Different market segments require different approaches
The insurance industry is a rather traditional one. There was seen no need for transformation for decades. But this is changing now. The drivers for transformation are changing regulation, financial crisis, changing customer expectation, and digitalization – just to name a few. The challenges linked to these drivers are quite different but need to be managed if you like to be successful in insurance industry. In order to be able to cope with these challenges insurance companies need to start substantial business process transformation.
The “product” of the insurance industry is rather different to products of other industries. From insurance company’s perspective a significant part of the insurance business is to take risks from the insured and sell the trust to be the right partner to stand in if the risk becomes a claim or benefit case. If insureds lose trust they will move away and look for another “trustworthy” partner, i.e. other insurance companies. However, there are still some other factors which influence the customer loyalty. Insurance needs to be easy to understand, to consume, and for a low price.
Even though these factors seem to be key influencers for insurance customers we need to consider and differentiate between two major market segments: The “old” traditional market which is rather saturated for insurance business and the “new” emerging market with high growth potential.
Customers and insurance companies of these two different markets act quite different. That’s something what global insurance players have to bear in mind when thinking about their business strategy. In traditional markets the focus is on how to find the “right” customers, i.e. someone who is highly profitable with long lasting contracts and relatively modest risks. The challenges linked with this approach are for example longevity in life insurance of development risks in liability insurance. For insurance companies the essential question is: how do we know which customer and which business is the most profitable with little risks?
This leads to a need for sophisticated solutions which support the insurance business prediction. Predictive analytics will be the key to check if your business will be still profitable in next one or two decades. Analytical solutions can help you to identify the risks and opportunities. Something very important for this analysis is a permanent comparison if underlying assumptions and models are still in line with reality.
If you signed long-term contracts where future interest income was considered in premium calculation then you need in addition a powerful asset management solution which helps you to identify, monitor and mitigate financial risks and their impact, e.g. low interest rates on capital markets. Many insurance companies now need to rethink their business. Stop signing new business or try to get the risks fixed. On the other side insurers need to minimize costs of operation, optimize customer services, and increase readiness for new compliance rules and regulatory requirements.
Any transformations at insurance companies need to be made very carefully. With an existing portfolio of customers who are trusting in an established “old” brand it’s not easy to change and transform into “new” business world for example switch your business model from agent to internet based insurance sales. In emerging markets with little saturation rates the situation is different. Parameters like time-to-market for new products and business agility are in focus. In such markets the customer experience and simplified products are of importance. First movers with innovative products will be able to be ahead of competition.
Compared to traditional markets we see in emerging markets a higher degree of business agility with a focus on how to attract the customers. While “old” traditional markets are focused on long term business the emerging markets prefer business agility and short term opportunities.
How can transformation of insurance business be managed?
Depending on insurance companies’ strategy the transformation of business processes can be managed with different approaches.
1. Industrialization and Standardization
As a first but very efficient step insurance companies can start with a standardization of business processes and IT landscapes by using end-to-end solutions (like SAP for Insurance). Many insurance companies already think about or even implemented centralized procurement or shared services for human resources management and financial accounting. With predefined standards and centralized centers of excellence they are able to minimize costs, ensure constant service levels, and speed up response time.
For core insurance business standardized white label insurance products can be used to address different channels and different brands. The standardization and simplification of insurance business is actually the most often seen field of transformation. Once business processes are standardized it’s easy to industrialize them while costs of business operation can get minimized. Process automation needs clear business rules, task management, and assignment of responsibility in order to be cost efficient.
2. External service provider
Standardization is often recognized as a prerequisite for business process outsourcing. Standard processes help a lot when insurance companies need to define what kind of outsourcing services and which service levels are needed. In insurance industry the use of outsourcing is often seen for only a few processes . The reasons therefor are different. Sometimes there are data protection laws or compliance rules which prevent the use but often it’s the lack of standardized processes and missing openness of insurers to use external support.
The reasons why insurance companies are conservative for outsourcing services are also often very different. Sometimes it's not all about cost reduction. Insurance companies all too often need to bear in mind is that any shift from internal processes to external service partners is also a shift of workforce. In “old” traditional markets it’s often not easy to replace internal workforce by external services. Beside strict labor legislation there is also public employee protection law which needs to be considered. Outsourcing of business processes to external service partners is most times also linked to the question what kind of opportunities insurance companies can offer their employees. For this reason internal workforce reassignment is usually also an important part of every transformation process.
Once a balance is found between external service provider integration and internal resource management the benefits can be very high.
3. Business networks and collaborative scenarios
This kind of transformation is already known and well established in insurance industry. In motor insurance for example where repair shops, loss appraisers, and car rental companies are connected to insurance companies by special tools collaboration is already established. Nevertheless there is much room to expand the collaboration via business networks like ARIBA. This helps insurers to minimize costs of operation and speed up customer services.
The collaboration of business process partners is a topic which is often underestimated. Do you know how much safety surcharge insurance companies are calculating into their insurance premiums because of uncertainties?
If insurance processes become transparent and everyone knows what to do at which time, the insurance could save costs. Just imagine that you run a car and your insurer is using a service company for glass repair. After an accident your windshield is broken and need to be replaced. Today you expect to just only give a call to the service company and tell them your number plate.
In the old days you needed to find a repair shop which has capacity to repair, make the appointment, bring your car to the repair shop and hope that the windshield is in storage – if not, it took at least another day to wait for your car return – and check if all positions on the bill are correct (but how if you’re not a car specialist?) Today collaboration between insurer and service provider saves time because the service provider has all car details, can arrange an appointment at any repair shop near to your location and check if the spare parts are available or need to be ordered.
Now you just only need a short time frame from starting repair to return of your car. Repair services can be given even at your home. Excellent preparation by collaboration reduces uncertainty and costly contingency surcharges at your suppliers and network partners. Even thought the cost reduction effect is not directly at the insurer, but added value can be identified also there because the network partners can enhance the service levels at same price or grant additonal discounts.
4. Innovative and flexible products
There is a need to shift from provider-oriented to customer-oriented products. Customers do not want to buy products which don’t fit to their needs. They want to pay for what they really need instead of buying bundle products which cover risks they never will be exposed to. For this reason insurers need to increase their flexibility for new products in order to be able to serve customers with tailored insurance offers.
Customers expect innovative and easy to understand products which cover for example risks of the new digital world and consider more the individual needs. On the other side insurers often struggle with such requirements because existing application silos are not flexible enough to manage innovative products which are maybe across different lines of business.
Today in the digital world most of the customers inform themselves and compare insurance offers before signing any contract. If insurance companies are not able to leave a positive mark at first contact, the prospect or customer will probably look for a competitor. It's very important to bear in mind that insurance companies sell a product called "trust" for which a gut feeling sometimes turn the balance.
5. New business models
Traditional business models for insurance companies are reaching their limits. If insurers like to expand their footprint or improve their income it’s necessary to think about new alternative business models. Sometimes it helps to rethink about entire insurance supply chain, i.e. which services can be reused or provided in order to increase income and profits while at the same time minimize total costs. But sometimes it’s necessary to take a look beyond existing borders and start with innovative ideas.
Some insurance companies already started with investments in infrastructure projects. They invest money in building the infrastructure while they also have an impact on quality and costs. After hand-over they offer to run and maintain the infrastructure in collaboration with specialized partners. In addition they even insure the objects build and maintained by themselves.
For all of these approaches the most important first step is simplification of business processes and system landscapes. It's the precondition for standardization and industrialization. Once standards and simplified processes are established next level can be outsourcing or extension of collaboration and business networks usage.
The time and money which can be saved by simplification can get reinvested in product innovations and new business models. It’s not a strict path to follow but a valid approach to transform insurer’s business.
Where to start with transformation?
Many insurance companies do not have yet an idea where to start with transformation processes. Often questions are coming up like:
- What are the priorities of the transformation?
- What kind of benefits can we expect?
- How much will it cost and how much can we save?
- Are we already prepared for new digital world?
- What is the impact on our existing strategies?
There is no golden rule to answer these questions but there are a lot tools and methods partners and SAP provide to customers and help them to find right answers.
For example, insurance companies who like to know if they are already prepared for the digital transformation can run a digital fitness assessment. That gives an insight where they actually stand compared to peer insurers, what steps they need to be done, which benefits they can leverage, which business priorities they shall focus on, as well as a roadmap in accordance with their strategy.
In my next editorial I will elaborate on different methods which can be used for business transformation support.
Karsten Tecklenburg
Industry Principal Insurance – MEE (Middle & East Europe)
SAP Deutschland SE & Co. KG, Hasso-Plattner-Ring 7, 69190 Walldorf, Germany