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February 9, 2011updated 13 Apr 2017 8:50am

Insurers losing the innovation race

Insurers have adopted technology to improve processing functions, but many are failing to get to grips with the impact technology is having in the sphere of innovation

By Charles Davis

Insurers have adopted technology to improve processing functions, but many are failing to get to grips with the impact technology is having in the sphere of innovation. IBM warns that by being laggards in the innovation space insurers risk losing ground to entrants from other industries. Charles Davis reports.


A new study from US technology giant IBM portrays the insurance industry as laggards when it comes to the new world of social networking and mobile technologies, and urges the industry to shake its “lethargy” and get on the innovation bandwagon.

The study, by the IBM Institute for Business Value, Insurance 2020: Innovating Beyond Old Models, showed that while market forces demand real innovation in business models, insurers consistently focus on the optimisation of products, processes and services. For many carriers the result was an organisation that mistook optimisation for innovation.

The study blames a misplaced emphasis on optimisation for two negative outcomes that continue to plague the industry. Changes in value chain automation, data management, and the use of online mechanisms made over the course of the last several decades were at the tail end of larger technological or societal changes and were directed towards improving existing processes and mechanisms.


Opportunity costs

The second outcome from the industry’s focus on optimisation is in opportunity costs. There is an uncalculated cost from the insufficient, or even absent, application of innovation, especially in business models.

So, although making improvements in processes and operations via the use of increasingly advanced technology felt like the right thing to do, those activities became a proxy for innovation and supplied a stream of revenue enhancements of sufficient stability to please executives.

The emphasis on optimisation rather than engagement runs head-on into one of the study’s major findings: the disruptive potential that changing demographics will bring to insurance industry stakeholders.

These demographic realities will impact not only insurance consumers, but also agents, brokers, policyholders and other industry professionals across various demographics.

Insurers need to recognise that opportunities arising from understanding such demographics realities extend beyond optimisation of sales channels. They include customer service, claims handling and fraud prevention – as well as chances to engage consumers and clients with more customised products.

Another major trend identified in the study is how technology – and information technology in particular – acts to level the playing fields of the insurance business. One aspect of this is how technology will empower an influx of new players in the traditional insurance space.

Already, retail grocery chains, such as Tesco in the UK and Kroger in the US, have implemented the distribution of insurance products. And since virtually all commercial enterprises have access to the same technology and information systems, it can be expected that other types of businesses will begin to explore the “adjacent spaces” of insurance protection products, in addition to being points of distribution.

These adjacent spaces are literally those areas of service or asset protection that are closely related to existing products and services. Life insurers, for example, could consider adding adult day care riders to retirement income products to help customers deal with the burden of caring for elderly parents.

Insurance companies working to develop a more strategic view of their business should consider that essential systems needed to run an insurance business today could be purchased.

“If they continue to follow this course, carriers will logically see diminishing results,” IBM noted. “It is likely that either an existing competitor or a new entrant from outside of traditional insurance – such as a retailer, social computing purveyor or other service industry constituent – will capture a portion of the market. We believe that instead of working hard to improve current processes, insurers should be preparing for a changing future.”


Start them young

To move beyond the focus on optimisation and towards innovation, IBM suggests that instead of their long-time focus on “life events”, insurers could prepare younger children (aged 10-15) for their eventual interactions with the insurance industry.

Although it is a relatively safe assumption that older groups can be approached with well-understood mechanisms such as surveys and promotional campaigns, younger groups will require a more modern approach. Carriers need to leverage social computing tools, including blogs, social networking sites and online communications push devices such as audio and video podcasting. These tools allow a carrier to integrate marketing outreach and provide near-real-time demographics research that can become a vital component in dealing with younger consumers.

The IBM study also highlights the opportunities for industry collaboration. In the insurance context, collaboration could come from suppliers, peers, competitors, employees or other stakeholders. Observation and engagement with other industries can also supply a much-needed fresh perspective on problems and techniques facing the industry.

“The opportunity to leverage new technologies will only be fulfilled when internal impediments to progress receive the same attention that optimisation of existing processes receive,” the study said. “Younger generations need to be won over with a new approach to dealing with the realities of complex lives and the new aspects of culture that arise from a world that continues to grow smaller as technology evolves.”

Finally, the report finds that technology is levelling the playing field for traditional carriers, as well as the other players emerging today.

To prepare for competition from these sources, carriers need to confront long-held industry beliefs, chief among them the belief that its processes are so specialised that they cannot be handled by third-party software. And, even if third-party applications are purchased, they are often modified to such an extent that they became home-grown solutions.

“What needs to happen now is the evaluation of business and IT processes to determine what aspects of their operations could or should be in-sourced, outsourced or co-sourced in ways that provide not only cost reductions, but value enhancements as well,” IBM emphasised.

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