Insurance companies are generally considered to be laggards in terms of their adoption of technologies, and life insurance companies especially so. But change is happening, and Life risk News spoke to Tom Scales, Senior Analyst at research and data provider Celent, to learn more about what he is seeing in terms of the digital transformation of life carriers.
LRN: Tom, ‘digital transformation’ is one of those buzzwords that consulting firms love to throw around, but they tend to do so quite flippantly. Tell us what this means precisely for a life insurance company.
TS: I suppose that is up to the interpretation of each company, to a point. My definition would be movement away from an aging infrastructure that forces the customer to work with an actual human. Whether it be the agent or the post-sale service center, life insurance is both sold and serviced primarily by people. In a digital transformation, much of the interaction between the consumer and the insurance company would be electronic. From their computer, or more commonly, their phone.
We’ve seen this transformation in other parts of financial services. I recently sold a car, so I went onto the carrier’s site and removed the car. I had my first ever homeowners claim and filed it electronically. I pay my bills through my bank’s website.
The number of life insurers that can provide this level of service online is small. We’re seeing that change, but not very fast. As they say, life insurance is sold, not bought, which means the amount of online sales is small too.
LRN: Why has the insurance industry historically been so slow to change?
TS: It is complex, but to me the number one reason is how long life insurance policies last. For your auto insurance, you renew every year and might even switch insurers. Even your health insurance, you sign up every year. For life insurance, you buy a policy and it is on the books for literally decades.
That’s the challenge. Insurers are running back-office systems that are aging and that’s a polite way to say it. Even those companies that have installed modern, API-equipped systems, most have not converted their entire book of business. They’re selling using the new system, but older systems have been pushed into a corner and are still running. It is tough to web-enable a system written in mainframe assembler language that went into production in the 1960s. Those systems really still exist. They’re still in production.
Converting a complex book of life business is not easy and generates no revenue. Better to leave those systems running until there are no more policies.
This means that many companies are approaching their digital transformation with only their more recently sold policies.
The problem is the risk of this approach continues to grow. Often the older systems are maintained by people at or well beyond their retirement date. They run on costly mainframes managed in enormous data centers. They’re just old.
For post-sale service, there also isn’t a huge incentive. I interact with my bank every week. With my auto insurer less often, but I’m always printing insurance cards. My life insurer basically never. I pay my bill annually and I’ve moved since I bought the policy, but I don’t have any other reason for service. So why digitally enable a rare occurrence? If the insurer automates address changes, bank account changes, and beneficiary changes, and maybe a few more, they’ve done a high percentage of their transactions.
LRN: What’s driving this investment in technology? Is it one main factor or a confluence of them?
TS: Business risk. I mentioned aging systems. We also cannot forget potential new entrants to the market. The barrier of entry to life insurance is not that great. Newer companies are already coming into play. Most are in the distribution arena, but that was true for health insurance too, and new insurers have started up. The same with auto insurance.
Let’s face it, there is a lot of room for improvement and starting fresh has its benefits.
In digital sales, the difference maker is economic. The cost of sales is quite high, with a huge percentage going to agents. The same with underwriting. Newer approaches to underwriting both shorter the time, but also lower the cost. I believe we’ll continue to see big investments in sales.
LRN: What are some of the key domains in the life insurance space that are seeing activity in the digital transformation journey and which ones are having the largest impact right now?
TS: This is a hot topic here at Celent. We recently published our research themes and their tightly tied to our beliefs in the direction of the industry. For 2022, we broke it down into five basic areas: Customer and Distributor Experience, Data Analytics and AI, Digitization: Today and for the future, Digital Innovation and the insurtech ecosystem, and Legacy Transformation.
We discussed Customer and Distributor Experience, and it is a huge area of investment. As mentioned, it all comes back to increasing their share of the market. We see the same priority in health insurance.
Data Analytics and AIis an area that’s white hot. Insurance companies have an extraordinary amount of data about their customers. The insurers are also incredibly focused on the security of that data. But the aggregated data has such power. From better underwriting decisions, to predicting the next best product to sell the customer, mining this data has a huge impact.
The Digitization: Today and for the future themehas overlap across the themes. The industry is rapidly reaching the point where customer expectations will not be met without a true digital experience across the value chain. After she had children, I spoke to my daughter about her need for life insurance. I described the process of an agent coming to her home, then a paramed, then gathering all her medical records, then wait a month or two and then they’ll tell her the final price.
She couldn’t stop laughing. She thought I was kidding. Her response sums it up.
“If I can’t buy it on my phone, I am not buying it.”
In terms of Digital Innovation and the insurtech ecosystem, what the startups out there focusing on insurance are accomplishing is simply amazing. Celent spends a lot of effort focusing on the companies that have the potential to revolutionize our industry. These small, nimble companies are looking at problems in unique ways and often bringing expertise from outside of insurance. There are thousands and thousands of these companies, and they are making an impact. Insurance companies even have venture capital arms investing in insurtechs. One insurer provides them office space in their headquarters. It’s game changing.
Legacy Transformation is the most complicated of the five areas we have identified. I won’t restate what has been discussed but will add that a true legacy transformation is complicated, time consuming, and expensive.
LRN: What are the next few years going to look like in terms of digital transformation in the life insurance industry?
TS: Ah, the big question. I’ve predicted a digital transformation for too long, but we’re finally seeing it come true. We’ll certainly see new and innovative ways to sell life insurance, including embedded insurance. We’ll see even better ways to underwrite that allows instant underwriting. We’re already seeing that, and the scope will grow. We’ll see better customer service. Hopefully we’ll see more effective cross-sales, since today they’re virtually non-existent.
What I think we’ll see fewer of is agents. The direct-to-consumer push is finally gaining traction. Don’t get me wrong, an agent brings huge value, particularly for complex financial situations. For a 30-year-old that needs a $100,000 term policy, that’s going to move online.
It is fun to see the activity.
Tom Scales is Health Practice Lead at Celent