The Death of Insurance?

The birth of insurance has its roots in so-called bottomry contracts, which were known to merchants of Babylon as early as 4000–3000 BCE. Bottomry was also practised by the Hindus in 600 BCE and was well understood in ancient Greece as early as the 4th century BCE.

Thousands of years later I want to pose the question are we about to experience the death of insurance as we know it?

The world is about to enter a technology and economic inflection point. While we all get side-tracked in the UK by the endless Brexit debate, we could be in danger of failing to spot the digital elephant in the room.

Science Fiction writer Stephenson– a purveyor of the so-called dystopian school of SF - was interviewed a few years ago for Technology Review’s annual science fiction anthology, TRSF. Much of the discussion explored Stephenson’s fear that big thinking, of the sort that once drove the space program and other large-scale projects, has fallen out of vogue.

In part, Stephenson explained, this was because of the Internet: “Everything got put on hold for a generation,” while civilisation digested the Internet and figured out what it could be used for.

Another part of the problem is the modern inclination to hold off on starting really big projects in the belief that the cost of the hardware, or software will reduce risks and sometimes that it would be better to wait for some enabling advance. That is a challenge that will be familiar to many CIOs and IT leaders operating in the world of financial service today, particularly those who are trying to help drive change and innovation into their organisations. I feel that they should adopt a mantra of “The future of insurance is now – There’s no need to wait!”

According to Stephenson we already have much of the fundamental technology we need to fulfil such science fiction ambitions such as large-scale solar power production, or routine space flight. Instead, he said, we need to start looking at the non-technological obstacles to these advances, one of these that he cites that may be a surprise to those of us in the industry is insurance. The development of alternative space launch systems has been curtailed by the unwillingness of the insurance industry to underwrite satellite launches on systems for which there is no good model of the risk involved.

Talking to an audience of mostly MIT students back in 2012, Stephenson said: “maybe some of you people need to go into the insurance industry instead of writing code.”

The response, reportedly, was nervous laughter. It makes a refreshing change though to see the question looked at from the other side of the insurance telescope. When speaking with senior people in the insurance sector who are trying to make some of the more significant changes I have been told more than once that the reason that they are running insurance education classes for their highly technical people is that: “it is easier to train a coder to understand insurance rather than train an insurer how to understand code”.

While the two disciplines are seen to be so different from one another, that will remain true, but surely we need to get better at selling the insurance value proposition, the fact that it is potentially a lucrative, social and conceptually rewarding profession to work in and break new ground.

The insurance sector hasn’t been the quickest adopters of some of the newer ways of working. In fact a recent survey Willis Towers Watson survey says that 58% of senior executives in the sector acknowledge the fact that they are behind other financial services sectors, when it comes to digital technology, in particular. This should be a concerning statistic for an industry that is being viewed by investors in InsurTech companies as being ripe for disruption.

The customer experience or ‘CX’ is increasingly considered a crucial part of business strategy in the insurance industry, which cannot risk being left behind. Customers are frequently not only used to but are expecting low friction interactions with the companies that they deal with, allowing them to do business in a way, a time and a place that is convenient for them.
An example of how some insurers have started to react to the trend is the fact that they are allowing their customers to access their policy information and progress of claims through engaging and interactive digital portals or mobile phone apps.

This is driven by the trend towards self-service across all sectors and leaps in software design. This taps directly into reducing the friction of dealing with an insurer (or another supplier), so there are no surprises from the research undertaken by Design Management Institute and Microsoft that shows that user-centric, design-led companies outperform those who do not have such a focus by 211%.

Equally, staff (particularly younger staff) and investors are demanding innovation from the insurance sector. Investors are looking for ways to help bring down the cost of premiums or reduce payouts.

Staff, on the other hand, don’t want or expect to be working on old green-screen technology. So for insurers, in particular, doing more of the same is no longer viable, they need to become more agile and innovative to stay in the game.

A challenge that is facing some insurers is the number of systems that they were writing in older computer languages, and these are increasingly difficult to maintain. They don’t capture the imagination of today’s young developers which means that sourcing specialist suppliers/partners to enhance such systems is increasingly a challenge.

Does that mean we have to scrap legacy solutions entirely though? Re-innovation could enhance old systems to ensure those that would otherwise be too costly to replace can remain relevant and work effectively. That might prolong their lifecycle and protect the IT investment, but there is a total cost of ownership (TCO) question, and when it comes to legacy systems there is never a good time to upgrade, only a better time.

The status quo is not going to last forever, however, and many would say that the signs are already there for the passing of this time. Developments in data visualisation, the Internet of Things and machine learning are already affecting and influencing the insurance industry.

However, in the WLTW survey, 42% of senior-level executives in the insurance industry felt that the complex regulatory requirements remain the most significant barrier to the adoption of “off the shelf” digital solutions.

In reality, new technologies actually help with the regulatory landscape. Data visualisation and analytics, for example, helps insurance firms leverage customer and risk profiling data, turning it into information that can give better insight, while also ensuring the accurate and timely provision of data for Solvency 2 regulations.

A recent KPMG survey showed that 48% of global insurance companies are experiencing disruption from new, more nimble competitors. However, according to the research, it is not just start-ups that are creating innovation challenges within the sector. Four-in-ten respondents say that increased competition from their existing competitors would create significant problems over the next two years.

This is an opportunity for insurance organisations looking to embrace the latest technology or use what they have more effectively to give themselves an advantage.

Is automation the answer? According to some reports, automation could leave up to 25 per cent of the insurance industry’s current full-time positions consolidated or replaced over the next decade. In a recent report called Automating the Insurance Industry McKinsey & Co. said that insurers need to “rethink their priorities right now” and focus on revamping their operations to accommodate the digital transformations contributing to the trend.

Priorities “should include retraining and redeploying the talent they currently have, identifying critical new skills to insource, and returning value propositions in the war for new talent and capabilities,” McKinsey & Co. said. “That competition will almost certainly increase as the digital transformation takes hold.”

Most of that change would likely hit operations. Based on an evaluation of Western European insurers (and the use of its full-time-equivalent benchmarking database), McKinsey predicted that just 33 per cent of the insurance-industry workforce would be centred in operations within a decade, down from 46 per cent in 2015.
McKinsey said product development, marketing, and sales support would go from 21 per cent of the workforce in 2015 to 20 per cent within a decade.

Similarly, IT could decline from 15 per cent to 12 per cent over the same period.
If you’re an IT leader or manager that might make for depressing reading. We shouldn’t assume that the next decade presages some “Insurance” dystopian vision of the future, however.

I believe the opposite is true and that what the McKinsey report is really saying is that the future requires IT leaders to be far more innovative and business focused than their predecessors, not just IT specialists as they have been in the past. This is, however, going to lead to very interesting times indeed for insurance people, their companies and, in turn, their investors as I intend to outline in future upcoming Death of Insurance blogs on this subject.