutions and capabilities through a genuine minimum viable product (MVP) approach.

Balancing architectural purity and practicality has always involved a set of tradeoffs. A set of common capabilities can of course be consistently deployed, provided that it is established at an early stage which markets, deals or partnerships are most likely to succeed, as well as which core technical services should be considered. The initial investigation of market opportunity will offer some pointers to the capabilities required, and these can be reappraised over time based on changing experience.

Identifying the right ecosystem and selection of providers is critical to successful delivery. Partners must be chosen carefully, but yet swiftly. Not all vendors will be able to supply what is necessary. It is important to track performance and move on quickly to other providers if they do not deliver these requirements. Quite often even the clearest pitch by an InsurTech does not actually reveal that much. Swiftly establishing the reality through hands-on experience is much more effective than a long procurement exercise.

Back in the old world

Meanwhile, there will still of course be large pockets of legacy technology, supporting profitable business that insurers would rather not disrupt. However, the sustainability of these technology estates will be called into question over time. Their cost and fragility will ultimately prove unacceptable. New approaches that assist cost-effective migration, based on artificial intelligence, may delay the inevitable. However, the threat of future disruption remains and this should curtail the level of investment in the existing estate. We remain some way from a situation in which only new-world architectures and solutions fully support the existing book of business, but given the current pace of change, this will happen sooner than we think.